The necessity to remain competitive within a fast-changing environment in the service industry, especially within the banking sector is a priory task to keep existing consumers happy and attract new customers by introducing and improving new goods and services. Consequently, the study aimed to assess the effect of differentiation strategies on customer retention in the case of selected commercial banks operating in Bahir dar city. The study adopted mainly the mixed research design with both qualitative and quantitative research approaches. Purposive as well as convenient sampling technique was employed to select the sample size of 3 branch managers and 399 customers. A structured self-administered questionnaire and semi-structured interview were implemented and validated for data collection. The response rate from the 399 copies of the questionnaire administered was 87.48% Data were analyzed using descriptive and inferential (Pearson Product Moment Correlation and multiple linear regression) statistics. The study established that product differentiation, service differentiation, personnel differentiation, channel differentiation, image differentiation, and process differentiation positively and significantly influence customer retention. Differentiation strategy was found to be a good indicator of improving customer loyalty among the selected commercial banks in Bahir dar city. This means that there is a need to invest resources in differentiating banks to effectively attract loyal customers in the bank. From the study, it is recommended that firms using the differentiation strategy should concentrate on investing in and developing things that are distinguishable and which customers will perceive. In addition, what makes an organization different from a competitor should be established.