Customer Retention Rate is a key strategic metric for analyzing your current customer shopping behavior. However, to REALLY impact your clients’ long-term goals, you need sufficient data and the correct insights to unleash new marketing initiatives.
First, you need to measure your ecommerce customer retention rate efficiently.
More than 95% of online resources define the calculation of the customer retention rate for an ecommerce company onlyby the purchase frequency metric. But this metric needs to be applied to EACH of your customer segments and product/service categories.
Product categories and customer segments do not behave the same for most companies. For example, the customer retention rate for MacBook Pro and iPhone cases will be different on Apple’s site due to the lifecycle of these two product types. The same will be true if you are looking at the purchase behavior for B2B customers vs. B2C customers.
These metrics allow an ecommerce company to calculate the customer retention rate:
- Number of customers
- Average Order Value (AOV)
- Average number of purchases a year
- Yearly customer churn
- Customer Acquisition cost
Once a metric is determined for each segment across each category, calculate the average of all the metrics BASED on volume purchase weighting. This will serve as the “Overall Website Retention Rate.” This metric is useful for reviewing your customer retention YOY, but not to drive marketing efforts that will leverage it.
The Overall Website Retention Rate calculation is where the LTV methodology starts to influence the calculation of the customer retention rate. Back to Apple, if people who buy iPhone cases represent 90% of the total website sales, it is normal that the overall customer retention rate reflects this data. Therefore we apply a 90% weighting to the customer retention rate of the iPhone cases category for the overall website customer retention rate.
This approach should be the guideline for an ecommerce company selling multiple product categories that wish to unleash a new customer retention program like a loyalty program or an email retention drip.
Other models are currently emerging to produce a broader vision of the customer retention rate. The Harvard Business School recently published a paper that reveals the importance of looking at new data when calculating customer retention rates. They advise a model similar to an LTV Analysis, confirming that how the customer has been acquired in the first place has a tremendous impact on how that customer will purchase again in the future (purchase frequency, future AOV, and revenue), especially regarding from WHICH channel the customer comes and for WHAT margin. The margin, also named “the customer acquisition cost,” is the reference point of what product/service category they bought first and for what price (coupon, offer, shipping price, etc.). Multiple leading ecommerce companies found that the first customer purchase path is the main influencer of LTV and customer retention rate.
Here are additional general ecommerce customer retention facts:
- On average, online retailers lose 25% of their customers every year – McKinsey
- 86% of Online Shoppers Order Once and Never Again – RetentionGrid
- The probability of selling to an existing customer is 60-70%. The probability of selling to a new prospect is 5-20% – Marketing Metrics
- A 2% increase in customer retention has the same effect as decreasing costs by 10% – Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy
- It costs 6-7 times more to acquire a new customer than retain an existing one – Bain & Company
- Customer profitability tends to increase over the life of a retained customer – Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy
- A dissatisfied customer will tell between 9-15 people about their experience. Around 13% of dissatisfied customers tell more than 20 people – White House Office of Consumer Affairs
- 68% of customers leave because they think that you do not care about them – Rockefeller Corporation
- Ecommerce spending for new customers is on average $24.50, compared to $52.50 for repeat customers – McKinsey
- 63% of executives are seeing higher churn rates in 2012 – CMO Council and Satmetrix
- 34% of people believe that exceptional customer service is the best way to build customer loyalty – ZenDesk
- 80% of a business’ future revenue comes from just 20% of existing customers – Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy
- 93% of adult Americans said that a company's reputation for honesty and fairness is extremely important to them – Better Business Bureau 2007
- A commitment to customer experience results in up to 25% more customer retention and revenue than sales or marketing initiatives – Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy
- Repeat customers spend 33% more than new customers in general – Laura Lake, Marketing Consultant and Strategist