“Our customer retention is excellent. We only lose 5% of customers per year, so our retention is 95%.”
Does this sound familiar? If so, you have probably also been caught off guard when your board double clicks on this number. The resulting panic and personal brand hit can be avoided.
I recently saw this first hand. Founding CEOs know their customers well and care deeply about customer retention. But this passion masked a deeper issue: customers, especially legacy customers, were not purchasing at the same rate. They were becoming single-product customers. Low dollar customers. But guess what? The key metric of customer retention rate did not alert the management team. They were caught off guard, and as a result their standing with the board suffered.
This frustrating experience can be prevented. Blind spots can be lit, and revenue growth can be secured. All by expanding your customer churn metrics.
Your New Customer Retention Metrics:
1) Net Revenue Retention. If you only have one retention metric, make it this one.
The aggregate revenue change of the same segment of customers over time. It is calculated by current revenue divided by revenue from a year ago (or month, or quarter – just stay consistent). NRR is truth serum of your current customer base. NRR combines on the downside of lost customers plus the upside of expansion revenue: cross-sell and up-sell.
2) Gross Margin Retention. Owners and shareholders priority.
Calculated by current margin divided by margin from a year ago. We have all seen it. End of quarter comes, and we need to hit the number. Or a competitor releases a superior product months ahead of you and you can’t lose market share. The result? Price erosion.
3) Product Retention. It’s not only the Account Managers duty.
Calculated by # of products per customer divided by # of products per customer from a year ago. Customers are stickier when they rely on multiple products. Product retention is a leading indicator of customer count retention.
4) Bonus: Channel Churn. Thinning the pack, or losing whales?
Calculated by the # of channel partners divided by the # of channel partners a year later. This one can be tricky as some strategies call for reducing channel partners to optimize your channel management headcount and channel marketing spend. Control for purposeful channel optimization. Pro Tip: ensure you consider partner levels in this calculation; a gold partner becoming a diamond is generally a good thing.
The key in any retention calculation is using the same cohort of customers. The goal is to separate out new customers to obtain a clear health status on your base.
Download the Retention Metrics Tool to see how companies interpret these metrics.
Why do you care? Different metrics alert you to different opportunities or issues in your business. That 95% customer retention rate is not great if the 5% that churned were high revenue customers. Taking a multipronged approach helps balance short term requirements like customer count, and long term strategic initiatives like net revenue retention. If this hits home, you likely have an opportunity to prevent panic by improving customer success and sales operations.