Measuring Customer Retention

Accurately determining a retention rate is not as straight forward as it may seem. Typical defection and retention rates are average rates, influenced equally by the retention rate of newer customers and the retention rate of customers who have had longer relationships with the firm. However, as discussed the customer lifecycle section of chapter 2, retention rates can vary among the different stages of the customer-firm relationship. For example, a 1st time repeat buyer may have a lower likelihood of buying again versus a customer who has repeat purchased several times. Similarly, a firm's retention rate can also be strongly influenced by its acquisition strategy. For example, if a firm focuses on acquiring customers, its average defection rate will be higher, because new customers generally have much higher defection rates than long-term customers. In essence, the standard reported retention and defection rates are influenced by the number of customers at different stages of the customer lifecycle.

The solution to this problem is to use duration-adjusted retention and defection rates. Duration adjusted rates account for differences in customer "stickiness" at different stages of the customer-firm relationship. If retention rates do not change over time, a duration adjustment is not necessary.

Duration-Adjusted Retention Rates
Ratio of Lost Customers to New Customers