Entrepreneurship and Small Business (ESB) V2 Certification Practice Exam

What is the formula for calculating Customer Retention Rate (CRR)?

1. (Ending number of customers in a period - new customers gained in a period) / Starting number of customers in a period * 100

2. (New customers gained in a period + Starting number of customers in a period) / Ending number of customers in a period * 100

3. (Ending number of customers in a period - Starting number of customers in a period) / New customers gained in a period * 100

4. (Total number of customers at the start - Total number of customers lost) / Total number of customers at the start * 100

The correct answer is: (Ending number of customers in a period - new customers gained in a period) / Starting number of customers in a period * 100

The formula for calculating Customer Retention Rate (CRR) is grounded in determining how many customers a business is able to retain over a specific period. The correct formula effectively focuses on the net retention of existing customers by subtracting the number of new customers gained from the total at the end of the period. This gives a clear picture of how well the business is maintaining its existing customer base. By taking the ending number of customers and removing the new customers acquired during the period, the calculation effectively isolates the number of customers retained from the beginning of the period. This figure is then divided by the starting number of customers to understand the retention relative to the initial base, with the result multiplied by 100 to express it as a percentage. This percentage is a critical indicator for businesses as it helps assess customer loyalty and the effectiveness of customer relationship strategies. A higher retention rate typically correlates with greater satisfaction and engagement among customers, which is essential for long-term business success. The other options do not provide an accurate measure of CRR as they either include the new customers as part of the retention calculation or misrepresent the relationship between the starting and ending customer counts. Therefore, understanding this formula allows businesses to track their customer engagement effectively and make informed strategic decisions.