Without customers you don't have a business -- and that means not only acquiring customers, but keeping them.
That means understanding what you're doing right -- and wrong -- where customer retention is concerned.
And that means tracking a few key metrics.
Data and analytics are not everyone's cup of tea, but they're vital to uncovering any weak spots and areas for improvement.
Besides website traffic and conversion rates, the survival and growth of your eCommerce business heavily relies on customer retention. Your website may be attracting loads of traffic, and you may convert a decent proportion of your visitors into paying customers. But what happens after the first conversion? Are you able to hold on to them over a longer period of time, or are they leaving straight after their first purchase?
According to RJmetrics, the most successful e-commerce businesses get more than 50% of their revenue from returning customers. For building a sustainable and scalable business, you'll want to know your customer retention rate and keep your churn rate (the rate people abandon your product or service) to a minimum.
Defining customer retention
Customer retention refers to a business' ability of keeping a paying customer over a duration of time.
A business with a low retention rate is like a water bucket with holes in it. Obviously you can keep pouring more water to make up for the leakage, or you can find out what's wrong with the bucket and fix it. According to HBR, acquiring new customers costs 5 to 25 times more than it takes to retain one. What's more, research by Bain & Company shows that a 5% increase in retention rates can raise profits by 25% to 95%.
Naturally, you'll want to go for the cheaper option and fix your leaking bucket.
So let's look at the 5 key metrics for determining the performance of your customer retention activities.
1. Customer retention rate
The key metric to determine whether you customer service team is keeping your customers happy and to predict how fast you can grow your business.
Your customer retention rate indicates what percentage of your customers have stayed with you over a given period of time, and be calculated on an annual, monthly or weekly basis.
While there's no standard formula for calculating your customer retention rate, here's one accurate way of measuring it.
Customer Retention Rate = ((CE-CN)/CS)) X 100
- CE = number of customers at end of period
- CN = number of new customers acquired during period
- CS = number of customers at start of period
Let's say you start the month with 1000 customers. By the end of the month 150 people have left, but you attracted 200 new customers, so you now have 1050 customers. When we fill in the formula with those figures, it looks like this:
((1050-200)/100) X 100 = 85%
So what is a good retention rate? Like many things, it depends on your industry and your goals. But the objective is to keep retention rates as high as possible.
2. Customer lifetime value
The customer lifetime value is a projection of revenue you can expect from a customer relationship. This metric is based on previous purchasing behavior, only, which means its value does not immediately translate into actual money in your bank account.
Knowing the lifetime value of a customer will help you determine how much you can spend on customer acquisition and also help you calculate your return on investment (ROI). Venture capitalist David Skoks explains in his article that the biggest reason startups fail is due to their customers' acquisition costs being higher than their lifetime value.
You can include many variables when calculating your customer lifetime value, but let's keep things simple here by taking this formula from Hubspot:
Customer Lifetime Value = (Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)
For determining whether your retention strategies are working, you'll want LTV to increase over time. This means that people are be spending more and buying more frequently as their relationship with your business progresses.
3. Repeat purchase rate
Your repeat purchasing rate is the percentage of your customers who have bought from you more than once. It shows how many have come back to buy from you after their first purchase, which gives a good indication of how your customer retention efforts are performing.
You can track this metric easily by dividing the number of customers who have shopped more than once by the total number of customers.
Repeat purchasing rate = Number of customers who have shopped more than once / total number of customers
For a more detailed analysis into your repeat purchasing rate, you may want to use cohorts to track it daily, weekly and monthly. If you're running a special promotion, cohorts can help you determine whether that specific activity led to an increase or decrease of people coming back for more.
4. Redemption rate
Sending out coupons with special offers can be an effective way of bringing people back to your business - but what percentage of your coupons are being redeemed?
Your redemption rate will tell you just that:
Number of coupons redeemed / Number of coupons issued
Your redemption rate will tell you whether your customers are taking action - usually by purchasing - when you issue a coupon. If your redemption rate is low (around 20%) then you'll want to dig deeper to find out what the causes are. Perhaps your special offer isn't enticing enough to draw people back to your store - or they're just not interested enough in what you're offering.
5. Net promoter score
From scale of zero to ten, how likely are you to recommend this product to a friend or colleague?
That's your net promoter score: Your customers are asked this simple question, and they answer with value between 0 and 10, with zero being 'not likely at all' and ten being 'extremely likely'.
This is a powerful metric to track, because it questions your customers' willingness to promote your product to their network, which they would only do for companies they're 100% satisfied with.
NPS divides customers into three categories:
Detractors (0-6) are people who are unhappy with your product or service, who will never buy from you again, and who may damage your brand by complaining on social media and forums.
Passives (7-8) are satisfied customers, but they won't go above and beyond to promote your brand and may be tempted by competitive offers from competitors.
Promoters (9-10) are the ones who bend over backwards to get everyone they know using your product. They're loyal to your brand alone and can fuel your growth organically through word-of-mouth, by attracting new customers at a relatively low cost.
Calculating your NPS is simple: subtract the percentage of Detractors from the percentage of Promoters.
NPS = % Promoters - % Detractors
There are a handful of tools out there to help you gather responses. Most NPS applications such as Trustfuel NPS and Promoter.io will work together with your customer database to import a list of emails and automatically send out the questionnaire. But do you really need an extra email in your inbox? That's why my personal favorite is Wootric, which asks you for feedback directly on the website or application you're already engaged with.
It's easy to get overwhelmed with metrics, and analyzing may seem like a daunting task.
However, by tracking these customer retention metrics you get a better overview of how you're performing and discover what areas need improving.