Entrepreneurship and Small Business (ESB) Certification Practice Exam

How can customer retention rates be calculated?

1. Adding new customers to the beginning total and dividing by new customers

2. Subtracting the number of new customers from the end total, then dividing by the start total

3. Multiplying the number of new customers by total customers

4. Dividing total customers by the number of new customers acquired

The correct answer is: Subtracting the number of new customers from the end total, then dividing by the start total

Customer retention rates are calculated to determine the percentage of existing customers a business retains over a specific period. The correct approach involves taking the number of customers at the end of the period, subtracting the number of new customers acquired during that period, and then dividing that figure by the total number of customers at the beginning of the period. This method provides a clear view of how many of the original customers remain loyal to the business, allowing for a comprehensive understanding of customer loyalty and engagement. By focusing on the customers who were already present at the start of the period, this calculation helps businesses assess their effectiveness in retaining existing clientele rather than just acquiring new ones. The other approaches do not accurately measure retention. For example, simply adding new customers to the beginning total doesn't reflect retention, and multiplying customer numbers does not provide meaningful insights about loyalty or retention rates. Likewise, dividing total customers by new customers fails to account for existing customers and gives an incorrect perspective on retention.