Calculating Yours Product’s Retention Rate and Its Importance
Any firm wanting to succeed must closely monitor its retention metrics. Of course, anytime a company introduces a product, it attracts customers, and the product’s retention rate helps determine the number of customers the product retains over a given period.
There’s one economic reason businesses need to keep an eye on a product’s retention rate. Keeping your current customers is much less expensive than trying to lure and win new ones.
The existing customers help promote your product or brand on social media platforms and give feedback, helping improve it. These loyal customers go a long way in contributing to the health of your firm through their referrals.
Read on to learn how to calculate your product’s retention rate and understand its importance to your firm.
What Is a Product’s Retention Rate?
A product’s retention rate measures the number of customers the product retains since its introduction in the market, up to a certain time (a week or month, for example). Usually, you express this as a percentage of your existing customers who remain loyal to the product within that period.
It’s worth noting that a product’s retention rate must also account for new customers that you win. This is crucial to ensuring you don’t throw off any data.
Monitoring your retention metrics helps a company establish lifetime customer value. Additionally, they can quantify the efficacy of their customer service program and marketing strategy.
Retention Rate Formula
There are no industry-specific or standard formulas linked with calculating retention rates. Nevertheless, there’s a basic formula that you can use to calculate your product’s retention rate, giving you an insight into how the product is doing with customer loyalty.
This retention rate formula comprises the following components:
The time frame you want to determine product retention rate.
The number of existing customers the product had at the start of this period (Cs).
The number of customers for the product at the end of the period (Ce).
The number of new customers for the product you added within the time frame (Ca).
Once you have this data, you only need to plug it in the below retention rate formula:
Product’s Retention Rate (in percent) = [(Ce- Ca) / Cs] *100
Retention Rate Formula Step-By-Step:
Start with the number of customers for the product at the end of the period (Ce): To calculate the product’s retention rate for a calendar year, Ce is the total number of customers you have on 31st December.
Subtract the number of customers you gained within the time frame (Ca): Remember, failure to subtract the new customers may throw off the data.
Divide the result by the number of customers the product started with (Cs): Considering the case of the calendar year, S is the number of customers buying the product on 1st January of the previous year.
Multiply the figure by 100: This expresses the result as a percentage.
Example
Consider a product that had 10,000 customers at the start of the year. (Cs = 10,000)
Throughout the year, the product managed to gain 4,000 new customers. (Ca = 4,000)
At the end of the year, the product had 9,000 customers. (Ce = 9,000)
Product’s Retention Rate is [(9,000-4,000)/10,000] * 100
Product’s Retention Rate = 50%
Why Is a High Product Retention Rate Important?
Most business analysts and entrepreneurs believe retention rate is the most critical metric in determining a firm’s success.
Some of the benefits your company is likely to gain from improving the product’s retention rate include:
1. It Boosts Your Profit Margin
Research indicates that increasing your customer retention rate by 5% can improve profits by anywhere between 25% and 95%. That’s because loyal customers using your product for a long time are likely to think highly of your brand and trust your firm.
Ultimately, they end up buying any other products you offer. Such customers keep buying more and coming back because they know your products provide value.
This statistic should be a wake-up call for any business that is yet to put a solid product retention strategy in place.
2. It’s Cost-Effective, Saving You Money
Acquiring a new customer can be expensive. In fact, research shows that this can be five times more costly than retaining an existing customer.
With loyal customers, you’re looking at people who spend more on your product, are less expensive to maintain, and are easier to convince to keep buying your product.
The research cited in a Forbes article shows that the probability of selling to an existing customer is 60 to 70%, while the chance of converting a new customer is only 5 to 20%.
Simply put, existing customers are cost-saving.
3. Retained Customers Help Market the Product
The product’s retention rate is a great indicator of how happy your customers are with a product and whether or not it continues to solve their problems.
A high rate means the product’s customers keep coming back because they’re satisfied with its service. These happy, loyal customers are likely to promote your product among their close friends and family.
Interestingly, 92% of people trust word-of-mouth referrals than any other form of marketing.
Conclusion
Your product’s retention rate is like a company insurance policy. Staying on top of it is the surest way to guarantee a bright business future and prevent sudden downfall. But of course, this is only effective if you take action any time the rate changes.
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