Retention rate

Last updated

Retention rate is a statistical measurement of the proportion of people that remain involved with a group from one time period to another.

Contents

The concept is used in many contexts, including marketing, investment, education, employee management, research, and clinical trials. The exact definition depends on the context. As a general rule, high retention corresponds to a positive outcome.

In marketing, retention rate count customers and their activity irrespective transactions they make. [1]

"Retention rate is the ratio of the number of retained customers to the number at risk". In contractual situations, it makes sense to talk about the number of customers currently under contract and the percentage retained when the contract period runs out." This term should not be confused with growth (decline) in customer counts; retention refers only to existing customers in contractual situations. "In non-contractual situations (such as catalog sales), it makes less sense to talk about the current number of customers, but instead to count the number of customers of a specified recency."

In a survey of nearly 200 senior marketing managers, 63 percent responded that they found the "retention rate" metric very useful. [2]

Purpose

The purpose of the "retention rate" metric in a marketing atmosphere is to monitor firm performance in attracting and retaining customers. "Only recently have most marketers worried about developing metrics that focus on individual customers. In order to begin to think about managing individual customer relationships, the firm must first be able to count its customers. Although consistency in counting customers is probably more important than formulating a precise definition, a definition is needed nonetheless. In particular, we think the definition of and the counting of customers will be different in contractual versus non-contractual situations." [2] Since there are multiple definitions of retention rates this could cause issues with interpreting retention rates in practice. [3]

In the workplace arena, the purpose of the retention rate is to assist organizations with deciding when to take action in order to keep employees happy and motivated. [4] According to a survey by CNN Money, the top 100 best companies to work for had less than a 3% turnover rate during a 12-month period. [5]

Retention rate may also refer to colleges . According to the FAFSA, the retention rate is the percentage of a school’s first-time, first-year undergraduate students who continue at that school the next year. For example, a student who studies full-time in the fall semester and keeps on studying in the program in the next fall semester is counted in this rate. [6]

Construction

"Retention applies to contractual situations in which customers are either retained or not. Customers either renew their magazine subscriptions or let them run out. Customers maintain a current account with a bank until they close it. Renters pay rent until they move out. These are examples of pure customer retention situations where customers are either retained or considered lost for good. In these situations, firms pay close attention to retention rates." [2]

Retention Rate: The ratio of the number of customers retained to the number at risk. [2]

Workplace

Retention in the workplace refers to “the percentage of employees who were employed at the beginning of a period, and remain with the company at the end of the period”. [7] For example, in January 2010, Company A had 500 employees. After one year, 200 of the 500 employees were still working for the company. The retention rate is 200/500 = 40%.

See also

Methodologies

No retention rate methodologies have been independently audited by the Marketing Accountability Standards Board (MASB) according to MMAP (Marketing Metric Audit Protocol). [8]

Related Research Articles

In marketing, customer lifetime value, lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.

Market penetration refers to the successful selling of a good or service in a specific market. It involves using tactics that increase the growth of an existing product in an existing market. It is measured by the amount of sales volume of an existing good or service compared to the total target market for that product or service. Market penetration is the key for a business growth strategy stemming from the Ansoff Matrix (Richardson, M., & Evans, C.. H. Igor Ansoff first devised and published the Ansoff Matrix in the Harvard Business Review in 1957, within an article titled "Strategies for Diversification". The grid/matrix is utilized across businesses to help evaluate and determine the next stages the company must take in order to grow and the risks associated with the chosen strategy. With numerous options available, this matrix helps narrow down the best fit for an organization.

<span class="mw-page-title-main">Net income</span> Measure of the profitability of a business venture

In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.

<span class="mw-page-title-main">Performance indicator</span> Measurement that evaluates the success of an organization

A performance indicator or key performance indicator (KPI) is a type of performance measurement. KPIs evaluate the success of an organization or of a particular activity in which it engages. KPIs provide a focus for strategic and operational improvement, create an analytical basis for decision making and help focus attention on what matters most.

Churn rate is a measure of the proportion of individuals or items moving out of a group over a specific period. It is one of two primary factors that determine the steady-state level of customers a business will support.

Customer satisfaction is a term frequently used in marketing to evaluate customer experience. It is a measure of how products and services supplied by a company meet or surpass customer expectation. Customer satisfaction is defined as "the number of customers, or percentage of total customers, whose reported experience with a firm, its products, or its services (ratings) exceeds specified satisfaction goals." Enhancing customer satisfaction and fostering customer loyalty are pivotal for businesses, given the significant importance of improving the balance between customer attitudes before and after the consumption process.

Net promoter score (NPS) is a market research metric that is based on a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague. The NPS is a proprietary instrument developed by Fred Reichheld, who owns the registered NPS trademark in conjunction with Bain & Company and Satmetrix. Its popularity and broad use have been attributed to its simplicity and transparent methodology.

Bounce rate is an Internet marketing term used in web traffic analysis. It represents the percentage of visitors who enter the site and then leave ("bounce") rather than continuing to view other pages within the same site. Bounce rate is calculated by counting the number of single page visits and dividing that by the total visits. It is then represented as a percentage of total visits.

Customer attrition, also known as customer churn, customer turnover, or customer defection, is the loss of clients or customers.

Return on marketing investment (ROMI) is the contribution to profit attributable to marketing, divided by the marketing 'invested' or risked. ROMI is not like the other 'return-on-investment' (ROI) metrics because marketing is not the same kind of investment. Instead of money that is 'tied' up in plants and inventories, marketing funds are typically 'risked'. Marketing spending is typically expensed in the current period.

All-commodity volume or ACV represents the total annual sales volume of retailers that can be aggregated from individual store-level up to larger geographical sets. This measure is a ratio, and so is typically measured as a percentage.

Customer profitability (CP) is the profit the firm makes from serving a customer or customer group over a specified period of time, specifically the difference between the revenues earned from and the costs associated with the customer relationship in a specified period. According to Philip Kotler, "a profitable customer is a person, household or a company that overtime, yields a revenue stream that exceeds by an acceptable amount the company's cost stream of attracting, selling and servicing the customer."

Customer retention refers to the ability of a company or product to retain its customers over some specified period. High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defect to another product or business, or to non-use entirely. Selling organizations generally attempt to reduce customer defections. Customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship and successful retention efforts take this entire lifecycle into account. A company's ability to attract and retain new customers is related not only to its product or services, but also to the way it services its existing customers, the value the customers actually perceive as a result of utilizing the solutions, and the reputation it creates within and across the marketplace.

Sales effectiveness refers to the ability of a company's sales professionals to “win” at each stage of the customer's buying process, and ultimately earn the business on the right terms and in the right timeframe. Improving sales effectiveness is not just a sales function issue; it's a company issue, as it requires collaboration between sales and marketing to understand what is working and not working, and continuous improvement of the knowledge, messages, skills, and strategies that sales people apply as they work sales opportunities.

The Marketing Accountability Standards Board (MASB), authorized by the Marketing Accountability Foundation, is an independent, private sector, self-governing group of academics and practitioners that establishes marketing measurement and accountability standards intended for continuous improvement in financial performance, and for the guidance and education of users of performance and financial information.

One of the indicators of the strength of a brand in the hearts and minds of customers, brand preference represents which brands are preferred under assumptions of equality in price and availability.

Annual growth rate (AGR) is the change in the value of a measurement over the period of a year.

Willingness to recommend is a metric related to customer satisfaction. When a customer is satisfied with a product, he or she might recommend it to friends, relatives and colleagues. This willingness to recommend can be a powerful marketing advantage. In a survey of nearly 200 senior marketing managers, 57 percent responded that they found the "willingness to recommend" metric very useful.

Numeric distribution is based on the number of outlets that carry a product. It is defined as the percentage of stores that stock a given brand or SKU, within the universe of stores in the relevant market.

“The incentive plan needs to align the salesperson’s activities with the firm’s objectives.” Toward that end, an effective plan may be based on the past (growth), the present, or the future.

References

  1. ↑ Search Engine Spot (29 October 2020). "CTR – Customer Lifetime Value". searchenginespot.com. Retrieved 2021-01-20.
  2. 1 2 3 4 Farris, Paul W.; Neil T. Bendle; Phillip E. Pfeifer; David J. Reibstein (2010). Marketing Metrics: The Definitive Guide to Measuring Marketing Performance. Upper Saddle River, New Jersey: Pearson Education, Inc. ISBN   0137058292. Content from this book used in this article has been licensed under Creative Commons Attribution Share Alike 3.0 and Gnu Free Documentation License and be modified and reused. The Marketing Accountability Standards Board (MASB) endorses the definitions, purposes, and constructs of classes of measures that appear in Marketing Metrics as part of its ongoing Common Language in Marketing Project.
  3. ↑ Wierckx, Patrick J. (2020-10-11). "The Retention Rate Illusion - Understanding the Relationship between Retention Rates and the Strength of Subscription-Based Businesses". Rochester, NY. SSRN   3629281.{{cite journal}}: Cite journal requires |journal= (help)
  4. ↑ "The Average Employee Retention Rate | Chron.com". Smallbusiness.chron.com. 2011-08-15. Retrieved 2016-08-10.
  5. ↑ "100 Best Companies to Work For 2011: Turnover - from FORTUNE". Money.cnn.com. 2011-02-07. Retrieved 2016-08-10.
  6. ↑ "What are graduation, retention, and transfer rates?". Fafsa.ed.gov. 2013-04-04. Retrieved 2016-08-10.
  7. ↑ [ dead link ]
  8. ↑ MASB. Marketing Metric Audit Protocol (MMAP). February 2009. [cited 8 July 2011]
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.