Customer Retention Rate
A retention rate is also known as a loyalty rate. It measures the percentage of existing customers in a year (or period) that remain customers in a future year (or period). There is no consideration of new customers in this formula – we simply use the total customer base or we can use customers in a particular segment.
Please see the following example for a bank:
In the above example we are just looking at the customers that were on the books, in year one and measuring whether they were also an active customer some time in year two.
As can be seen from the above table, the bank has an overall retention/loyalty rate of 90%, which is quite good. When you drill down to retention rate by segment, you can see that there are significant differences – ranging from retirees at 98% loyalty to young adults with just 82% loyalty. Therefore, it becomes quite apparent that if the bank were to invest in additional retention strategies that they should be aimed at young adults when there is no need to modify their retention approach for retirees.
This example also highlights the importance of looking at individual customer segments, rather than limiting the measure of customer lifetime value to the overall customer base.