Net retention is the percentage of customers that continue to purchase from you after a given amount of time. This net number is essentially the net profit that you will generate from keeping your current customers versus looking for new ones. Net retention is important to track because it's much more profitable to keep your old customers than pay to acquire new ones.
How to calculate net retention
There are four inputs that go into calculating net retention:
- Total net new profit
- Net cost of acquiring net new customers
- Net amount of net new customers
- Total customer acquisition cost
Using these inputs, you can calculate net retention with this formula:
Net retention percentage = 1 - ( ( ( customer acquisition cost + net new profit ) / net new customers ) / ( customer acquisition cost + net new profit ) ) * 100
That sounds complicated, but let's use an example to make things clearer.
If a company has $45 in net new profit and they spend $20 to acquire net new customers, then their net retention percentage would be 1 - ((($20 + $45) / $20) / ($20 + $45)) * 100 = 79%.
In plain English, this formula is really saying , "how many net new customers did we have to pay for in order to generate $45 net new profit?"
How to connect net retention to your business
This net retention formula can be applied to any business model, but net retention is extremely important for SaaS companies. Companies like Dropbox or Evernote use a freemium model where they offer their product for free and only charge net new customers. For these types of companies, net retention can be used to figure out how effective your freemium business model is.
Net retention is critical for any business to look at long term profitability. Companies should always operate under the assumption that current customers are much more profitable than new ones. Net retention can help smart businesses make this assumption become a reality.
So how do you know if your company has great, good, or bad net retention?
- Companies with great net retention have net retention greater than 75%.
- Companies with good net retention have net retention between 50% and 75%.
- Companies with bad net retention have net retention lower than 50%.
Tracking net retention with Lido
While impressions are easy to calculate, it’s important to keep in mind that impressions are one of many valuable metrics to track your performance. If you don’t want to spend hours at the end of the month juggling numbers from your Google Analytics and Stripe accounts, consider trying Lido. Lido can help you build a dashboard to monitor your data and give a look into how your key metrics (such as impressions) change over time.
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