How to Measure Ecommerce Customer Retention
Updated: Aug 13, 2019
We’ve already talked about the importance of customer retention for ecommerce businesses. We also touched on a few key metrics that can help you gain a better understanding of how good your business is at retaining customers.
Today we’re going to take a more in-depth look into measuring ecommerce customer retention and the all the metrics that can help you do it.
What influences customer retention
There are a number of factors that can influence your business’ customer retention. These include:
Customer support - Offering excellent customer support is one of the best ways to improve customer retention. Poor customer support, on the other hand, can easily make you lose customers.
Pricing - How you price your products can also influence retention. If your pricing is competitive, customers will be more likely to buy from your business again in the future. If you price your products too high compared to the competition, on the other hand, customers might be less likely to purchase from you again.
Delivery - Making delivery convenient and affordable for your customers can also influence your customer retention positively.
Loyalty program - A properly structured loyalty program will encourage your customers to keep purchasing from your business again and again.
Customer retention metrics
Now we’ll go over the metrics you should keep an eye on if you want to measure customer retention accurately and have an easier time improving your retention strategy.
Customer retention rate (CRR)
Perhaps the most important retention metric of all, and the one that will give you the most insight into how your retention strategies have been working, is customer retention rate. It shows how many customers you’ve retained over a specific period.
While all businesses will experience customer loss, you should be careful not to lose customers too quickly. Retention rates vary between different industries, with the average being around 20% (Hubspot).
To calculate your customer retention rate, subtract the number of customers acquired during a specific period from the total number of customers at the end of that period, and then divide that number by the number of customers you had at the start of the period. Finally, multiply the result by 100 to get your customer retention rate expressed as a percentage.
Purchase frequency (PF)
Purchase frequency is a metric that shows how often your average customer makes a purchase in your store. It’s useful for understanding how often customers engage with your business and allows you to figure out if there’s a specific reason why the average customer makes as many purchases as they do during a specific period.
You’ll need to divide the total number of orders made during a specific period (e.g., one year) by the number of unique customers you’ve had during that same period to get your purchase frequency.
Average order value (AOV)
As the name implies, average order value shows how much, on average, do customers spend on a single order in your store. It’s calculated by dividing the total revenue for a given period with the total number of orders made during that period.
Keeping an eye on your average order value will allow you to look for ways to generate more revenue from your customers (e.g., by upselling or cross-selling during checkout) as well as provide a good indication of your customers’ loyalty.
Customer lifetime value (CLV)
Customer lifetime value is a metric that shows how much a customer is worth during their lifetime. It’s based on customers’ previous purchasing behavior. Looking at CLV can give you a better understanding of how good you are at retaining customers, as well as give you an insight into how sustainable your acquisition strategies are in the long run.
Another thing CLV is useful for is segmenting your most valuable customers so that you can design specific strategies to extract even more value out of them.
Here’s the formula for calculating customer lifetime value:
If your business is good at retaining customers, your CLV should keep increasing over time, which would indicate that customers are spending more per order and buying more frequently.
Customer churn rate (CCR)
Customer churn rate is the rate at which your business is losing customers. A low churn rate means that your customer loyalty is high and that you’re doing a good job retaining customers. A high churn rate, on the other hand, means that you’re most likely doing something wrong.
Keeping an eye on your churn rate will allow you to know when it’s time to make improvements to your retention strategy.
To calculate your customer churn rate, subtract the number of customers at the end of a period from the number of customers at the beginning of a given period, and then divide that figure with the number of customers you had at the start of the period.
Since it’s very important to know the rate at which you’re losing customers, you should strive to measure and keep an eye on your customer churn rate on a month-to-month basis.
Revenue churn rate
Revenue churn rate represents the percentage of revenue that your business loses from its existing customers during a specific period. As with customer churn rate, you should strive to measure revenue churn rate on a monthly basis.
Revenue churn rate is usually calculated on a quarterly basis by subtracting the revenue generated during the previous quarter from the revenue generated the current quarter.
Repeat customer rate
Repeat customer rate shows the percentage of your customers that place more than one order in your store. Having a high repeat customer rate means that you’re doing a good job at retaining your customers and extracting more value out of them.
To calculate your repeat customer rate, divide the number of repeat customers with the total number of customers over a specific period (usually a year).
Repeat customer rate is especially useful when looked in terms of different customer cohorts and personalized marketing campaigns you might be performing for each specific cohort.
Repeat purchase probability
Repeat purchase probability is a metric that represents the likelihood of your customers making another purchase. It’s closely related to customer churn rate, with customers that aren’t likely to make a purchase being more likely to churn.
You can calculate repeat purchase probability by dividing the number of customers that purchased an X amount of times with the total number of customers within a given period (e.g., one year).
Time between purchases (TBP)
As the name suggests, time between purchases (TBP) shows how much time goes by until your customer makes another purchase. Knowing your TBP will help you gain a better understanding of your customers’ buying patterns and allow you to design effective retention strategies to ensure that they keep making purchases and stay customers for a long time.
To calculate TBP, divide a specific period (e.g., 365 days) by your purchase frequency.
Net Promoter Score (NPS)
Net Promoter Score helps you understand the extent to which customers are satisfied with your products and service, as well as determine which customers are the most likely to recommend your business to other people (Net Promoter).
To calculate your Net Promoter Score, survey your customers by asking them how likely, on a scale of 1 to 10, they are to recommend your company to a friend or colleague. Customers who answer with 9s and 10s are considered promoters, while those that give a rating of 6 or lower are considered detractors.
Once you get the answers, subtract the percentage of customers deemed detractors from the percentage of customers that are considered promoters to get your Net Promoter Score.
Start measuring your customer retention
Are you currently keeping an eye on your ecommerce business’ customer retention? If you’re not, what’s stopping you?
Read through the above guide and start measuring your customer retention today.