True or False? A business retains 95% of its customers is always a stronger business than a business which retains only 80% of its customers.  Sounds True, right? The correct answer is False.  The reason for the confusion lies in the concept of Retention Rate Illusion. Patrick Wierckx in his paper “The Retention Rate Illusion: Understanding the Relationship Between Retention Rates and the Strength of Subscription-Based Businesses.” draws the reader’s attention to some interesting ways that this illusion enables misconceptions about the performance of companies when it comes to retention. For example, SimCorp’s, an asset management software company, boasts a retention rate of more than 96%.  However, a chart based on SimCorp’s numbers shows how this 96% rate was derived.

Another example of the how retention rates can elusive is in the example of KONE. KONE is one of the world’s largest manufacturers of elevators and boasts a retention rate of maintenance customers of around 95%.  Digging a bit deeper into the data, the 95% retention rate is mathematically correct, but as a business stakeholder, the deeper information is much more revealing. If you were charged with increasing KONE’s maintenance customer retention rate, how would this information be of more precise value?

Retention rates can also be construed to substitute for revenue data.  For example, if a subscription-based company offered a substantial discount for the one-year renewal of a contract, the renewal rate would erroneously be associated as a strength in producing revenue.  However, this would not be the case as the company would be sacrificing renewal rates for revenue. I encourage you to view Patrick Wierckx’s article regarding this subject.  Most of us are employed by businesses that rely on the subscription model, and we are also consumers of products based on the subscription model. The Retention Rate Illusion: Understanding the Relationship Between Retention Rates and the Strength of Subscription-Based Businesses

Wierckx, P. J. (2020). The Retention Rate Illusion: Understanding the Relationship Between Retention Rates and the Strength of Subscription-Based Businesses. Journal of Applied Business & Economics, 22(14), 104–114. https://doi-org/10.33423/jabe.v22i14.3969

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