Diving into CRR
You’ve built and launched the product/service, understood your target market, and now want to gauge how the product/service and by extension your business is performing. A good metric to gauge this is Customer Retention Rate (CRR).
So, what is CRR?
It is a metric that is expressed as a percentage of number of customers a company retains over a specific period. By eliminating the effect of new customer acquisitions over the same period, you evaluate the value derived from the retained population of customers over the said period.
The formula to calculate Customer Retention Ratio is:
CRR = [(No. of customers as at period end – No of new customers)/No. of customer at the period beginning] x 100
Why is CRR an important metric for businesses to track?
If you have ever wondered how, you can build an order book by scaling operations, and the first thought that comes to mind is acquiring new customer, then you are not alone.
However, going by Pareto’s 80-20 principle, we can deduce that 80% of the revenues come from 20% of the customers. So, what does that mean for you?
Retention of acquired customers is key to sustaining the growth of any business. To begin with, customer retention goes a long way in optimizing/justifying customer acquisition costs. It is estimated that a business will have to spend at least five times more to acquire a new customer than it does to retain one. Therefore, while acquiring new customers could help scale, it is how well you retain customers that really helps a business stay afloat in the long run.
The impact of CRR
With companies facing immense pressure to achieve growth quickly and responsibly, it is the existing customer that maximizes the likelihood of recurring revenue and product/service advocation.
CRR is now being deployed across all industries as an important metric that companies are using to improve budget allocation, exploration of cross-sell/up-sell opportunities, gain insights on improvements to offerings, and enhance brand reputation.
On the other hand, investors are looking at it to evaluate product-market fitment. In certain growth stage companies, investors also use CRR as an indicator of a company’s management, its ability to improve customer engagement, stickiness of the offering and the longevity of the recurring revenue thereon.
An effective CRR usually serves as a good indicator of:
How is the product/service perceived by the customers?
Depth of relationship established with the customer
Ability to enhance relationship value
The one size fits all approach doesn’t work.
It would be a dream to achieve 100% CRR for any company, however competition, churn and lack of product affinity keeps customers moving. Here are a few average CRRs across various industries; banking and insurance segment has one of the highest average CRR at 75% and 84% respectively primarily due to the duration of services, its nature and trust factor. Having said that, Edtech has one of the lowest CRR at just 4% due to significant competition and need to go after new customers rather than nurture existing ones. Retail and SaaS CRR hover around 63% and 25% respectively primarily guided by brand loyalty and high cost to switch.
Consider B2B SaaS setup, CRM and cloud companies, where Salesforce has a CRR of 91%. Companies such as Salesforce primarily sell to enterprises and embed themselves (via ERPs) in the organization thus becoming an inalienable part of organization and involve high cost to switch. It should be noted that several SaaS companies and subscription-based companies are initially built on a freemium model and in certain instances the freemium model stay-on even after tiered pricing is introduced. Hence disclosing or discussing CRR of a company in such circumstances would be incorrect and misleading.
Consider a Netflix example: Netflix had struggled to gain market share in India and hoped to improve its reach by indigenizing its content and slashing its prices in 2021. By doing so, while it sought to retain its users and still maintain its CRR, we can see how revenue per user was impacted. In such instances, Net Dollar Rate (NDR) which considers the dollar value each customer spends, is what further justifies or sheds light on CRR.
On the other hand, a master at customer retention by far, and beating online/ecommerce’s average CRR of 31%, Amazon has one of the highest customer retention rates at 93%. Now consider India’s payments and super-app, Paytm, that faced significant decline in users and market share due to its competitors and struggles with RBI licensing.
The entry point for Paytm and its competitors was primarily UPI, however, Paytm understood the significance of customer retention and quickly introduced the Paytm Sound Box (add-on paid product) for its B2B segment’s merchants that eradicated the need to check and verify payment notifications. The unique feature of the box involved the merchant to link the Sound Box to the Paytm application thus restricting its merchants to the Paytm app. This now also allowed Paytm to retain, upsell and cross-sell to larger group of customers.
Typical B2B customer retention rates stand between 76% and 81%. However, only 48% were investing heavily in customer retention strategies. The focus on customer acquisition remains a priority for most companies. It is important to note that 5% increase in retained customers, can result in 25%-95% increase in revenue.
All things given; it is evident that CRR is an important metric for several businesses. However, using it in isolation can deceive investors as well as the public, as it,
Doesn’t shed light on the actual value in terms of subscriptions /net dollar value being added to the business.
Inflates customer base and is misleading when a business is working on a freemium model.
As customer retention rates considers a specific time period (at their discretion), businesses mislead investors and other involved stakeholders by demonstrating feasible/industry accepted numbers vs what the reality is.