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What is Customer Retention? How to Keep Customers

Guide to customer retention.

You’ve heard it time and time again. It’s cheaper to get current customers to make a repeat purchase than it is to find new customers. It’s true for many businesses, especially in the crowded ecommerce arena where clicks and conversions always seem to be increasing in cost. This is the science of customer retention.

When was the last time you looked for opportunities to re-engage customers to get them to come back? If you've yet to market to current customers after the sale, now is a good time to build a cohesive strategy for customer retention. Let's look at how to get started.

What is customer retention?

Customer retention is the practice of increasing a business's repeat customer rate and extracting additional value from those customers. The goal of customer retention is ensuring a customer to make repeat purchases, be  satisfied with a company's services, and not defecting to a company's competitor. 

You want to ensure the customers you worked so hard to acquire stay with you, have a great customer experience, and continue to get value from your products.

In short, acquisition creates a foundation of customers while your retention strategy is how you build customer relationships and maximize revenue for each one. But how much time and resources should you devote to your retention program? The answer to that depends on your store.

When to focus on customer retention

Whether you should focus more on customer acquisition or retention is heavily influenced by where your store is in its lifecycle. A store that started yesterday is vastly different than one that’s been up and running for many years.

Take a look at the timeline below for general guidance on your store’s potential investment levels.

Customer retention vs customer acquisition

1. Just starting: When you’ve just started your store there is one thing you should be focused on: getting customers. At this point your acquisition efforts should completely trump retention. Focus on strategies and tactics that will help you grow your customer base.

2. Gaining traction: You now have customers and you are getting sporadic sales. At this stage you can begin to introduce retention elements to encourage each customer to buy more. My recommendation would be to start with retention email campaigns that focus on encouraging a past customer to purchase from you again.

3. Consistent: You aren’t quite an ecommerce juggernaut, but sales are growing. This is the point where you should begin to think about mixing in more retention with your acquisition efforts. You can look at starting a referral and/or a loyalty program as well as getting more serious with marketing automation.

Your retention strategy is how you maximize the profitability of each customer.

4. Established: You are now an established ecommerce store. A common problem for retailers of this size is finding ways to continue to grow. Acquisition may be leading to a lot of one time purchases, but a retention strategy can get customers to buy more often which increases their lifetime value. At this stage, you should be serious and deliberate about your retention efforts.

5. Well-established: At this stage your store has made it past the initial gauntlet. You’ve achieved many early successes and you have a lot of processes and automations in place. Now is the time to focus heavily on retention.

For example, in the graph below, each store has 100 customers buying a $10 item each month. The theoretical light purple store is retaining 5% of those customers each month, and the dark purple is retaining 10%. As you can see the 5% increase can lead to rapid growth that is difficult to match with straight acquisition.

Customer retention rate over time

Aside from the current stage your store is in, you'll also want to tailor your strategy based on what you sell.

Free Download: Retention Audit Checklist

Struggling with customer retention? This free checklist will help you build a retention mindset throughout your company by auditing retention strategies at every level of your business.

How customer retention fits your business

What you sell has a huge impact on which strategy you should focus on. A retailer selling high-end leather furniture is going to be categorically different than a store selling tea and coffee.

A store whose customers purchase high value items frequently will have the highest customer lifetime value (CLV). These are the types of stores that have the most to gain from a solid retention strategy.

Customer retention matrix

In general, as you move to the right across this matrix you should start focusing more and more on retention. But remember, you should never ignore one or the other. It's about finding a balance that makes the most sense for your business.

The customer retention metrics that matter

The key to improving your customer retention rate is understanding the underlying metrics. But what are these metrics? How do you measure them? More importantly, how do you improve them?

Answering these questions will equip you with the tools you need to build a customer retention strategy that has a significant and lasting impact on your store’s profitability. In order to do that, let’s look at three of the most important customer retention metrics and examine why they matter.

  1. Repeat customer rate
  2. Purchase frequency
  3. Average Order Value (AOV)

1. Repeat customer rate

Repeat customer rate

Repeat customer rate is the backbone of customer retention. It measures the percentage of customers willing to make a second purchase from you. Measuring your repeat purchase rate is an excellent way of evaluating how well your retention strategy is actually working. The higher this metric is, the more willing customers are to return to your store.

How to calculate repeat customer rate

When it comes to measuring retention metrics, it’s easy to get lost in a sea of complicated calculations. Thankfully, calculating your repeat customer rate is fairly straightforward and only requires two pieces of information:

A. Number of customers with more than one purchase

This refers to the number of customers who have made more than one purchase in a specific period of time. I recommend looking at an entire year to see the big picture.

B. Number of unique customers

This is the number of different customers that purchased from your store in a distinct time frame. Note that this is different from number of orders.

Fortunately, this is calculated for you in your Shopify reports. Should you want to do this manually, all you need to do is divide the number of customers with more than one purchase by the number of unique customers.

When you write out this equation, it looks like this:

# of Customers That Purchased More Than Once / # Unique Customers 

2. Purchase frequency

Purchase frequency shows you how often customers are coming back to buy from your store. This is especially important when you consider that repeat customers are often responsible for a significant portion of a store’s annual revenue—depending on the product category.

How to calculate purchase frequency

Calculating your store’s purchase frequency is similar to calculating repeat purchase rate. Using the same time frame you chose for your repeat purchase rate (e.g., a single month), divide your store’s total number of orders by the number of unique customers.

When you write out this equation, it looks like this:

# of Orders Placed / # Unique Customers 

3. Average Order Value

Average order value

Once you understand repeat purchase rate and purchase frequency, it’s time to maximize how much each of those purchases are worth. This metric is known as average order value, and refers to the amount of money a customer spends in your store on each transaction.

How to calculate Average Order Value

Just like purchase frequency, your average order value should be calculated using the same time frame you set for your repeat purchase rate. From there, all you have to do is divide your yearly revenue by the number of orders your store processed. Shopify reports also calculates this number for you.

When you write out this equation, it looks like this:

Total Revenue Earned / # Orders Placed

Customer value: The big picture of retention

Whether you hope to increase these metrics one at a time or simultaneously, the ultimate goal of retention marketing is to increase customer value. Customer value is the final piece of the puzzle because it helps you understand how much each customer is actually worth.

In order to calculate it, you need to already have a handle on your purchase frequency and average order value. By multiplying these two values together, you can truly see the fruits of your labor and understand the power of retention marketing.

Customer Value = Purchase Frequency x Average Order Value

Now is the best time to create a customer retention strategy to see how improving each of these metrics can help grow your business.

Thank you to Kirsten Burkard for her contributions to this post!

Illustration by Rachel Tunstall

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