In the second of a three-part examination of client retention analysis, CRM expert, author and businessman Joel Scott explains how basic client retention analysis can help lay the foundation for achieving higher client retention rates.

ANY business process needs to be measurable, else you will not be able to determine whether the process is successful or not. This is most certainly true of client retention strategies.

“Retention is clearly not a one-shot deal,” says Joel Scott. “It’s a process and needs to be continually measured. One of the challenges to implementing a good retention process is that retention is a difficult thing to measure.”

The problem, says Scott, is that customer relations management (CRM) software has no function that automatically produces a retention rate.

Simple client retention rate calculation
Scott says the simplest type of retention calculation looks at your client list from the past and compares it with the current list. “It’s based solely on how many clients remain active with your company from one year to the next.”

Scott defines “active” as being a paying client which is easy enough to track within any accounts receivable system, although it does require a deal of manual effort.

“You can examine annual, quarterly, monthly or even weekly retention rates,” Scott says. “At my company we chose annual, as it made our analysis fairly simple and gave us sufficient data to be meaningful.”

In conducting his client retention analysis, Scott chose to examine 100 (or about 20%) of its client base, and outputted this to an Excel spreadsheet, “because this allows you to do undertake additional analysis when you move on to a more sophisticated approach”.

Interpreting client retention analysis
Scott points out that simple retention analysis does not explain whose fault it was that certain clients are no longer active with your company, but is simply a measure of the percentage of clients that came back for more.

“If you lose a client, no matter what the reason, you need to replace that revenue with a similar amount of revenue from some other source,” explains Scott.

The value of revenue retention analysis
A more sophisticated version of retention rate calculation takes revenue into account, says Scott.

“Revenue retention analysis is meant to answer the following question: ‘If a client gave us $100 last year, and that client is still with us, how much are we likely to get from him this year?”

This analysis doesn’t require any more data than is already available, but it does require more calculations.”

Scott continues: “To calculate revenue retention, you add up all the money you received last year from the clients who are still with you this year, and compare this with the money you have received this year from those same clients.”

Specifically, says Scott, you divide this year’s income by last year’s income. “The larger the number you get, the better. Breakeven is 1.00.”

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