2 Ways to Measure Customer Retention Rate, One’s Wrong

Improving customer retention rate will multiply profits.


Today, we are breaking down how eCommerce retention works. We will look at two methods to calculate your eCommerce customer retention rate, and give our opinion on which you should use. 


Lastly, we'll look at a few strategies Amazon uses that you can implement to immediately increase your retention.


Let's begin!

What is Customer Retention Rate?

Customer Retention Rate measures what percentage of customers continue to buy over a given period of time.

It is the inverse of churn rate. While churn rate measures the percentage fo customers who are lost, customer retention looks at the data and asks how many stayed. 

Measuring Customer Retention Rate: 2 Necessary Quesitons

Before you can measure your customer retention rate, you need to answer 3 Necessary Questions.

Question 1: What Is a Retained Customer? 

A "retained customer" can mean a lot of things. 


Typically, a retained customer in eCommerce is an active one. But what makes a customer active? 


Is it someone who engages with your email campaigns? Or is it someone who has bought in the last 12 months? Or is it someone who has generated a certain amount of revenue?


Ultimately, you need to define a hurdle previous customers must achieve to be considered active. I recommend using real purchases or a certain revenue threshold.

Question 2: How Can You Segment Your Retained Customers?

Finally, you want to predefine what segments you can create. 


Hopefully, your store is using a customer data platform to tie purchase data across channels. If not, you will need to download transaction data from each channel and tie them together. 


Once you have a complete data set, you can segment your customers across a number of dimensions. Some of the most popular are:

  • Marketing Channels - This is the best way to measure your return on marketing investment. Possible channels include affiliates, referrals, organic, social, direct, or any other meaningful acquisition source for your store.
  • Product Categories -  Segmenting by product category allows you to see which products are most effective at creating loyalty and gives you the power to control for varying product lifecycles. Options include by brand, product lines, or more general product categories.
  • Demographics - Age, gender, and geographic areas can all reveal how your brand appeals to various groups of customers.

2 Methods to Measure Customer Retention Rate

There are two primary ways eCommerce stores can measure customer retention rate. 

Customer Retention Rate Method #1: Snapshot

The first method provides a more general view of how your store is retaining customers over a given period of time. 


It uses three variables.

  • Customers Start - Number of customers at the start of a time period
  • Customers End - Number of customers at the end of a time period
  • Customers New - Number of customers acquired during the time period

The final equation looks like this:


(Customers End - Customers New) / Customers Start


I've labeled this approach the "snapshot" method because it gives you picture of your retention in one moment in time. 

Snapshot Method Example

To illustrate, here is a simple customer retention rate example.


Let’s say you started the year with 1,000 customers.

Over the year, 800 of your existing customers made a purchase.

Likewise, over the year you gained 300 new customers. This means at the end of the year, you have 1,100 active customers.

Your final customer retention rate equation is:

( Customers End - Customers New ) / Customers Start

(1,100 - 300) / 1000

800/1000 = 80%

In other words, 80% of your existing customer base continued to be customers over the given time period (in this case, a year). 


If you plot these retention rates over time, you get a retention chart, like the image below. 


NOTE: 

This raises an important question. What time period should you select?


Ultimately, your time period should hinge on your product lifecycle. Some products, such as appliances or furniture, have lower purchase frequencies. Others, such as perishables or fashion brands have much shorter buyer frequencies. 

Customer Retention Rate Method 2: Cohort Method

The cohort method to customer retention rate tracks customer behavior over time, segmented by when they became your customer. 


The truth is, your business is not static. Every day, a change is made. Using cohort analysis, you are able to see if these changes made a positive impact on retention. 


I struggled deciding if I should break down how to perform a proper cohort analysis. 


Ultimately, because each tool is different, I decided against it. If you are using Excel or Google Sheets, there is already a fantastic step by step instructions here


Which Method Should You Use to Measure Customer Retention Rate?

Using cohort analysis expands what you can do with customer retention rate.

While the first method gives you a general idea of how you are doing at retaining customers, it is not actionable.

Integrating cohort segments into your retention analysis gives you a much deeper understanding on where your eCommerce store is succeeding and where it is failing

Low retaining cohorts will pop out.


You will know where you need to improve. You’ll also discover areas where you are doing well, and possibly identify successful customer retention strategies to apply to other categories and product lines.


Creating a cohort analysis is a well documented process. You can find 

How to Improve Customer Retention Rate

Next, I want to break down how successful eCommerce stores increase customer retention rates. We start with Amazon.

How Amazon Increases Customer Retention Rate

1. Free Shipping

We've covered shipping hurdles before. 


The reality is, shipping charges prevent conversions and are the primary reason for cart abandonment


Creating a free shipping policy removes this barrier, and rewards clients for making frequent, repeat orders. 


In Amazon's case, any order over $25 qualifies for free shipping. Even better, free shipping is the primary benefit of becoming an Amazon Prime member. 

2. Maximize Transactional Emails

The more recent someone purchases from your store, the more likely they will purchase again. 


We went over the phenomenon in our guide over RFM Segmentation, but there is no better time to cross and up-sell clients than immediately after they have revealed buyer intent for a specific problem. 


Here, Amazon does a great job of using dynamic recommendations


In combination with sharing delivery details, Amazon offers a number of complimentary products - encouraging repeat purchase and maximizing customer retention rate. 

3. Cross Promotion Tactics: Combine Bonus Offers & Continuity Programs

Cross promotions aren't new.


But I love how Amazon leverages their service products to enhance existing offers. 


Amazon Music is a great example. 


Amazon incentivizes customers to purchase Amazon products by pairing them with a free 90-Day subscription to Amazon music.

After purchase, customers get a direct email, thanking them and encouraging them to try Amazon Music.

Here, the cross promotion not only serves as a way to retain customers, it also acts as a bonus offer for the initial purchase.