Curt Mastio
By Curt Mastio on June 13, 2024

How to Calculate Retention Rates for Startups

There’s a lot of value to be found in calculating your startup’s retention rate. 

You’ve built your product, launched it, and now you want to know how well it’s performing. Retention rate is a good indicator of customer happiness and an essential metric for any startup, and it can also help you determine how to improve your product or service. 

Here’s everything you need to know about retention rates.

What is Retention Rate? 

Retention rate is a metric that indicates the percentage of customers who continue to use a product or service after the first use. 

Retention rates vary from company to company and industry to industry. But every business owner needs to understand how these figures work and how to calculate retention rates. This applies to an established brand or a startup just getting started. 

Ideally, the metric measures the percentage of customers who return to your business to buy again after their initial purchase. It indicates how many people are returning to buy from you and helps you calculate how long they stay customers.

Why is Retention Rate Important? 

Retention rate is a critical metric for all businesses, but especially startups. The higher your retention rate, the more likely you will survive and succeed. 

Startups are often still working on building their brand and reputation and tend to have lower customer retention rates than established companies. Unfunded startups also need more money for customer acquisition activities like advertising and marketing campaigns.

Retention rates are essential for determining whether a business successfully keeps the new customers they bring in. For example, if you have a 100 percent retention rate, all of your customers return to buy again and again after purchasing. A 50 percent retention rate means that half of your customers return to buy again.

Retention rates are essential for any business because they show how successful your business is at keeping customers engaged with its products and services. 

You’ll grow faster if you keep customers returning and spending money on your product. Consequently, you’ll have a sustainable company making money and keeping customer acquisition costs low.

How to Calculate Retention Rate

To calculate retention rate, you must first identify the period you wish to study. You’ll need three numbers from the desired timeframe to calculate retention rate:

  • Customers at the start of the period (S).
  • Total customers at the end of that period (E).
  • New customers that you acquired during that period (N).

Once you have this data, you can plug it into the customer retention rate (CRR) formula:

[(E – N) / S] x 100 = CRR

Start with the number of customers at the end of the period (E). To measure retention for a calendar year, start with your customer count on December 31st (E).

In the next step, subtract the number of new customers you gained during that period (N). 

Finally, divide the result by the number of customers at the beginning of the period (S). In this scenario, S will be the number of customers you had on January 1st.

To get the percentage retention rate, multiply the result by 100.

For example: 

Suppose your business had 400 customers at the beginning of the year, ended with 500 customers, and added 200 within the year. In this case: E = 500, S is 400, and N is 200. 

Use the formula above to get your percentage retention rate:

[(E – N) / S] x 100 = CRR

[(500 – 200) / 400] X 100

300 / 400 X 100 = 75%

Therefore, your percentage CRR is 75%.

How to Improve Your Retention Rate

Solid customer retention is a crucial aspect of business success. Happy and loyal customers will go a long way toward improving your bottom line. They’ll tell more people about you (helping you grow), and you can spend less to acquire new customers. 

Here are tips for improving your customer retention rate:

  • Do what you say you’ll do.
  • Join the conversation on social media. Be present, responsive, and engaged while proactively seeking contact with your customers.
  • Collect customer feedback and do your best to improve the customer experience.

Improve Your Retention Rate with the Help of an Experienced Accountant

For a business to be successful, it needs to retain its customers. Most startups that fail, do so because they need help attracting and retaining customers. 

That’s why retention is such an important metric to track, especially when trying to figure out what’s working and what isn’t in your business.

An experienced accountant can help you make sense of all the information flowing through your business. Using data and metrics, you can improve your business’s retention rate and overall financial situation. Contact Founders today!

Published by Curt Mastio June 13, 2024
Curt Mastio