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OWNER'S MANUAL

Best Way to Track Customer Retention

Here's the easy formula that every business owner should know by heart.
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Dear Jeff,

I own a fitness facility and obviously member retention is a major factor. The problem is I've seen customer retention calculated different ways. Is there a standard formula?

-- Name withheld by request

Customer retention is huge for any business, but even more so for membership- or subscription-based businesses. (The gym I use appears to constantly sign up new members, but the number of people actually working out doesn't ever seem to increase. Clearly they're churning members like a big dog.)

I don't know that there is one "standard" formula, but there is a mathematically accurate formula:

Retention Rate = ((CE-CN)/CS)) X 100

CE = number of customers at end of period

CN = number of new customers acquired during period

CS = number of customers at start of period

If you're not a math whiz (I'm definitely not) the formula might look complicated, but it's actually pretty simple. Here's an example:

You start the (week/month/year/other period you choose) with 200 customers. You lose 20 customers, but you gain 40 customers. At the end of the period you have 220 customers.

Now do the math:

220--40 = 180; 180/200 = .9; .9 x 100 = 90. Your retention rate for the period was 90 percent.

Is 90 percent a good result? Like many things, it depends--on your industry, your market, your goals. At face value it's hard to say.

In fact, your business model could mean your goal is to maintain a relatively low retention rate. I know some gym owners, for example, who charge a fairly high initial membership fee; they actually don't mind (too much) if existing customers drift away because they're making their money on new memberships. (I'm not sure that's a feasible long-term approach since they'll eventually extinguish their market unless they can re-attract old customers willing to pay another membership fee.)

But in most cases the goal is to keep retention rates as high as possible, if only because it's expensive to land new customers.

The same data lets you calculate customer acquisition rate. You picked up 40 new customers, so your acquisition rate was 20 percent. Great! On the other hand your attrition rate was 10 percent.

Many business owners know their acquisition rate, because getting new customers is fun.  Relatively few know their attrition rate; losing customers is no fun.

Tracking your retention rate lets you put both those metrics in perspective and provides an easy way to measure your results over time.

Some other posts on metrics and financial calculations:

Last updated: Jul 12, 2013

JEFF HADEN | Columnist

Jeff Haden learned much of what he knows about business and technology as he worked his way up in the manufacturing industry. Everything else he picks up from ghostwriting books for some of the smartest leaders he knows in business.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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