How do you calculate customer retention rate? What’s the difference between gross and net retention rates? And most importantly, once you know your retention rate, how can you improve it? Get the answers to these questions and more in our blog.
What Is Customer Retention Rate?
Customer retention rate is the percentage of customers who remain customers for a certain period of time.
How to Calculate Customer Retention Rate
The customer retention rate formula is:
For example, say you sell a software solution with four pricing tier options. If you have 8 customers at the beginning of the year and 5 at the end, your customer retention rate is 62.5%.
However, customer retention rate doesn’t take the value of each customer into account. In order to do that, we’ll need to take a look at gross and net retention rates based on your monthly recurring revenue (MRR) or annual recurring revenue (ARR).
Gross Retention Rate
Rather than looking at the number of customers you’ve retained, gross retention rate (GRR) looks at the value of those customers. With gross retention, we take downgrades and customer churn into account, but not upgrades.
How to Calculate Gross Retention Rate
The gross retention rate (GRR) formula is:
With this metric, we can get a better idea of our overall customer success through the value we’ve retained, rather than just the number of customers.
With the value of each customer now providing some “weight” to our data, we can see that our gross retention rate is actually significantly less than our customer retention rate.
Net Retention Rate
Net retention rate (NRR) is very similar to GRR, but it takes both downgrades and upgrades into account for a more full picture of your customer success.
How to Calculate Net Retention Rate
The net retention rate (NRR) formula is:
While GRR looks at how well we are retaining customers, NRR can give a more complete look at our overall retention and customer growth.
Now we can see that our NRR is significantly higher than our customer retention rate and gross retention rate. While we are not retaining all our customers, we’re doing a good job with expansion by upselling, and cross-selling existing customers, ensuring our lead pipeline maintains its current rate.
These three metrics are key to improving your net revenue retention and tracking your overall customer success.
How Can You Improve Your Gross and Net Retention Rates?
Once you’ve calculated your retention rates, you may be shocked at what you find. So how can you improve customer retention and grow your business through your current customers?
Set Achievable Goals
The first step is to understand your starting point by calculating your retention rates, and setting reasonable goals to drive your business in the right direction.
You can do things the old-fashioned way, or you can try a customer success platform that will help you set, track, and reach your goals. You can break them down into manageable tasks, assign them to team members, add deadlines, and track progress, all in one easy-to-use interface.
Track Customer Communication & Improve Account Health
Now that your whole team is moving in the same direction toward your goal, it’s time to talk tactics. First up – tracking communication with your customers to improve the health of your relationships.
Integrate your CRM with RevSetter to see your last contact with each customer at a glance and create a priority list for follow-ups. RevSetter can even remind you or your team members automatically to check in with customers on a schedule.
You’ll also be able to track the strength of your customer relationships over time. In turn, you can more accurately forecast retention, expansion, and customer churn.
Measure Customer Data
The better you know your customers, the more able you are to meet their needs and improve your customer retention rate over time. With Revsetter, you can explore customer lifetime value, renewal value, and more at a glance to see the bigger picture and identify key accounts.
With our growth matrix, you can explore high risk and high opportunity customers to maximize retention and prevent unexpected churn.
Keep Customers Satisfied
A huge element of improving your customer retention is being able to grow alongside your customers to offer them the things they need before they go shopping elsewhere.
RevSetter helps companies identify upsells and cross-sells to meet customer needs and prevent them from looking for other solutions. Happy, fulfilled customers mean stronger retention and less need to bring in new business.Improve your customer retention rate and net revenue retention with RevSetter.