Customer retention can be considered one of the most critical aspects of business development. Your loyal customers don’t just buy one product once; they come back again. Customer retention boosts your customers’ lifetime value and increases your revenue.
Statistics show that growing companies prioritize customer success more than stagnating ones and that increasing retention by 5% boost profits from 25% to 95%.
Measuring customer retention rate is the first and most crucial step when operating any loyalty campaign. You will learn how to track and measure some key retention metrics to maximize your retention effect and generate more profits.
There are about a dozen different indicators you can use to measure your customer retention efforts’ effectiveness. However, seven key metrics stand out when it comes to eCommerce projects.
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What is customer retention?
Customer retention can be simply defined as the ability of a company to increase the number of repeat customers and the profitability of existing clients. It is affected by how many new customers are acquired and how many existing customers churn (cancel their subscription).
The importance of customer retention for online businesses
Customer retention is one of the most decisive factors in your business success because it calculates how successful they are at converting new customers and how successful they are at satisfying existing customers.
There are some reasons why customer retention is critical to business growth:
Affordability
Retention is cheaper than acquisition. It’s cheaper to keep someone in the fold than to bring in new customers.
You can save your marketing expenses by keeping your old customers who are already familiar with your products.
More profits
Loyal customers will purchase your business regularly and tend to spend more money.
According to research, engaged consumers buy around 90% more frequently, pay 60% more per transaction, and are five times more likely to continue purchasing. On average, they are delivering 23% more revenue and profitability over the average customer.
Free Word-Of-Mouth Advertising
Loyal clients can be a more compelling force than even the best marketing campaigns. Happy customers are likely to share their good experiences with family and friends, in-person, and online.
The number speaks for itself:
- More than 90% of people trust recommendations from family and friends more than all other forms of marketing
- One offline word of mouth impression converts sales at least 5x more than a paid one.
Valuable feedback from retained customers
Regular customers will know in which area you can enhance your business performance. Ask your repeated customers about how your business can serve them better. By doing this, you can get new opportunities that you may have overlooked and lead to increased retention rates and sales.
Brand reputation
Companies with the best customer retention strategies also have very strong brand reputations.
7 Key metrics to measure customer retention
Customer Churn Rate
The most easily measurable tool that we can use for customer retention is customer churn rate. Customer churn rate can be identified as the percentage of customers that have been lost within a given period. In other words, they are clients that have stopped placing new orders or renewing a subscription.
Why should you care about churn? Because it suppresses growth. By determining your churn rate, you can better understand your business performance and take initial steps to improve your retention strategies. Studies show that:
- Reducing churn by just 5% can improve profitability by 75%
- Enhancing retention has a 2-4x greater impact on growth than acquisition
Here are some common sources of churn that you need to take into consideration:
- Cost
- Poor onboarding experience
- The poor user interface or user experience
- Lack of features
- Competitor products
- Poor product/market fit
So, how can we calculate customer churn rate?
You can estimate churn a few different ways, depending on what you need to take into consideration.
Here is the formula
How frequently you calculate your company’s churn rate will depend on your business volume. If you have thousands of customers, you may want to identify your monthly rates to look at monthly growth. In case your business is developing, you can calculate your annual churn rate to see how growth is evolving year over year.
Revenue Churn
Revenue churn rate is the percentage of revenue you have lost from existing customers in a given period. This is a critical indicator of customer health and satisfaction, especially for the SaaS business.
Revenue churn is reported with the following cause:
- Lost contracts/cancellations
- Downgrades
- Competitive losses
- Bankruptcies
Different from customer churn rate, You should calculate revenue churn rate every month. That is because your customers have problems with our service because the revenue churn rate does happen, and they are likely to leave. Customer churn rate is a useful indicator that points your business weakness precisely so that our customer success team can take quick action to improve your product or service.
The calculation of revenue churn is almost similar to that of customer churn. However, you should not include revenue from new customers or revenue you accrued from upselling or cross-selling to existing customers.
It is necessary to look for an acceptable churn rate number as a benchmark for success. A churn rate range from 5 to 7% annually is generally agreed to be acceptable and recoverable.
Repeat Purchase Rate
This is the percentage of customers that have returned to buy from your company again.
Repeat purchase ratio is typically vital as it is a good indicator of customer loyalty and its application to specific demographics. From this, you can adjust your target purchaser personas and improve your marketing strategies.
This measurement can be counted in any timeframe, such as weekly, monthly, etc. First, you need to set a period relevant to the life cycle of your selling products. Then take the number of customers who have bought this product more than once during the chosen time period and divide it by the total number of unique customers who have purchased this product within the period.
Time Between Purchase
This is a metric that shows you how many times per year a customer completes a purchase. When you know how long it takes the average customer to make the next purchase, you can correctly understand your customer’s purchase pattern. From this, it is easier to design retention strategies to increase the customer’s desire to buy and maximize revenue.
To count the average time between purchases, you will need to keep track of all customers’ purchase dates and know your purchase frequency exactly.
When you have that calculated, you can calculate the average time between purchases by dividing 365 days by your purchase frequency.
Product Return Rate
Another metric that we want to introduce in this post is product return rate, which is the proportion of your total units sold that have been sent back to you.
Products can be returned because of the following reason:
- Items did not arrive
- Item was damaged
- Item not as described
- Incorrect item delivered
- Bookseller accepted order in error
Product return rate is a data element that customer success teams must pay close attention to. Know that data well; you can specify where you fail to meet customer’s expectations and avoid the same situation in the future.
Depending on your sales volume, you can calculate the product return rate on different timeframes. Here is the basics formula which is applicable for whatever time you choose to contextualize the calculation. Please the number of sold units that were later returned on the total number of units sold.
Loyal Customer Rate
If you want to define which customers are truly loyal to your brand, use loyal customer rate.
This refers to the number of clients who have made a repeat purchase with you within a given time range.
This measurement gives you a comprehensive view of your loyal customer, who drives not only the most sales but also the most likely to share a nice review about your business. By identifying who are your raving fans, you can capitalize on opportunities to gather testimonials and maximize purchase value per customer.
Loyal customer rate is calculated by dividing the number of repeat customers to total customers. Note that both existing customers who made an additional purchase and new customers who make multiple purchases are counted simultaneously.
Customer Lifetime Value
The last indicator that we suggest in this today’s post is customer lifetime value. It measures how much revenue the average customer will bring you over the course of their relationship with your brand. Customer lifetime value is totally important because it gives you the best understanding of how much you should be spending on acquisition costs, which helps you manage your marketing budget appropriately.
Customer lifetime value can be counted by multiplying the average order value by the average yearly rate of discount and the average period when the customer stays with you.
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Conclusion
There are different metrics that you can apply to your business. However, depending on your business goal, you may combine more than one to get the most precise cut result. By understanding retention metrics and calculating them accurately, it is much easier to identify bottlenecks, find growth opportunities, and establish relevant business processes.
Author Bio
Daisy is an Avada Commerce content writer who specializes in sales funnels, targeted traffic, and marketing. She has experienced in these fields for several years since she worked as Mageplaza Content Creator. She loves to write about eCommerce solutions, helping online businesses proliferate within limited resources. She believes in the power of words and how a message can inform and even transform its intended audience.
