Customer retention rate formula
Retention rate is the share of the customers you started a period with who are still customers at the end. You cannot see them directly in an end-of-period count, because new customers are mixed in, so subtract the new ones first.
- Retention85%
- Customers kept170
- Churn15%
- Net growth5%
The goal of retention is to reduce the number of customers who defect, and holding on to an existing customer is typically cheaper than winning a new one.[1] That is the business case for measuring it every period.
Worked example over three months
| Month | Start (S) | End (E) | New (N) | Retention |
|---|---|---|---|---|
| January | 200 | 210 | 40 | 85% |
| February | 210 | 228 | 38 | 90.5% |
| March | 228 | 236 | 30 | 90.4% |
Each month’s start is the previous month’s end. February kept 190 of 210 (228 − 38), March kept 206 of 228. Quarterly retention is not the average of the three months; compound it (multiply the monthly rates) or measure the quarter directly from its own S, E and N.
Why retention matters for value
Retention drives lifetime value: in Gupta and Lehmann’s model a customer’s worth is margin × r ÷ (1 + i − r), so at a 12% discount rate moving retention from 80% to 90% raises the margin multiple from 2.5 to about 4.1.[2] Test your own numbers in the customer lifetime value calculator. Revenue-based retention, which public software companies report as net dollar retention,[3] is covered on the ARR formula page.
Retention rate mistakes
- Forgetting to subtract new customers. E ÷ S measures growth, not retention: it can exceed 100% while you lose customers.
- Inconsistent definitions of “customer”. Count the same thing at start and end: active accounts, paying subscribers, or buyers in the last 12 months.
- Reading retention without churn. Retention and churn add up to 100%; the churn rate calculator converts churn between months and years.
Frequently asked questions
How do you calculate customer retention rate?
(Customers at end − new customers) ÷ customers at start × 100. (210 − 40) ÷ 200 = 85%.
What is the difference between retention rate and churn rate?
They are complements: churn = 100% − retention. 85% retention is 15% churn.
Can retention rate be over 100%?
Customer retention cannot, because you cannot keep more customers than you started with. Net revenue retention can, through upgrades.
What period should I use?
Match your billing or purchase cycle: monthly for monthly subscriptions, annually for annual contracts or seasonal products.