What is customer retention rate and how does AI help?

Natalie Smithson
AI enthusiast | Tea addict | Focused on using AI assistants to win the working week

What is customer retention rate?

Customer retention rate is a metric showing the percentage of customers who keep engaging with your products or services over a specific period of time. It measures your ability to keep your customers, reflecting their loyalty and satisfaction, playing a crucial role in solidifying long-term relationships.

How do you calculate your customer retention rate?

To calculate the customer retention rate, identify the number of customers you have at the end of a set period of time and subtract the new customers you acquired during that time. Divide the result by the total number of customers you had at the beginning of that same period of time.

Formula for calculation

(E-N)/S x 100

  • E = customers at the end
  • N = new customers acquired
  • S = customers at the start

Typical time period options

  • Monthly
  • Quarterly
  • Annually

Example calculations

70% customer retention rate

Number of customers at end of quarter (E): 900 New customers acquired during quarter (N): 200 Number of customers at the start of the quarter (S): 1000

  • (E) 900 – (N) 200 = 700
  • 700 / (S) 1000 = 0.7
  • 0.7 x 100 = 70%

100% customer retention rate

Number of customers at end of quarter (E): 10,087 New customers acquired during quarter (N): 320 Number of customers at the start of the quarter (S): 10,310

  • (E) 10,087 – (N) 320 = 9767
  • 9767 / (S) 10,310 = 0.947
  • 0.947 x 100 = 95% (rounded up)

Overall, the customer retention rate calculation gives vital insights into customer loyalty and helps you track trends effectively and report progress to your teams.

What is a good customer retention rate benchmark?

A strong customer retention rate benchmark typically falls between 80% to 90%, but industry benchmarks vary, so it’s essential you understand your specific market dynamics and customer expectations to set realistic retention targets.

How to use customer retention rate in the age of AI

Using an AI assistant to support your customers speeds up service, improves accuracy, delivers a 24-hour service, and enhances efficiency, especially when it’s integrated with your go-to systems to automate routine tasks. If there’s a problem with customer retention, your AI assistant can soon help spot what it is, so you can fix it.

Keeping customers with the help of AI

Let’s say you offer multiple insurance options for a niche industry. It might be these options aren’t easily found on your website or it’s unclear which option is most suitable for which type of customer, so the outcome could be negative:

  • Customer doesn’t find a suitable service upgrade when it’s needed, so moves to a competitor
  • Customer doesn’t find the appropriate level of membership to suit their needs, even though it exists, so finds a cheaper alternative with a different supplier
  • Your membership options are so confusing, a customer is tempted to move to another insurer because their communications make more sense to them

An AI assistant with next-gen capability can not only understand what your customer is asking for in a simple back and forth natural conversation, specific to their exact query, you’ll also be able to see if customers frequently drop off once they get the information they need. This could signify a potential problem.

As well as this, while your customer is right there in the moment and focused on the issue, an AI assistant can get instant feedback from them.

Chat window showing AI assistant asking

If customers tell you they can’t find an appropriate level of insurance, but you know one exists, you can change the process to make sure people get the information they need ― instantly, 24 hours a day, through the AI assistant. Or if they tell you your membership levels are too confusing, your team can start testing new structures right away to move past the issue.

“Our AI assistant assists customers by making useful information more readily available in ways that haven’t been possible before, and therefore reducing pressure on our service centres.” ~ Claire Hird, Operations Director at Legal & General Insurance

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FAQs

Why is customer retention rate important for businesses?

Customer retention rate is crucial as it reflects customer loyalty and satisfaction, helps in identifying areas for improvement, and plays a key role in creating long-term relationships with customers.

Can a high customer retention rate lead to increased profitability?

Yes, maintaining a high customer retention rate can lead to increased profitability by reducing customer churn, increasing customer lifetime value, and lowering customer acquisition costs.

How often should companies track their customer retention rate?

It’s advisable for companies to track their customer retention rate regularly, typically on a monthly or quarterly basis, to monitor trends, identify changes, and address any issues promptly.

Apart from customer retention rate, what are other key metrics related to customer loyalty?

Other essential metrics related to customer loyalty include Net Promoter Score (NPS) and Customer Satisfaction Score (CSAT), providing additional insights into customer sentiment and behaviour.