customer retention rates

Question

80% of customers from year 1 remain at end of year 5. What is the average annual loss rate % of customers?

Answer 1

Assuming the rate is constant, this is solved by setting up a proportion. You know that 20% of the original amount of customers are lost after 5 years (since 80% remain), but you want to know how many are lost after 1. Plugging in the information given,

 

0.2         x

5      =    1

 

Cross-multiply and then solve for x:

 

0.2=5x

0.2/5=x

0.04=x

 

So, the annual loss rate is 4%.