Improving customer loyalty is one of the most important aspects of business development. Even if you’re a large online retailer with stable traffic and good conversion rates, you shouldn’t make attracting new customers your only goal. And here’s why.
A study of large and medium-scale ecommerce businesses in Eastern and Central Europe showed that repeat customers generate up to 4 times more revenue than new ones. In 2018, the traffic generated by returning customers increased by 24% and revenue by 15%. This is apparently due to the fact that it is much easier and cheaper to sell to customers who already know and trust your brand while you have to spend extra resources to attract new customers.
The best way to measure customer retention rates is to use the key performance indicators that are more related to retaining your loyal customers. In this post, we take a look at the main KPIs for measuring customer retention, and their importance for business.
How can an online store measure customer retention?
There are about a dozen different indicators you can use to measure the effectiveness of your customer retention efforts. However, five major indicators stand out when it comes to ecommerce projects.
1. Customer Retention Rate
Customer Retention Rate (CRR) is the first and perhaps the most important indicator that you need to track. It’s the percentage of customers who stay with the company over a certain period of time.
As you can see from the formula, CRR is largely determined by the period of time you use as a benchmark and the lifetime of your products. It’s obviously easier to retain loyal customers who buy products that need to be resupplied or replaced more often.
It’s important to understand that since your product lifespans, as well as business models, differ, the average CRRs may also be different.
Your customer retention rate is also critical to calculating customer lifetime value (CLV) for your business. The better you are at keeping customers, the higher the CLV and the more revenue you get.
2. Customer Lifetime Value
Customer Lifetime Value (CLV) is an indicator used to estimate how much revenue a customer can generate during the entire period of their time with a company.
To calculate the lifetime value of your customers, multiply the average order value by the average yearly rate of discount and by the average period of time the customer stays with you.
CLV is not only a measure of how valuable your customers are for your eCommerce project. It also helps evaluate how successful you are at selling new products to them. Improving customer retention will help you increase the lifetime value of each customer.
3. Repeat Purchase Rate
Repeat purchase rate (RPR) is a metric measuring how often customers return to your online store to make a repeat purchase.
To calculate this metric, choose a time period relevant to the life cycle of the products you’re selling. As a rule, this period is set to 1, 3 or 6 months, but it can also be shorter, especially if you’re selling perishable products. Next, take the number of customers who have bought this product more than once during the selected time period, and divide it by the total number of unique customers who have purchased this product within the period.
Let’s say you have had 200 unique customers for 3 months, and 75 of them have purchased with your store two or more times. This means your RPR is 37.5%. In eCommerce, the average return rate is usually between 20% and 40%.
Combined with other KPIs, this indicator can help you find more ways to bring back customers.
4. Customer Churn Rate
With the high competition in the online market and businesses continuously evolving in the struggle to acquire a customer, consumers are prompted to move away to a different retailer. Customer churn rate (CCR) is the second most important indicator that allows measuring the efficiency of customer retention in the eCommerce industry. This metric is especially important for companies operating on a subscription basis with a significant portion of the revenue generated through monthly payments, such as book publishers and media distributors.
However, the churn rate is also important for other ecommerce projects, especially if the business focuses on building long-term relationships with customers through social networks and email marketing. This is particularly true for large omnichannel retailers. Since many of them not only have online websites but also use a network of offline retail stores across the country, it is easier for them to determine how this indicator varies based on the region.
For example, if, over the course of a year, a thousand out of 20 thousand customers of an online store stops making repeat purchases, the business’s annual churn rate would be only 5%.
For a small online business, the optimal churn rate is 3-5% per month. However, the larger the business, the lower the CCR should be. Ideally, it should not exceed 1%. However, the average customer churn rate can also differ significantly across various niches of the online market:
To identify the reasons for customer churn, you first need to establish contact with your customers and learn why they stop your services. The simplest way to do this is to use an unsubscription form, listing a number of possible reasons for unsubscribing. Also at this stage, you can try to seize the opportunity to retain users by giving them bonuses — an approach implemented by the Stylus online store.
5. Net Promoter Score
Net Promoter Score (NPS) is a simple and convenient way to get feedback on how satisfied your customers are with you and what they’re thinking of your product or service.
To calculate this indicator, ask your customers to evaluate your business on a scale of 1 to 10. Next, you’ll be able to group the voters into three categories:
- Detractors (scores of 0 to 6). These customers are not satisfied with your service. They are unlikely to recommend you or even buy from you again. There’s also a risk that they can harm your business by spreading negative reviews online.
- Passives (scores of 7 and 8). These customers are content with your products or services, but they won’t do anything to give feedback or recommend you to others. They are unlikely to become regular customers, and there is a high probability that they’ll leave you for your competitors.
- Loyal customers (scores of 9 and 10). These are exactly the customers you need. They have the most confidence in your business, make constant purchases and are ready to recommend you to their friends.
The formula for measuring your Net Promoter Score is quite simple:
For example, if you have 55 loyal promoters, 25 passives and 20 detractors out of a total of 100 respondents, your NPS will be equal to 35. Generally, an average Net Promoter Score in eCommerce is about 45.
Extensive growth is not always a good thing for online businesses. Indeed, ensuring an influx of new customers is a good way to scale. However, zeroing in on customer acquisition alone can be quite costly, while focusing on customer retention is a long-term strategy that ultimately pays off. Since regular buyers bring in the greatest revenue, you should be interested in encouraging them to stay loyal to your business for as long as possible.
Using the 5 KPIs listed in this post will enable you to measure the efficiency of your ecommerce project. These KPIs will allow you to identify bottlenecks, find growth opportunities and establish relevant business processes.