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2 Ways to Calculate Customer Retention Rate, One’s Wrong
Improving customer retention rate multiplies profits.
Today, we are breaking down how eCommerce retention works. We will look at two competing methods to calculate your eCommerce customer retention rate, and give our opinion on which you should use.
Finally, we explore how Amazon, Starbucks, and others employ strategies to improve their retention rates. To skip straight to the examples, click here.
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 of customers who are lost, customer retention looks at the data and asks how many stayed.
Churn rate vs retention rate
Churn rate and retention rate both measure a company's ability to keep customers over time. The metrics are inverse of each other.
Churn rate measures the percentage of customers who are lost, typically expressed as # of loss customer over total customers, or amount of revenue loss over time from a specific cohort of customers. You can read more on how to reduce churn rate here.
In contrast, retention assesses how many customers stayed. This post focuses on eCommerce retention rate, but the same tactics can be used to reduce churn.
Advanced Reactivation Campaigns: See how Barilliance combines online and offline data, automatic segmentation, and triggered behavioral emails to create advanced reactivation campaigns. Request a demo here.
Calculate Customer Retention Rate: 2 Necessary Quesitons
Before you can calculate your ecommerce 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:
2 Methods to Calculate eCommerce 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.
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.
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.
We put together an in-depth look at how eCommerce stores can use cohort analysis here.
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 eCommerce 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 eCommerce 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. Implement free shipping ft. Amazon
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 ft. Amazon
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 ft. Amazon
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.
4. Create incentives to join loyalty programs ft. Starbucks
Loyalty programs are an excellent way to bring customers back.
The challenge is how to get new visitors and customers to join. Starbucks gives an illustrative example. They know that once a customer becomes a Rewards Member, they not only spend more per purchase, but they also have a much higher purchase frequency.
But, many customers chose not to sign up during the checkout experience. Starbucks came up with a great solution.
First, they required customers to create a free account to access their wi-fi.
Once customers gave them permission to contract them via email, they began creating offers to bring customers back. Often, these offers revolved around becoming a Rewards Member.
In this way, Starbucks was able to reduce friction in becoming a Rewards Member and personalize email content to email addresses that were not already registered with their rewards program.
5. Use flash sales to manufacture urgency and drive repeat purchases ft. Mint Julep
The truth is, your customers receive thousands of offers a year. One way to stand out is to create urgency. Above, Mint Julep accomplishes this with a flash sale. Their offer is only available for 24 hours, and if customers want to take advantage they must act now.
Improving eCommerce customer retention with Barilliance
Barilliance helps hundreds of eCommerce stores improve customer retention.
Some of the effective tools our customers use are
To see if Barilliance is the right personalization partner for your store, request a demo here.