How to calculate customer retention rate and why it matters for ecommerce
Kelli Trapnell
·February 14, 2023
As an ecommerce company, monitoring your retention rate is the key to growing revenue. A higher retention rate means that you can devote less energy to shopper acquisition. Research has proven that it is five times cheaper to retain an existing buyer than to acquire a new one.
Learn more about how customer retention affects your bottom line in The Future of Shopper Experience
Creating a community of repeat shoppers builds brand loyalty and increases awareness of your product. A high number of consumers make purchases based on reviews, whether it’s through word-of-mouth or standard marketing.
When calculating your customer retention rate, it’s essential to focus on the customer lifetime value (CLV). A high CLV means you have satisfied shoppers who are willing to return to buy from your company again and again. Gathering data about CLV means you can anticipate the longevity of your company and see where you can make improvements to strengthen brand loyalty.
Create personalized messaging that speaks to your shoppers’ interests, based on their purchase history. If for example, they recently purchased a shirt, send them emails that feature add-ons they might like such as accessories they could wear with the shirt or similarly designed items they might enjoy.
Make sure you are engaging buyers by anticipating their needs or concerns, understanding why they are returning items, and encouraging them to leave positive reviews. Implementing tools like automated tracking, fast customer service responses, and convenient return options are easy ways to grow your loyal base of shoppers.
So how do you go about calculating your retention rate, and why does this really matter? Here are a few guidelines:
Customer retention rate
A company’s customer retention rate measures the percentage of shoppers that continue to return to make purchases over a specific measure of time. There are several methods to find this number. One way to calculate customer retention rate is to take the number of purchases during a specific time period (for example, for three months), divide this number by the total amount of shoppers at the beginning (eg: before the three months) and then multiply this total by 100%.
Customer lifetime value
You can also use other calculations to give you an idea of your retention rate. If you use the customer lifetime value (CLV), you would look at the total number of purchases a buyer made over their lifecycle with your company. For example, if they have made three separate purchases of $40, their CLV would be $120. You could also measure it by multiplying the average order value by the average number of purchases they have made over their lifetime with your business. For example, if you sell pet food and the average order amount is $30, with the average number of purchases equaling 10, your CLV is $300.
Revenue churn rate
The customer or revenue churn rate is yet another way to measure your retention rate. In order to understand this metric, you would examine the percentage of shoppers who leave your business over any given period. Taking a step back to examine the churn rate helps you see how your sales compare to those of your competition. Churn rate also affects your profit and your revenue. In a Bain & Company report, data showed that a 5% increase in customer retention created more than a 25% increase in profit. This metric is most commonly used with companies that offer subscriptions, because when shoppers opt out of the subscription, they can use this specific time to measure the churn rate.
If you offer subscriptions, you would measure this rate by subtracting the number of shoppers at the start of a specific period from the buyers at the end of this period. Then add this to the new buyers acquired during that same period. Finally, divide this by the number of buyers at the beginning of the period. For instance, if you had 100 existing shoppers in October, 105 by October 31, and acquired 10 new shoppers in October, your churn rate would be 5%: (100 – 105 + 10) / 100 = 5/100, or 5%.
Read more: Turning customer churn into loyalty
Elevate the shopping experience
In order to increase your customer retention rate, focus on improving your current shoppers’ shopping experience and gathering data. Ensure the information about your products is completely up-to-date so that you’re not selling an item that is actually unavailable. There’s nothing worse than getting excited about a product and then finding out at checkout that the item isn’t available.
If you sell clothing, make sure your size guide is accurate. If your sizing differs from that of other brands, implement a “real fit” guide to help shoppers pick the correct size when they place their order. When it comes to branding, make sure you focus on using size-inclusive modeling strategies. If a shopper doesn’t see their body type represented, they may not be able to picture the item. You can also use AI technology that lets shoppers virtually try on clothing at home. These types of methods can drastically reduce the return rate and increase customer loyalty.
Ensure reliable delivery and tracking
Don’t overpromise a delivery date when there is a possibility that it will be delayed. Whenever possible, use automated tools to help delivery go smoothly. Once a shopper has made a purchase, make sure they receive confirmation of their order and send a follow-up email with shipping information. Send additional follow-up emails to let them know their item is on its way. This will increase the shopper’s trust in your company, letting them know you are reliable and that you value them.
If you have a subscription service, your shoppers will rely on this arriving around the same time every month. Try to stick to a similar date each month. A disappointed buyer can quickly become a one-time shopper who won’t make a repeat purchase.
Omnichannel marketing is key
When it comes to engagement, make sure you are connecting with shoppers through multiple platforms. Implementing omnichannel marketing techniques is a given these days. Shoppers expect a company’s brand to be consistent, no matter which channel you use. Using SMS is a great way to notify your buyers of exclusive sales, nudge them about items they recently looked at, or offer birthday discounts.
After a purchase, encourage consumers to share reviews online. You could offer incentives like discounts for sharing a review on your website or their social media platforms. Word-of-mouth marketing is a great way to increase your customer retention rate. 88% of shoppers trust personal recommendations compared to traditional marketing methods.
Word-of–mouth marketing can also look like creating a team of brand ambassadors who host live shopping experiences. Because most people shop on social media platforms, live shopping has proven to be a successful revenue stream. Being able to picture the item in real life and have their questions answered increases the likelihood of making a purchase.
This also helps create a community around your brand. You can use social media to do this, but many businesses also use personalized shopping apps. Through an app, you can notify buyers of member-only sales, gather data, and encourage them review your products. Many shoppers will use these apps ready to learn more about your business and meet like-minded individuals to share information.
Offer plenty of options
When a buyer checks out, offer options and bonuses like free shipping. Make sure you offer multiple payment options, such as Apple Pay, PayPal, and credit cards. Having a “buy now, pay later” option on expensive products is popular since it helps ease shoppers’ purchase regret.
Automate where possible
Ensure all the information a shopper may need is at their fingertips—always. Using automated customer service can help answer the most frequently asked questions. If there’s an issue, they can also get support started before handing the case off to your team. Up to 40% of purchases end up as returns. Creating a positive experience around returns will ensure shoppers are willing to return for a repeat purchase.
Create a seamless process that allows multiple options, like a free return label or QR code that can be easily scanned. Offer the ability to switch an item for a new one, whether there’s a sizing issue or the product didn’t fit the shopper’s lifestyle. They may have had their eye on another item, so helping them make an easy exchange will lower your return rate. Loop makes it a painless process to exchange one item for another, even if it’s different from the original item.
Want to learn more about growing your retention rate? Book a demo with Loop today.
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