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Definition

Retention rate is the ratio of the number of retained customers to the number at risk. Retention rate is used to count customers and track customer activity, irrespective of the number or dollar value of transactions made by each customer.

Retention rate is usually assumed to be constant across the life of the customer relationship. For products and services that go through trial, conversion, and loyalty progression, retention rates will increase over the lifetime of the relationship.[1]

Purpose

The purpose of the retention rate metric is to monitor firm performance in retaining customers. Retention rate (and, by extension, attrition rate) is a driver of customer lifetime value. Very small changes in retention rate can make a major difference to the lifetime value calculation. Accuracy in this parameter is vital to meaningful CLV results.

Construction

      Retention rate (%) = [Number of customers retained ÷ Number of customers at risk] x 100

Note that this definition of retention is a ratio of the number retained to the number at risk (of not being retained). The key feature of this definition is that a customer must be at risk of leaving in order to be counted as a customer successfully retained. The percentage of customers starting the period who remained customers throughout the period is close to being the retention rate. This percentage would be a true retention rate if all the customers starting the period were at risk of leaving during the period.

References

  1. ^ Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; and David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition). Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>


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