What Is Customer Retention Rate? How To Calculate & Improve It
Meaghan has provided content and guidance for indie retailers as the editor for a number of retail publications and a speaker at trade shows. She is Fit Small Business’s authority on retail and ecommerce.
Brigitte is a retail specialist and staff writer with brick and mortar management experience. She is versed in retail sales analysis, merchandising, and buying with an emphasis in retail sales and marketing across platforms. She has a BA in writing from Washington University, St. Louis.
This article is part of a larger series on Retail Management.
Customer retention rate is the percentage of customers who remain customers over a certain period of time (weekly, monthly, quarterly). It is calculated with just three numbers—customers at the beginning and end of the designated period and new customers added during the period—and can help you understand your successes and opportunities in customer service, engagement, and loyalty. Average customer retention rates vary by industry—from greater than 80% for media and professional services firms to 55%–65% for retailers and restaurants.
Use our customer retention rate calculator below to quickly find your customer retention rate:
Calculating Customer Retention Rate
To calculate your customer retention rate manually, use the following formula:
Customer Retention Rate = [(E – N) / S] X 100
- E – number of customers at the end of the period
- N – number of new customers gained during the period
- S – number of customers at the start of the period
Here’s an example. Let’s say you’re measuring your customer retention rate for the last three months and you have the following data:
- You had 55 customers at the end of the period
- Ten new customers shopped at your store during the three months
- You had 50 customers at the beginning of the three-month period
[(55 – 10) / 50] X 100 = Customer Retention Rate
(45 / 50) X 100 = Customer Retention Rate
0.9 X 100 = Customer Retention Rate
90% Customer Retention Rate
All in all, although you gained customers during the period, you lost five existing customers. So, your customer retention rate is 90%—which is pretty good.
This varies widely between businesses. Generally, brands that rely on high customer retention will measure their rate more frequently, whereas businesses that don’t will measure their retention rates less often.
For example, if you have a coffee shop, many of your customers might be regulars that stop in almost every day on their way to work. So, you may want to measure retention on a weekly basis. If you have a spa that people only visit sparingly or for a special occasion, you may want to measure customer retention over a period of 6 to 8 weeks or evenly quarterly.
While you can track the customer retention variable yourself and calculate the rate manually, you can also have it done automatically with an integrated point-of-sale (POS) system. For this, we recommend Lightspeed. It will calculate your customer retention rate and provide you with a whole custom reporting suite, so you always have the data you need right at your fingertips.
Customer Retention Rate by Industry
To give you an idea of what a healthy retention rate would be for your business, here are some industry averages:
Factors Affecting Customer Retention Rates in 2022
As you can see, the benchmark figures above come from several years ago, before the pandemic shook the retail world to its core. While these are the most recent figures on average rates by industry, there are a number of current issues that might impact customer retention, including:
- Emphasis on convenience: Post-pandemic, customers are prioritizing convenience more and more. In fact, according to a 2021 Linnworks report, 76% of consumers say convenience is the key priority in choosing a retailer.
- Company ethos: As people become more and more socially conscious, they are increasingly wanting the companies they patronize to have a social consciousness as well. In a study from Iterable, respondents said “knowing a brand’s beliefs and values makes them feel more trust toward the brand (62%), better know the brand’s authentic identity (44%) and better believe the brand’s purpose (34%).”
- User-generated content (UGC) and customer reviews: Whereas previous generations looked to formal ad campaigns and commercials to learn about a product and gain trust, this is no longer the case. Modern consumers prefer UGC and real-life reviews to get a sense of a product or brand and whether or not they trust it.
User-generated content/UGC: Any form of content—images, videos, text, and audio—posted by users or customers on online platforms such as social media or wikis.
- Personalization: Another trend among modern consumers is that they expect their shopping journey to be personalized to them. That could mean custom product suggestions or a sales associate who remembers their name and preferences—customers just want the brands they love to treat them with personalized care.
While the modern consumer certainly creates new challenges, keep reading to learn about retention strategies that will boost your customer retention rate even in the post-COVID era.
7 Strategies To Drive Your Customer Retention Rate
At the end of the day, to improve your customer retention rate, you are going to have to prioritize customer experience at every corner of your business so that everyone who enters your store walks away with a positive impression.
Did You Know?
A classic and oft-cited report from Bain & Company and Harvard Business School found increasing customer retention rates by 5% can increase profit anywhere from 25%–95%. Not only that, but repeat customers tend to spend more per visit than new customers and are easier to market to and more likely to send referrals.
Here, we will look at seven different ways to boost your customer retention rate by providing an excellent customer experience:
1. Collect Customer Feedback
Collecting consumer feedback is a great way to get candid responses from your customers about their perception and experience of your store and help you understand what could be improved. Not only that, but collecting customer feedback demonstrates that you put the customer at the center of your brand and prioritize their needs. This, in turn, will make customers feel valued, helping to foster their loyalty and increase retention.
DID YOU KNOW?
Most customers won’t tell you when they’ve had a bad experience—they just won’t return. About three-fourths of customers will abandon a brand after three negative experiences, according to Coveo.
To conduct customer satisfaction surveys, you simply collect customer information at checkout (either in-store or online) and then send a post-purchase email that asks questions about their experience and offers space for open-ended feedback.
Sending out satisfaction surveys will show your customer base that you want their input and value their satisfaction, and gives you the opportunity to improve your store operations.
Surveys are a great way to gauge customer satisfaction and see where you can improve on experience.
(Source: Pipefy)
Keep your surveys pretty short—somewhere between five to 12 questions is ideal. Each question will have a multiple choice option and a space where customers can add feedback in their own words. You will also want to ensure that your questions are specific, but general enough to apply to all your customers. Some areas you might want to inquire about include:
- Customer service
- Product selection
- Store appearance and cleanliness
- Overall impression
- Likelihood of recommending your brand to a friend
- Suggestions for improvement
In addition to sending out one-time surveys after a transaction, it’s also a good idea to regularly solicit customer feedback. This will not only allow you to monitor the performance of any changes you make to your business but will give you snapshots of the overall health of your business.
Some POS systems like Square have customer feedback tools built into digital receipts. With Square, when a customer receives an email or text message receipt, they can indicate whether the experience was positive or negative and choose a reason for their ranking. This allows businesses to collect real-time feedback and respond to customer concerns immediately.
Monitoring and responding to online reviews is also important for maintaining current customer relationships. It demonstrates that you are listening to feedback and taking active steps to improve customer experience.
Check your Google review, Yelp, and TripAdvisor pages, your customer service email, and other review platforms regularly. Address positive reviews with graciousness and invite people back. For negative reviews, be thoughtful with your responses, and work toward solving the customer’s problem rather than getting defensive.
For an easy and streamlined solution, Podium is cloud-based customer feedback software that aggregates online reviews from more than 20 different sites and text, email, and online communications—including Google and Facebook—into one dashboard. Podium helps businesses of all sizes collect customer feedback, solicit reviews, and respond to comments with ease.
User-generated content (UGC) includes reviews, how-to videos, and other organic text, videos, and images created by customers rather than the brand. Monitoring UGC is a great way for brands to gauge whether customers love their products. And, because modern consumers place a lot of value in UGC, this type of content is an important area to focus on to build trust and loyalty.
The Bar, a clothing brand, has a large selection of UGC in its tagged posts on Instagram. It also encourages people to post and tag its brand page by reposting almost every user-generated picture.
(Source: Instagram)
While it is great if UGC happens organically, you can also use a number of strategies to encourage your customers to post about your store and products. The only place to start, however, is to get yourself online so that users can tag you in their posts. Create social media profiles for your brand on every platform that you can—Facebook, Instagram, Twitter, TikTok, etc. From there, users can start making content about your brand and tagging you for all to see. To create UGC incentive, you can:
- Repost content created by your customers on your brand page
- Offer gift cards or other rewards for anyone that tags you in a post
- Hold contests where posts about your brand equal entries
- Work with influencers to create posts
Beta testing, or holding trials or offering free samples of upcoming products in exchange for feedback, is generally best for products that require customer use, like new software, beauty products, appliances, or tools.
This helps you get customer impressions before you roll out a new item and lets you understand your customers’ preferences so you can make product tweaks for maximum appeal. It will also show customers that your product centers on them, helping to garner their loyalty.
We recommend using your actual customers for beta testing for responses that accurately reflect your target audience and for any adjustments to be in line with their preferences.
You can check out this article for more on how you can set up your own beta testing group.
2. Revamp Your Customer Service
Strong and effective customer service will make or break your customers’ experience and impression of your brand and determine whether or not you are able to retain a solid customer base. This is only more true in the post-pandemic era, with 50% of consumers saying that COVID-19 has increased their prioritization of customer service as a factor when deciding to do business with a brand.
Did you know?
55% of customers will continue purchasing from a brand after a positive customer service experience. Some 44% would go on to tell close contacts like friends and family about the company.
Good customer service can make or break your customers’ experience with your business.
(Source: PointofSale)
When creating your customer service policies, here are a few guiding principles to help set you on the right track for creating a positive experience for your customers:
I am the first to admit that the customer is not actually always right. However, the goal of customer service is to create satisfied customers, so be sure that you are creating policies that prioritize happy customers over any other concern. For example, allow returns on damaged items, be lenient with your return window, and offer coupons or other compensation if anything goes wrong. Remember, you are a small business, so focus on being personable and not a corporate stickler for the rules.
Your customers are what keep your business going, so show them you care by telling them “thank you” and making them feel appreciated. For example, at my boutique, we would offer $10 coupons to anyone that spent over $100, and we always reminded people what their support meant to us as a small business.
While you might want your associates to contact you every time there is an issue, this will slow the service process and lead to frustrated shoppers. In fact, a third of consumers consider having their problem solved in a single interaction to be the most important part of customer service. Streamline your customer service policies and empower your employees, so that most, if not all, problems can be solved by a single person without overhead input.
When customers come to you with a problem or request, be sure that your business is the one carrying the onus of creating a solution. Make things as easy as possible for your customers to avoid frustration and show that you prioritize taking care of them.
In cases of company error, the best thing you can do is apologize and rectify the situation. If you make a mistake, don’t make excuses, but rather focus on fixing the problem and taking accountability for the issue. This approach is much more likely to retain your customers.
On the day-to-day, your employees will be the outward face of your store and will handle customer interactions. Be sure that customer service training is built into your onboarding process and periodic retraining occurs to keep things fresh. This will ensure that your associates are prepared to offer the experience you want to create in your shop.
Learn more in our ultimate guide to customer service for small businesses.
3. Implement a Loyalty Program With Perks
A great way to keep people shopping at your business is to reward their support with a loyalty program. Loyalty programs offer rewards, exclusive updates, or special services—the main thing is you want to make people feel special and keep them thinking about your brand so they continue spending with you and not someone else.
For example, at my store, we had a VIP program that gave our most loyal shoppers access to “Item of the Month Deals,” early entry to sale days, and exclusive text updates to keep them in the loop about all of our discounts and offers. Our VIPs were by far our biggest spenders and most likely to form an attachment to our brand. Additionally, the program not only rewarded customer loyalty, but also reinforced it by maintaining a line of communication. (We’ll talk more about omnichannel marketing later on in this article.)
For smaller-scale operations, you can use Excel, Google Sheets, or other platforms to manually keep track of your loyalty members. Otherwise, you can use a loyalty program software that will give you much more control, the ability to reach out to customers instead of waiting for them to come to you, and data on loyalty program usage and effectiveness. Most POS systems (including Lightspeed and Square) also have built-in loyalty programs and tracking capabilities.
In addition to setting up a system for keeping track of your members, you should also determine the structure of your loyalty program. We detail two structures below:
4. Use Omnichannel Marketing Techniques
Omnichannel marketing is the integration of physical and digital marketing tactics with the goal of creating a cohesive and memorable brand experience. Let’s say you are shopping in a local boutique and you give your email address at checkout to stay up-to-date on the newest arrivals. Then, when you get home a few hours later, you receive an email from the same boutique with a new member’s offer of 25% off if you follow its Instagram account.
Suddenly, you are seeing this brand all over your day-to-day life—from your email to your social media, as well as when you’re out shopping. As a byproduct, you become a regular customer and begin looking to this boutique for your clothing needs.
This integration of customer experience onto both digital and physical platforms is omnichannel marketing. And, as we can see from the example we discussed, this marketing strategy is also a great way to boost your customer retention.
5. Offer Something Unique
Another strategy you can use to boost your retention is by offering something unique. If no one else offers your specific product, service, or experience, people will have to shop with you to get what they are looking for.
For example, at my boutique, we spent a lot of time training our staff and kept our floor full of associates so that we could offer exceptional customer services like styling, clothing suggestions, and a friendly and outgoing staff. By offering a uniquely attentive and friendly shopping experience, shoppers not only referred others to our store more frequently but also were more apt to shop with us over other local boutiques.
Consider ways you can elevate your services, enhance your experience, or offer a specific product that can’t be found anywhere else. Market those unique elements, and be sure customers know about the exclusivity of what you offer.
6. Get Involved in a Community or Humanitarian Cause
In a 2021 study, Porter Novelli found that 78% of consumers are more likely to remember a brand with a purpose or mission, and 71% would purchase from a purpose-driven company over the alternative. If you are able to work with a local charity or align your business with a humanitarian organization, this will help your business stand out in the eyes of consumers and boost your customer retention.
You can donate a portion of your proceeds, hold fundraising events, or source from charitable groups. Along similar lines, you can partake in community events like farmers markets, pop-up shops, or collaborations with other businesses.
7. Prioritize Convenience
For the modern, post-pandemic consumer, convenience is a top priority that will make or break their experience and is expected to keep people coming back. More and more, convenience is coming to be the No. 1 factor influencing whether or not a customer makes a purchase and dictating their overall experience.
Did you know?
In the 2020 Consumer View Report for the National Retail Federation, they found that 52% of consumers say that half or more of all their purchases are based on convenience.
In efforts to accommodate new consumer expectations, you should work to incorporate convenience services into your business structure, especially buy online, pick up in store and buy now, pay later options.
Click and collect is a retail fulfillment strategy that allows shoppers to buy items online and then pick them up in-store (or at another collection point). This hybrid ecommerce model—also known as BOPIS (buy online, pick up in store), BOPAC (buy online, pickup at curbside), and curbside pickup—gives customers more options for shopping and creates a convenient way for shoppers to engage with your brand.
BOPIS is a great option for shoppers that want to shop online but don’t want to wait a week to get their purchase.
(Source: image ID 1874433676)
If you want to learn more about how you can set up BOPIS for your business, check out this five-step guide.
Another convenience service that is more and more important to modern consumers is financing options or buy now, pay later. BNPL services allow customers to pay for items in installments while you, the merchant, are paid in full right away. In recent years, BNPL services have rapidly grown in availability and are now a service that consumers expect from their retailers.
To start offering BNPL for your store, you will need to partner with a third-party app, like Klarna or Affirm. You can learn more about our top suggestions for BNPL apps as well as how to set them up for your store with our BNPL guide for merchants.
Not convinced that BNPL is a powerful trend in modern retail? Check out our guide on the top BNPL stats for 2022 so you can better understand the customer financing landscape.
Other Metrics for Understanding Your Retail Business’s Success
While customer retention is important and a key metric for understanding how your business is performing, it should be used in conjunction with other KPIs or key performance indicators to understand your business’s success.
Key Performance Indicators (KPIs): Performance metrics that evaluate the success of an organization or of a particular activity in which it engages.
Your customer churn is essentially the inverse of your customer retention rate. It measures the number of customers that your business loses over a certain period of time. While slightly depressing, understanding and tracking your customer churn will allow you to spot and address problem areas before they get out of hand.
As with customer retention, you can use an integrated POS system to track your customer churn rate. Or, you can do the calculation by hand using the following formula:
Customer churn rate = (customers at the beginning of the month-customers at the end of month) / customers at the beginning of month
This metric can also help you identify your target market. If your churn rate is consistently higher than you want, it might be because you are looking to sell to the wrong people; increasing your customer retention and lowering your churn rate might be a matter of shifting your target market.
For example, say you own a flower shop marketing to women, but your churn is high and you want to increase your retention rate. For six months, you launch a marketing campaign at men that advertises your bouquets as the perfect gift for their girlfriend. This marketing shift boosts your retention rates and slows your customer churn.
Use your understanding of both your customer churn and customer retention to determine your target market and devise a strategy that will attract customers to your business and boost your customer retention.
This metric does exactly what it sounds like it does—measuring the average number of products sold in each transaction over a certain period of time. At my fast fashion clothing store, we measure UPT on a weekly basis because having a high UPT was important to our success. Other businesses—for instance, higher end retailers that don’t need to prioritize high volume orders—might measure their UPT monthly or even quarterly. It all depends on how important having multi-item purchases is for the health of your business.
To measure you UPT, you simply use the following formula:
Units sold in a period / Number of transactions in a period = UPT
This metric tells you the average dollar amount per transaction and is great for understanding the success of your pricing strategy and how well your associates are selling to customers.
The formula for calculating your average transaction value is:
Total sales in a period / Total number of transactions in a period = ATV
You can also measure the health of your business by measuring sales per square foot, or your store’s average revenue for every foot of selling space. Over time, this metric can help you to understand how efficiently you are using your sales space, so you can make smarter merchandising, inventory, and sales decisions.
In general, stores with higher value items will have higher sales per square foot and stores with lower value items will have a lower figure. The biggest thing you want to look for with this metric is that it either stays consistent or increases. That means that you should monitor this figure regularly to see how it changes over time so that you can make adjustments to keep it improving or recover losses.
The formula for sales per square foot is as follows:
Total revenue / total square footage = sales per square foot
When you measure your sales per square foot, do not only use the square footage from your sales floor and exclude other areas, like storage and office space. You should use your total square footage from your entire store for an accurate measure.
The final KPI that we will look at is your gross margin or your business’s net revenue minus the cost of goods sold. In other words, gross margin is your profit once you have taken out all the money you spent to acquire and manage your inventory. Your gross margin helps you understand the efficacy of your business and your overall profits.
Cost of goods sold (COGS): All the costs associated with that item—including all labor, transportation, storage, marketing, and unit costs.
The formula for your gross margin can be written in two ways:
Gross margin = (Price – Cost) / Price
OR
Gross Margin = Profit / Price
You can calculate your gross margin by hand or you can check out our article on gross margin and markup for a calculator that will do it for you.
Learn more about retail analytics and using different metrics to drive sales.
Bottom Line
Customer retention is one of the most effective ways to drive your sales and grow your business. Although the formula for calculating customer retention is cut and dry, improving your rate can feel more like an art and takes a lot of experimentation. As a whole, driving your customer retention rate comes down to creating a positive customer experience and having strong communication with your customer base. Use the tips above to help guide your customer retention initiatives, and watch your business flourish.
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