I read your article in National Clothesline about customer retention rate with
interest as I’ve
struggled with the concept and tried different formulae. But I’ve never accepted an approach.
With your formula, how do you suggest I determine how many customers I have at
and at the end?
My problem stems from the fact that over the life of my business I have a large
customers. For example, I have had 13,000 customers in the 14 years at one of my
maybe only 4,000 of those customers have used us in the last year. So is the
correct number to
use the 13,000 or the 4,000 in my example?
And just to muddy the water even more, if I
pick the number of customers active in the last
12 months, why 12 months as opposed to six
or three months? I’d appreciate any thought in
this that you might have.
Thank you for your thoughtful follow up
question regarding the effect of frequency
when measuring customer retention and
whether one should include infrequent customers in the calculations.
I think that analysis and measurement efforts should be designed from the
perspective of what
you are wanting to learn and what you are planning to do with what you learn.
There is great value in looking at your entire customer dataset when doing an
(recency/frequency/monetary) analysis for the purpose of targeting your sales
efforts and making decisions about range of service offerings, route, and
specific target marketing
for both customer and service segmentation.
However, I think that you want to look at customer retention for the purpose of
potential problems with quality, customer service, and competitor incursion.
We do not want to lose the “Big Tunas.” When one drops out, the sooner you realize and
address it the better chance you can resolve the issue and win them back.
When measuring customer retention, we are also trying to measure revenue
our frequent and higher volume customers contribute the most important part of
(the 80/20 rule), those are the people we want to keep a close eye on. It is
really the group of
customers who are in all the time that have the most impact on your sales
For this metric, my suggestion would be to pick a relatively short frequency
But regardless of the interval you decide to use, as long as you are consistent
methodology, you will get useful information.
So, to determine “…how many customers I have at the start and at the end” create a definition
of “customer” that says to be counted, for example, one has to have visited within the
three months. Otherwise treat them as “New.”
To determine what that interval should be, do a frequency analysis of your
database, say over
a 12-month period, where you look at every customer for a year and determine how
and how much revenue each contributed.
Then if you sort that list from highest revenue to lowest you might see that
almost all of your
revenue comes from those with, say, four or more visits. Then your definition of
becomes “one who has had a previous visit within three months” (12 months/4 = 3).
The frequency analysis will give you the support for deciding that a three-month
interval is the
right one for you.