Calculate Customer Retention by Yanick Jomphe

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It's important to understand the terms. PHOTO Andreas Klassen (unsplash)

In this article, we will review some important calculations in the industry.

It is important to understand the terms: retention, penetration and loyalty rate. We will therefore provide an overview of each rate in order to better differentiate them.

Calculating the retention rate

First, it is important to understand the definitions of each term used in the industry. We will skim through several rates to obtain accurate figures rather than unjustified rounding.

Please note that to calculate your client retention rate, simply subtract, for a given period of time, end-of-period clients from new clients, divided by the original clients.

The formula is simple: Retention Rate = ((E-N)/S) x 100 

E = # of customers at end of the period.

N = # of customers acquired during the period.

S = # of customers at the start of the period.

We will need to differentiate the post-purchase retention rate from the retention rate of customers in service for recommended maintenance (no purchase from you).

For example, we have a promotion for the service and have about 2000 customers solicited in total. Of this number, 500 active customers are taking advantage of your promotion and 75 customers have been added as new customers (file creation).

Your calculation will be done like this : (500-75) / 2000*100.

Sometimes, the retention rate is calculated by the manufacturer and includes sales (therefore with the potential market segmentation).

Many companies do not make the right calculations. Let me explain: if, for example, 200 customers are targeted for their recommended maintenance and 100 people show up, the calculation is simple: 50%. On the other hand, you often forget about recall campaigns that are done at the service without doing their maintenance (considered as new customers). The retention rate should be calculated with the target (come for a service).

If we are talking about sales, it is the same principle. The question we ask ourselves is: “If a customer buys from a competitor and comes in for service at another dealership, where will it be calculated in terms of customer retention? “So, before we do statistics, it’s good to know what we want to calculate and to understand the principle that in service, you have to do the calculation carefully to get real numbers, not speculation.

In summary, if you are doing a promotion or simply following up on recommended interviews, the retention rate strictly represents the customers who were solicited and who came in for their recommended interview, not all the work orders. Beware of numbers!

Penetration rate

Many manufacturers use this term to calculate potential customers in the area. Therefore, we are talking about the penetration rate for a dealer X. This rate reflects the proportion of consumers having acquired a product for a given period and a given market segment. It is calculated by the number of customers obtained divided by the potential customers in the market (zone) * 100.

This rate is provided by the automobile manufacturer according to the segmentation of zones (target markets) by dealer. For example, a dealership that serves X number of customers is divided by the total number of customers it should serve in its zone * 100.

Depending on the area limitation, some dealers may be penalized by an expanded or narrowed area. In addition, all dealers are analyzed in the same way. Is there an exact science for this calculation? I’ll let you be the judge of that…

Loyalty rate

With regard to the customer loyalty rate, the number of new customers must therefore be subtracted from the number of past customers or customers accounted for by a work order for a targeted period (end of period). Then, we will have to divide by the number of clients at the beginning of the targeted period (start date) * 100, i.e. the number of clients passed in 2020 via 2019 (minus new clients). So, we can analyze if the past client who passed 6 months ago (example) came back to us for another service. We can analyze it on a short term or long term period.

Taking stock

Beware of numbers and opt for your own calculation according to your specific needs. Work your customer bank properly and call in the experts!

Yanick Jomphe is a training consultant and a specialist in the implementation of CRM reminder systems. She holds a B.A.A., M.B.A. and Ph.D. on the impact of stakeholder involvement in the implementation of management tools on organizational performance. Online training available at [email protected]  


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