A masterclass on Ecommerce Customer Retention Metrics
Did you know that your existing customers are likely to spend, on average, 67% more than new ones?
Fostering loyal customers is key to growing your business sustainably rather than spending it all on customer acquisition.
But this does not mean customer acquisition must entirely be ignored. It is a seemingly pricier alternative to customer retention, considering the complexity involved in converting a brand new customer.
Measuring eCommerce customer retention is as important as having an effective retention strategy. And many companies focus more on execution than on measuring their results.
Are you one of them, too?
In this guide, we have carefully picked twenty-one of the most valuable customer retention metrics you should measure to stay on top of your retention game and watch your eCommerce company flourish based on proven numbers.
CRR represents the percentage of buyers who return to purchase items from your eCommerce store. This is a clear indicator of whether you’ve successfully retained a customer after they made their first purchase.
How do you calculate Customer Retention Rate?
(No. of customers at the end of a given period – No. of new customers acquired) / No. of customers at the start of the period.
For instance: If your eCommerce company had 120 customers at the beginning of the year and 170 by the end of it, and 60 new customers were added during this period, here’s what your CRR looks like:
(170-60) / 120 = 0.91 or 91%.
The opposite of CRR, you must calculate the Customer Churn Rate to find the percentage of customers you lost in a particular period. It is mainly calculated monthly, annually, or quarterly.
Losing customers is inevitable for any eCommerce company – small or large, but Churn Rate lets you work on bringing it down by building an efficient customer retention strategy. It also gives you an insight into remodelling your strategies and developing better solutions for your customers.
How do you calculate the monthly Churn Rate?
(No. of customers at the end of a given month / No. of customers at the start of the period
) x 100
For instance: An eCommerce brand, “A”, lost 10 customers by the end of April and had 250 customers at the beginning of April. So, their Churn Rate for the month would be:
(10 / 250) x 100 = 4%
Calculating Customer Lifetime Value or CLV is crucial to assessing the “value” of each existing customer. It is the most important metric for eCommerce brands as CLV provides future budgeting insights and helps set revenue goals.
What does assessing value mean? With CLV, you measure the expenses of a particular customer in your store and the revenue they helped generate over time.
How do you calculate the Customer Lifetime Value?
(Average Purchase Value x Average No. of Purchases) / Average Customer Lifespan
In eCommerce, you need your customers to promote your brand provided they are satisfied with your products and the support offered. The Net Promoter Score or commonly referred to as NPS, is the best metric to measure the probability of your customer recommending your product or brand to their friends or family.
It is a score ranging from a scale of 0 to 10, 0 being the most unlikely to recommend. NPS can be calculated when feedback is collected at various stages of a customer journey.
How do you calculate the Net Promoter Score?
The customers are divided into three categories based on the rating they provide:
Detractors: 0-6, Passive: 7-8, Promoters: 9-10.
And the formula used is: The percentage of Promoters – The percentage of Detractors
Analysing your growing customer base provides a clearer perception of your business growth despite the ever-growing market trends. CGR indicates the rate at which your customer base has grown. It lets you plan your resources well ahead, so you do not fall short of catering to your customers’ needs.
CGR can be calculated for any specific period depending on the requirement.
How do you calculate the yearly Customer Growth Rate?
((No. of new customers acquired in a year x Customer Retention Rate) / Total no. of customers at the start of the given year) x 100
AOV is a straightforward yet effective metric to measure each customer’s average order size per transaction.
It is a crucial metric that eCommerce brands must regularly monitor as it helps them strategize their future advertising and marketing spending. So, the higher the AOV, the cheaper your advertising spending.
AOV also gives an insight into the ideal ordering size your customers prefer. For example, fewer or higher number of products ordered at a time. Based on this, you can package and upsell your products to achieve a higher AOV.
How do you calculate the Average Order Value?
The total revenue earned in a given period / Total number of orders placed in the period
Here’s an example:
For the eCommerce business “Y”, if the total revenue earned in Q1 was $15000 and the number of orders placed in Q1 was 2500, then their AOV is 15000/2500 = $6.
As the name suggests, the Product Return Rate is the percentage of your customers returning their purchased items. A higher percentage of this is bad news for eCommerce brands as it indicates poor product quality, shipping concerns, or a mismatch in the product descriptions.
Therefore, it goes without saying that the return rate is correlated with the customer churn rate. PRR must be frequently monitored and the underlying issues rectified to bring the percentage down.
How do you calculate the Product Return Rate?
Total no. of returned products / Total no. of products sold.
Why is this self-explanatory metric important in customer retention? Well, it provides a clearer insight into customer loyalty and your brand’s image over competitors.
It is the average time a customer returns to your site and places an order.
How do you calculate the Time Between Purchases?
The sum of individual purchase rates / Total no. of returning customers
Also referred to as the re-order rate, the Repeat Purchase Rate gives you the percentage of customers that returned to place a fresh order.
So, the higher the rate, the more effective your customer retention strategy.
How do you calculate the Repeat Purchase Rate?
No. of returning customers / Total no. of customers
DSO represents the average number of days it takes for your company to collect the full and final payment after an item is sold.
This is an essential metric to understand any underlying delays in payment completion and to take steps to reduce the gap. A higher DSO signifies unsatisfied customers and can affect your retention methods.
How do you calculate the Days Sale Outstanding?
The DSO Ratio is calculated using the amount receivable (AR) over the amount of credited purchases for the desired number of days.
(AR / CP) x No. of days in the selected period
Let’s take a look at an example:
If a company has a total CP of $20,000 and has collected AR amount of about $15,000 from sales in 60 days, then their DSO is:
(15000 / 20000) x 60 = 45 days.
Revenue Churn Rate is not the same as the Customer Churn Rate. In the latter, you calculate the number of customers you lost over time. In the former, you identify the underperforming products and take appropriate action to improve retention rates.
This metric is accurate for businesses offering a single product. But, since most eCommerce businesses offer multiple products, it is suggested to calculate each product individually.
How do you calculate the Revenue Churn Rate?
((Revenue in the previous period – Revenue in the current period) / Revenue in the previous period) x 100
PPO is similar to Average Order Value (AOV) but calculates the average profitability per order value using your Gross Margin.
A lower PPO suggests you bundle higher-margin products with the lower ones.
How do you calculate the Profitability Per Order?
(The total revenue earned in a given period / Total number of orders placed in the period) x Gross Margin
CSAT is a metric widely used by businesses to survey how satisfied customers are with the purchased products. It may sound similar to NPS, but NPS is to identify the satisfaction rate with your brand, while CSAT is targeted at your sold products.
How do you calculate CSAT?
CSAT is measured through feedback using a 5-point scale, where 1 is “Highly Unsatisfied” and 5 is “Highly Satisfied.”
Here’s how Apple does it:
Formula to calculate CSAT:
(1 * NR1 + 2 * NR2 + 3 * NR3 + 4 * NR4 + 5 * NR5) / Total no. of respondents
Note: NR = Number of respondents for each point.
Want to find the overall cost incurred while retaining an existing customer? The Customer Retention Cost metric is your go-to. It is the sum of six costs you spend to ensure a customer repurchases.
How do you calculate Customer Retention Cost?
Total sum of CST, RAMT, CEAS, CEAP, PST, and CM.
Here, CST = Customer Success Teams, RAMT = Renewals and Accounts Management Teams, CEAS and CEAP = Customer Engagement and Adoption Systems/ Programs, PST = Professional Services and Training, and CM = Customer Marketing activities.
To calculate CRC per customer, suppose a company’s total CRC is $1.5mn and was able to retain 10,000 customers in a period, then their CRCC is:
1.5 Mn / 10000 = $150 per customer.
For your retention strategy, it’s important to know if you’re going over budget with your customer acquisition expenses. And CAC is the metric that can accurately help you calculate and strategize your spending.
CAC uses a complex calculation method due to the number of variables involved and is primarily measured annually or quarterly.
How do you calculate Customer Acquisition Cost?
CAC = (MCC + W + S + PS + O) / CA
Here, MCC = Sum of your marketing costs spent on new customer acquisition, W = Wages – for sales and marketing teams, S = Cost of Sales & Marketing software, PS = Use of professional services, O = Other overhead costs, CA = No. of customers acquired in the chosen period.
The LCR is not to be confused with the Repeat Purchase Ratio (RPR). In RPR you calculate the rate of repurchases, whereas in LCR, you calculate the “loyal customer base” who returns to make multiple purchases.
Higher LCR indicates higher customer satisfaction with the products and your brand and is great news for your customer retention analysis.
How do you calculate Loyal Customer Rate?
( Total no. of customers who made multiple purchases / Total no. of customers in a given period) x 100
Share of Wallet is used to calculate the average customer budget shared with your brand compared to your direct competitors. The goal is to increase a customer’s SOW with your brand by upselling your products and maximizing profits.
How do you calculate Share of Wallet?
This is a 3-step process:
(1 – (Average rank of your company / Total no. of competitors + 1) x 2 / Total no. of competitors
You have your Customer Retention Rates, but how do you assess their behaviors over time? It’s by plotting Customer Retention Curves.
These curves show your efforts in retaining customers pictorially.
How do you plot Customer Retention Curves?
Firstly, create customer groups and compute their retention rates at regular points in time and plot them as a line graph:
Cohort analysis is a more in-depth insight-driven metric than retention curves. They track and break down customer behaviours over time based on their interaction with your eCommerce store.
For instance, the customers acquired in Jan 2021 showed decent loyalty with repeated purchases compared to the ones acquired in May 2021. In this case, Cohort analysis lets you drill down to such underlying gaps and understand customers’ behavioral patterns.
Cohort analysis is usually displayed in a tabular format. Here’s an example:
COGS shows how much it costs you to produce the product your store sells. With this data, you can price your products strategically and increase your profit margin while retaining customers.
How do you calculate COGS?
Starting inventory during a chosen period + Total no. of purchases made during this period – Ending inventory for the period
Purchase frequency is the average number of times your customers – new and existing, make a purchase within a selected period.
This is a vital metric that signals if your customers are frequently engaging with your store or not so that you can take appropriate measures to improve this frequency.
How do you calculate Purchase Frequency?
Total no. of orders in a time frame / Total no. of customers who purchased
Analysing and assessing the resultant insights from these retention metrics is key to the long-term success of your company.
But often, eCommerce companies bare the brunt of high-volume and scattered data.
And the result? They eventually lose track of progress while measuring success.
eCommerce companies must leverage tailor-made tools to successfully implement customer retention strategies without being overwhelmed by the sheer volume of valuable data.
And that is why a solution such as LimeChat is an absolute need for eCommerce companies. You can seamlessly implement your customer retention strategies across multiple platforms and streamline relevant data, all under a single dashboard!
Book a free demo with us!