The Basic Formula to Predict the Future
In the last blog post, I wrote about the value of being able to predict the future in business. For revenue, predicting the future starts with a system to monitor the journey of prospects becoming customers. But it does not end there.
You also need to monitor the business’s ability to retain its customers. I will cover that topic in this blog post.
To predict the future revenue, executives in many industries can use the following formula:
I generally project future revenue on a monthly basis in an Excel spreadsheet – with four rows (one for each item above) and twelve columns (one for each month). I also have assumptions that drive each of those rows.
The Customer Retention Report
This report tracks the retention and loss of customers over time. Measuring lost customers varies by industry, but the general idea is that you measure this data because losing customers is a bad thing. You want a number that you can monitor over time to see whether the business’s ability to retain customers is improving or dropping. Low or dropping retention rates reduce business growth. They also increase the expenses required to attract new customers needed to replace lost customers. In addition, customer retention rates usually indicate the overall customer satisfaction with your business.
A Landscape Industry Example
In the landscape industry, I recommend tracking retention both annually and month over month. The landscape industry has annual contracts that require monthly landscape maintenance services. For this industry, I recommend using an Excel spreadsheet with one row for each property. The spreadsheet should show monthly maintenance revenue for the last 13 months (i.e. 13 columns of numbers).
For the annual calculation, compare the most recent month to the same month in the prior year (i.e. the 13th month if counting backwards). If the business lost a property, then it will appear as positive revenue in the same month of the prior year but zero revenue for the current month. In the spreadsheet, identify all of those losses and add up the revenue for those properties in the prior year’s month. Divide that number (lost revenue) by total revenue from the prior-year month. The percentage is your year over year lost revenue rate. Your retention rate is simply one minus that lost revenue percentage.
In other words, the lost revenue percentage plus your retention rate will equal 100%.
Here’s another interesting way to think about these percentages. Calculate the average time the business retains a property with this calculation: One divided by the lost revenue percentage. The answer represents the average number of years the business keeps a property.
To calculate the month over month lost revenue percentage, follow the same steps but just compare maintenance revenue for the last two months.
Retention Rates to Predict Future Revenue
I hope you will calculate your business’s retention rate. It is critical to helping you predict the future revenue of your business and to understand how satisfied your customers are with you. If you have questions or if you have other ways of calculating these measures, drop your comment in our contact form. We love learning from others.
The big problem with retention rate is that it is a lagging indicator – you do not know that you have a problem until you have already lost the customers.
In the next blog post, I discuss how to determine the leading indicators of customer satisfaction and healthy retention rates.