## Definition of Retention Rate Retention rate is a [[product metric]] that measures the percentage of customers who continue to use a product or service over a period of time ([[user retention]] or [[Customer Retention]]). Specifically, retention rate measures the percentage of customers who remain active customers at the end of a given time period, such as a month, a quarter, or a year. Retention rate is important because it reflects [[customer loyalty]] and the overall health of a business. High retention rates indicate that customers find value in a product or service and are willing to continue using it. This can lead to increased [[revenue]] and profitability, as well as lower [[Customer Acquisition Cost (CAC)]], since existing customers are more likely to refer new customers. ## How to Calculate Retention Rate To calculate retention rate, a business needs to determine the number of active customers at the beginning of the time period, as well as the number of customers who remain active at the end of the period. The formula for retention rate is: > Retention Rate = ((E-N)/S)) x 100 Where: - E is the number of customers at the end of the period - N is the number of new customers acquired during the period - S is the number of customers at the start of the period For example, if a business had 1,000 customers at the start of a month, acquired 200 new customers during the month, and ended the month with 900 active customers, the retention rate would be calculated as follows: > ((900 - 200) / 1,000) x 100 = 70% This means that 70% of the original customers remained active at the end of the month, indicating a relatively high level of customer loyalty. ![[Pasted image 20230509161456.png]] ## Types of Retention Rate There are three main types of retention curves: flattening, declining, and smiling. Flattening curves occur when a percentage of users who have tried the product continue to find value in it and return over time. The higher the level at which the curve flattens, the better the long-term retention of the product. Declining curves occur when a product has not achieved product-market fit and retention continuously declines over time. In these situations, it is important to focus on changing the product to find a value proposition for a core set of users. Smiling curves occur when a product is exceptional and its retention curve actually rises over time. In these situations, users eventually return to the product even after initially churning away. However, even for products with smiling retention curves, retention will eventually trend towards zero as the product is disrupted by competition, shifts in user behavior, and other factors.