Customer Retention Rate: How to Calculate & Improve

Customer retention rate measures how many of your customers keep coming back over a specific time frame, such as a week, month, or quarter.

The customer retention rate formula uses just three values: the number of customers at the start, the number at the end of the period, and any new customers acquired during that time. This metric can help you understand your successes and opportunities in customer service, engagement, and loyalty.

What Is Customer Retention Rate?

Customer retention rate is a retail metric that describes the ability of a business to retain customers or maintain consistent sales through repeat purchases. Its purpose is to measure and track the effectiveness of customer loyalty and relationship management efforts.

Your customer retention rate is influenced by how many new customers you acquire in a period of time, how many existing customers churn (by not returning to shop again, canceling their subscription, or closing a contract), and how many continue to patronize your business.

Average customer retention rates vary by industry—from greater than 80% for media and professional services firms to 55%–65% for retailers and restaurants.

Customer Retention Rate Calculator

Use our customer retention rate calculator below to quickly find your customer retention rate:

Customer Retention Rate Formula

To learn how to calculate customer retention rate manually, use the following formula:

Here’s an example. Let’s say you’re measuring your customer retention rate for the last three months. You had 55 customers at the end of the period, 10 new customers shopped at your store during that time, and you had 50 customers at the beginning of the period.

1. Start with the number of customers at the end of the period, which is 55.
2. Subtract the number of new customers acquired during the period, in this case, 10.
3. Divide the result by the number of customers you had at the beginning of the period, which is 50.
4. Multiply by 100 to get a percentage.

This means your Customer Retention Rate for the period is 90%—which is pretty good.

Why Customer Retention Rate Is Important

Customer retention rate is a vital indicator of both how effectively you acquire customers as well as how successful you are at keeping existing ones satisfied. Retaining customers is significantly less expensive than acquiring new ones, with estimates suggesting it costs five to 25 times more to attract new shoppers.

Retained customers not only reduce costs but also promote your business and can help drive growth. In fact, it’s widely estimated that increasing your customer retention by just 5% can boost revenue by 25%–95%. Moreover, repeat customers usually spend more per visit, are more receptive to marketing, and are more likely to refer new customers.

How Often Should You Measure Your Customer Retention Rate?

How often you measure your customer retention rate should match the buying patterns of your customers. Frequent transactions, like those in a coffee shop, might require weekly tracking. In contrast, less frequent services (such as at a spa) might extend to measuring customer retention rate quarterly.

To streamline this process, consider using a point-of-sale (POS) system like Lightspeed, which automates retention calculations and offers comprehensive reporting features.

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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

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. 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: User-generated content and customer reviews are now more influential than traditional ads, as modern consumers trust real-life testimonials to inform their product choices.
• Personalization: Modern consumers expect personalized shopping experiences, from tailored product recommendations to sales associates who remember their preferences, enhancing their connection with brands.

How to Improve Customer Retention Rate

One of the most effective ways to improve your customer retention rate is to prioritize customer experience at every corner of your business so that everyone who enters your store walks away with a positive impression.

Here are seven different ways to increase customer retention by providing an excellent customer experience:

1. Collect Customer Feedback

Collecting customer feedback offers direct insights into how your customers view and interact with your store, guiding you on what to improve or change to encourage repeat business. It also shows that you value customer-centricity, making them feel appreciated and nurturing their loyalty—which in turn boosts retention.

Customer Satisfaction Surveys

To conduct customer satisfaction surveys, simply collect customer information at checkout (either in-store or online) and then send a post-purchase email asking questions about their experience. Be sure to leave a 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.

Customer satisfaction surveys are effective when they feature a few straightforward questions and offer customers a variety of response options, including scales from 1 to 10 and open-ended fields for detailed feedback. (Source: Doofinder)

Keep your surveys short (between 5–12 questions is ideal). Typically, each question will have a multiple-choice option. You’ll also want to ensure that your questions are specific, but general enough to apply to all of 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 its overall health.

Some POS systems like Square for Retail 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.

Online Reviews

Proactively monitoring and addressing online reviews is crucial for sustaining customer relationships. It shows you value their feedback and are committed to enhancing their experience.

Regularly check and respond to reviews on platforms like Google, Yelp, and TripAdvisor, thanking customers for positive feedback and constructively addressing any criticism. For efficiency, consider using services like Podium, a cloud-based tool that consolidates reviews and communication from various channels into a single dashboard.

User-generated Content on Social Media

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.

Encouraging user-generated content (UGC) starts with establishing your online presence. Set up profiles for your brand across various social media platforms like Facebook, Instagram, Twitter, TikTok, and more, allowing customers to easily tag your store in their posts. 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

Beta testing, or holding trials or offering free samples of upcoming products in exchange for feedback, is generally best for products that require direct consumer interaction (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 interest and 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.

2. Revamp Your Customer Service

Exceptional customer service is key to defining your brand’s impression and experience, which are crucial for retaining a loyal 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.

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:

Prioritize Customer Satisfaction

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.

Show Appreciation

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.

Ensure Ease of Resolution

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.

Maximize Convenience

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.

Take Responsibility

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.

Train Your Associates

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.

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. Their main purpose is to make customers feel special, incentivize them to return, and keep them thinking about your brand (so they continue spending with you instead of a competitor).

For tracking loyalty members, smaller operations can use tools like Excel or Google Sheets, while larger ones might benefit from specialized loyalty program software, offering greater control and insights. Many POS systems, including Lightspeed and Square, come with integrated loyalty features.

In addition to setting up a system for keeping track of your members, you should also determine the structure of your loyalty program. Here are two examples:

Rewards

One way that you can structure your loyalty program is as a rewards system, where members get deals or gifts as a “thank you” for their patronage. Here are three rewards systems:

• Punch cards are effective for businesses with uniform products or those relying on frequent purchases. They track the number of purchases, and upon reaching a set amount, customers earn a free item.
• Points programs let customers accumulate points with each purchase. Once a certain threshold is reached, they can redeem these points for deals, store credit, or free items. It typically requires POS or loyalty software for tracking.
• Exclusive deals offer special sales or promotions exclusively to loyalty program members. This model often involves notifying customers about these offers via phone or email.

Subscription Services

Another way you can engage customers and boost retention rate is through subscription services—offering exclusive content or regular deliveries (weekly, monthly, etc.).

For businesses with products bought regularly, consider a subscription model, like seasonal fashion boxes or weekly coffee deliveries. For instance, a soap seller might provide a monthly subscription for seasonally scented soaps.

Alternatively, offer exclusive content, like early access to products through a subscriber-only newsletter. These models establish a dependable customer base and enhance brand loyalty, with content subscriptions generally being more affordable and reliant on providing substantial exclusive access.

4. Use Omnichannel Marketing Techniques

Omnichannel marketing combines physical and digital marketing strategies to create a unified and memorable brand experience.

For instance, if a customer provides their email at your boutique, you can soon after send them an offer via email to follow your Instagram for a discount. This approach places your brand across various aspects of the customer’s life, from online interactions to physical shopping, enhancing customer engagement and loyalty. Essentially, omnichannel marketing weaves together different customer touchpoints (both online and offline) proving effective in increasing customer retention.

5. Offer Something Unique

Another way you can boost your retention is to offer something distinctive. Unique products, services, or experiences that no one else offers will encourage customers to choose your business.

For example, my boutique invested in training staff and ensuring ample presence on the floor, providing exceptional customer services like styling and friendly interactions. This distinctive approach led to increased referrals and customer preference over other boutiques.

Finding ways to elevate your services or offer exclusive products and effectively marketing these unique aspects can significantly enhance customer attraction and loyalty.

6. Get Involved in a Community or Humanitarian Cause

The 2022 Harris poll, commissioned by Google, revealed that 82% of consumers prefer brands with values that align with their own. Additionally, three-quarters of shoppers indicated they would switch brands if they encountered a conflict in values.

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 number one factor influencing whether or not a customer makes a purchase and dictating their overall experience.

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.

Buy Online, Pick Up in Store (BOPIS)

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.

Buy Now, Pay Later (BNPL)

Another convenience service that’s important to modern consumers is financing options or buy now, pay later (BNPL). 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’ll need a third-party app, like Klarna or Affirm. Read our top suggestions for BNPL apps as well as how to set them up in our BNPL guide for merchants.

Other Metrics For Understanding Your Retail Business’s Success

While using the customer retention rate formula is important for understanding how your business is performing, it should be used in conjunction with other metrics and KPIs (or key performance indicators) to understand your business’s success.

Customer Churn Rate

Customer churn (or churn rate) is the opposite of customer retention and tracks the loss of customers over time. Understanding churn helps identify issues early on.

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:

This metric can also help you identify your target market. If churn is high, consider targeting a different audience. For instance, a flower shop targeting women might switch to marketing to men—positioning bouquets as ideal gifts—to improve retention. Balancing insights from churn and retention rates is key to defining your target market and developing strategies to attract and retain customers.

Units Per Ticket (UPT)

This metric measures 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 it was a key indicator of 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 your UPT, use the following formula:

Average Transaction Value (ATV)

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:

Sales Per Square Foot

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 understand how efficiently you’re using your sales space, so you can make smarter merchandising, inventory, and sales decisions.

Generally, stores selling high-value items tend to show higher sales per square foot, while those with lower-priced goods have lower figures. The key is to ensure this metric remains consistent or shows an upward trend. Regular monitoring allows for timely adjustments to maintain or improve performance.

The formula for sales per square foot is as follows:

When calculating sales per square foot, it’s important to include your store’s total square footage, not just the sales floor. This ensures a more accurate measurement, as it accounts for all space, including storage and office areas.

Gross Margin

Gross margin is your business’s net revenue minus the COGS (cost of goods sold). In other words, gross margin is your profit once you’ve taken out all the money spent to acquire and manage your inventory. This metric helps you understand the efficacy of your business and your overall profits.

The formula for your gross margin can be written in two ways:

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.

Bottom Line

Customer retention is one of the most effective ways to drive your sales and grow your business. Although the customer retention rate formula 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.