Editor’s Note: This post was originally published on January 10, 2017 and was updated for accuracy and comprehensiveness on June 1, 2018.
If you’re familiar with the Smile.io blog, you’ll know how passionate we are about retention marketing. As the cost of digital advertising continues to creep skyward, retention marketing is slowly but surely beginning to expand throughout the marketing industry.
But recently it occurred to me that the concept of “retention marketing” still might not be that clear to some of you. If someone asked you to define it in your own words, would you be able to? More importantly, would you know how to measure it?
In order to maximize your retention efforts, you need to understand how to track and measure some key retention metrics. Once you know how to calculate them, you can begin to put them to work in your own store for lasting, profitable results.
Categorizing Retention Metrics
There are 11 retention metrics that every ecommerce marketer should be aware of. Each of these metrics can be divided into one of four categories:
Together, these four categories make up the building blocks of what I affectionately refer to as Retention Metrics 101. Through this introduction, you’re going to learn what each metric measures, why it’s important, how to calculate it, and how to improve it.
Retention Metrics 101: Bringing Customers Back
At the root of any retention strategy is the desire to bring customers back. Whether they’ve only made one purchase or they’ve made five, retention marketing helps you bring every single customer back to make that next purchase.
The following three retention metrics target that repeat purchase behaviour.
Customer Churn Rate (CCR)
Customer churn rate (CCR) is the percentage of customers that have been lost over a specific period of time. In other words, these are the customers that have stopped making purchases.
Why is CCR important?
Although it might seem ridiculous to focus on the customers you’ve lost, knowing your churn rate helps you determine what steps to take when developing a retention strategy. Since you want this metric to be extremely low it stands to reason that the lower it is, the more effective your retention strategy is!
How do you calculate CCR?
To calculate your customer churn rate, you need to determine a timeframe in which to measure it. It’s a good idea to assess your customer churn rate on a semi-regular basis in order to keep your finger on the pulse of how your customers are responding to your retention marketing efforts. With that in mind, I’d recommend measuring this metric on a month-to-month basis.
Now that you have your date range, you can get to calculating! The formula for CCR is as follows:
By determining how many customers you lost and dividing it by how many customers you had, you’re able to see what percentage of shoppers are choosing not to come back every month.
Improve your CCR with outstanding customer experiences
9/10 customers will begin shopping with a competitor following a bad customer experience, which means you need to bring your A-game to every transaction.
A customer-centric loyalty program is a great way to do that. By providing your customers with valuable incentives to stay, you create a switching cost that can’t be ignored.
Repeat Purchase Probability (RPP)
Repeat purchase probability (RPP) is the likelihood of a customer making another purchase.
Why is RPP important?
Your brand’s repeat purchase probability rate is very closely related to your customer churn rate – the less likely they are to make another purchase, the more likely they are to churn. Keeping an eye on this metric allows you to assess where customers are falling off throughout the customer journey, giving you the opportunity to put preventative measures in place.
How do you calculate RPP?
Calculating your store’s repeat purchase probability is a little bit trickier than customer churn rate because it needs to be done in stages. This makes sense when you look at the formula:
As you can see, you need to determine the number of purchases to use. In order to be most impactful, I recommend calculating your RPP rate with different numbers of purchases to get a better read of your customer’s journey from beginning to end.
With this formula, you can pinpoint the exact moment that customers begin to fall out with your brand and launch a retention strategy to get them back on track.
Improve your RPP with gamification
If you want customers to come back, you need to give them a reason to come back. Adding an element of gamification to your customer loyalty program will show customers why your brand is valuable and how much they stand to gain by returning.
Repeat Purchase Rate (RPR)
Repeat purchase rate (RPR) is the percentage of customers who’ve made more than one purchase at your store.
Why is RPR important?
Even though repeat customers only make up 8% of your customer base, they’re responsible for a whopping 40% of your annual revenue! This staggering reality is what makes your store’s repeat purchase rate so valuable. Your repeat purchase rate gives you gives you a clearer snapshot of the effectiveness of your entire retention strategy, providing proof that each of your tactics are working.
How do you calculate RPR?
To calculate your repeat purchase rate, you only need two pieces of information: the number of customers who’ve bought more than once and your total number of customers.
By dividing the number of customers who have bought from your store more than once by your total number of customers, you’ll get a better idea of how your customer experience impacts customer purchase behaviours.
Improve your RPR with a wide variety of rewards
As the backbone of your retention strategy, repeat customer rate gives you insights into the purchase patterns of specific demographics. Appealing to those different customer demographics with experiential and transactional rewards can help you increase the number of purchases each cohort is making.
Retention Metrics 101: Maximizing Revenue
The three retention metrics in the previous section gave you a good idea of why retention marketing is important. In this next section, I’m going to show you how to measure the profitability of each individual customer and how you can ramp it up even more.
Average Order Value (AOV)
This is the money maker (literally). Average order value (AOV) measures the average amount of money a customer spends per purchase.
Why is AOV important?
This metric is important for one simple reason: it allows you to see how much each of your customers is worth. The more each customer spends per transaction, the less you need to spend to try to get new customers to shop with you. This equates to more money in your pocket and less spent in the competitive ad game.
How do you calculate AOV?
To calculate your AOV, you need to look at the total amount of revenue you’ve earned and the number of orders taken.
When calculating this retention metric, it’s important to keep in mind that this does not reflect the margin you are generating per order. In order to get the most accurate rate, make sure you’re also subtracting expenses and the costs of goods sold.
Improve your AOV with product bundles
Whether you’re focused on acquisition or retention, the main goal is always to get customers to spend more. Product bundles are a great way to encourage this behaviour because they eliminate the risk associated with new products.
Profitability Per Order (PPO)
While AOV tells you how much money the average customer is spending per order, profitability per order (PPO) shows you how much profit you’re making on each purchase.
Why is PPO important?
This one should be a no-brainer. The higher your PPO, the higher your profits, and the higher your profits the more successful you are. There’s really nothing else to add!
How do you calculate PPO?
In order to calculate your profitability per order, you’ll need to know your average profit margin. Once you have that figured out, you simply need to multiply it by your total revenue and divide it by the number of orders.
Improve your PPO with customer reviews
The best way to increase your profitability per order is to push your higher margin products, and the best way to do that is with customer reviews. Shoppers are 59% more likely to trust their peers when forming an opinion about brands and products, so using your loyalty program to reward customers for leaving reviews will provide you with the ammo you need to help customers build up their baskets.
Find out more about the power of peer-to-peer trust in our article about developing and using brand advocates.
Purchase Frequency (PF)
Purchase frequency (PF) is closely related to your store’s repeat purchase rate, however instead of looking at repeat purchases specifically, it refers to how often the average shopper makes a purchase at your store.
Why is PF important?
This is another no-brainer. Your revenue can only go up when customers make purchases with you. Therefore, an elevated purchase frequency results in more revenue and higher profitability.
How do you calculate PF?
You can easily calculate your purchase frequency by dividing your total number of orders made in 365 days by the number of unique customers you’ve had in the same time period.
The key to calculating your store’s purchase frequency is to use the number of unique customers. Otherwise, you could skew the data and get an inaccurate calculation.
Improve your PF with personalized retention emails
Most customers won’t spend more money just for the sake of spending money, which means you need to create an experience they simply can’t refuse. Sending personalized, relevant messages to shoppers on a semi-regular basis will keep your business top-of-mind and help establish an emotional relationship between you and your customers. This relationship is what will bring them back and have them clicking the “buy now” button more often.
Time Between Purchases (TBP)
Time between purchases (TBP) is exactly what it sounds like – a metric that shows you how many times a year a customer completes a purchase.
Why is TBP important?
When you know how long it takes the average customer to make another purchase, you can begin to target their buying patterns with retention strategies designed to increase their desire to buy. This knowledge positively impacts your ability to maximize revenue.
How do you calculate TBP?
Time between purchases and purchase frequency go hand in hand – you can’t have one without the other! In order to calculate your TBP rate, you’ll need to know your purchase frequency. When you have that calculated, you can calculate the average time between purchases by dividing 365 days by your purchase frequency.
Improve TBP with social media
Understanding the customer journey is vital to improving this type of retention metric. Your customers’ post purchase analysis is particularly important to understand, since this is where a customer decides whether to return to your store, and when.
Using social channels to encourage customer feedback will help you gauge your customers’ satisfaction with their experience, creating a two-way communication loop that builds trust and strengthens their relationship with your brand.
Retention Metrics 101: Tracking Retention Efforts
With so many metrics flying around, it can be hard to keep track of how well your retention strategy is actually doing. This next batch of retention metrics focuses on the meat and potatoes of any retention strategy: the success and profitability of your loyalty program.
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is a projection of how much revenue the average customer will bring you over the course of their relationship with your brand. This projection is based on their previous purchasing behaviour in order to deliver the most accurate result.
Why is CLV important?
This retention metric is extremely important because it gives you the best understanding of how much you should be spending on acquisition costs. The higher your CLV, the lower your acquisition costs need to be. This allows you to rebalance your marketing budget to focus on profitable retention strategies instead of costly acquisition ones.
How do you calculate CLV?
Customer lifetime value is one of those retention metrics that requires a couple of pieces in order to calculate it. These pieces are customer value and store’s average life span. For more information on how to find these two variables, you can check out the definitive post on how to calculate CLV.
Once you have those variables in hand, the calculation is surprisingly easy:
By combining data from your average order value and purchase frequency, your CLV will give you a good idea if customers are spending more and purchasing more frequently. If your customer lifetime value rate is increasing over time, you know you’re in a good spot!
Improve your CLV by making your brand convenient
Customers will be more likely to choose your brand if you’re easy to access and quick to shop with. It’s estimated that 2 billion people will make mobile purchases this year, so having a well-designed mobile website that integrates with your loyalty program will make your brand a highly convenient choice for this huge market of shoppers.
Redemption Rate (RR)
Your redemption rate (RR) refers to the percentage of loyalty rewards that are being redeemed.
Why is RR important?
This retention metric is the best indication of how healthy your loyalty program is. Customers are only going to redeem points for a reward if they see the rewards as being valuable, so your brand’s redemption rate is very closely tied to program engagement. This knowledge is invaluable when it comes to assessing and improving your loyalty program.
How do you calculate RR?
To calculate your redemption rate, all you need to do is divide the number of reward points that have been redeemed by the number of points you’ve issued.
Improve your RR with more ways to earn rewards
In general, a good redemption rate should be around 20% after 6 months. If this rate is lower, you need to assess whether the rewards you’re offering and the way to earn them are truly valuable to customers. Offering more ways to earn rewards can help you combat a sluggish redemption rate and build a program that truly adds value to your customer experience.
Retention Metrics 101: Measuring Loyalty
After all of your retention marketing strategies are in place, you need to give them a little bit of time to start generating results. Once those results start coming in, though, you begin to get the best understanding of how well each of your retention tools are working. This final group of metrics shows you how loyal your customers actually are.
Customer Retention Rate (CRR)
Customer retention rate (CRR) is the percentage of customers staying with you over time.
Why is CRR important?
As I mentioned above, this metric gives you the clearest idea of how well each of your retention tools are working. The higher your customer retention rate, the more successful your retention strategy, letting you know that you’ve achieved your retention marketing goals.
How do you calculate CRR?
This calculation is one of the trickier ones on the list simply because it includes more variables. However, once you know what those variables are, you’ll see that there’s nothing to worry about!
While you can use any period you want, I recommend using a year (365 days). It’s a lot easier to manage and gives you a broader idea of how well your retention marketing efforts are working.
Although the desired rate is different for every industry, you want to be aiming for a CRR rate of 85-90%.
Improve your CRR with retention marketing
You can improve your customer retention rate through any combination of the retention tools and strategies we’ve already talked about.
For more information on retention marketing, check out our introduction to retention marketing.
Loyal Customer Rate (LCR)
Your loyal customer rate (LCR) allows you to define which customers are truly loyal to your brand. This creates a distinction between your best customers and repeat customers.
Why is LCR important?
This metric is the true reason you started retention marketing in the first place! As it gets harder and harder to secure brand loyalty, you want to make sure that your retention efforts are working to acquire and retain customers who are truly committed to your brand. In the long run, these loyal customers are who will help attract and convert new shoppers into lifelong shoppers, making them invaluable to the success of your business.
How do you calculate LCR?
A loyal customer can be defined as someone who makes more than four purchases in your store. Based on that description, you can calculate your store’s loyal customer rate with the following formula:
Improve your LCL with an exceptional loyalty program
When it comes to developing loyal customers, there’s nothing more effective than a loyalty program.
Making a professional loyalty program the center of your retention strategy will get you on track for more loyal customers and more success for years to come.
The Importance of Retention Metrics
Understanding how to track and measure these 11 retention metrics will get you equipped to experience tremendous success with any retention marketing campaign. So whether you’re new to the retention game or an old pro, you’re now prepared to take your industry by storm, securing profitable customers for years and years to come.