Customer loyalty is a gold-standard measure of e-commerce business success. There are endless resources to help you improve customer loyalty, but those won’t be helpful if your business doesn’t know how to measure the value of repeat customers.
Retention rate is an excellent metric to help your company understand which customers are loyal to your e-commerce store and why. This guide will help you understand exactly what retention rate is, why it’s a valuable metric for your business to track, and give you two options for calculating retention rate so you can use whichever best fits your business’s needs.
What is the Retention Rate?
Retention rate is the percentage of customers that a business retains, or keeps, over a given period. This is often measured by whether a customer made more than one purchase or whether they continued paying for a product over that period.
Retention rate helps businesses gauge the long-term loyalty and reliable revenue coming in from customers. It can be thought of as the inverse of churn: churn measures the rate at which customers drop and retention measures the rate at which customers remain active. A high retention rate indicates low churn and vice versa.
Why is Measuring Retention Rate Important for e-Commerce Businesses?
Chances are, you’re already monitoring metrics and analytics for your e-commerce business. Retention rate is an important metric to keep track of in addition to your usual reports. Understanding your online business’s retention rate:
Helps Your Business Set Goals and Benchmarks
Getting an e-commerce business off the ground is one thing, but nurturing and expanding it is a completely different task. Successful growth efforts require careful goal setting, benchmarking, and planning. Retention rate is a measure of long-term loyalty, and by benchmarking and improving your retention rate, you’ll foster overall growth for your business.
If you’re measuring retention rate for the first time, it may be helpful to know that e-commerce retention rates hover, on average, around 30%. This industry benchmark can help your business work towards improving your rate with reasonable expectations.
Allows for Precise Customer Segmentation
Once you find your retention rate, you can crack open that data and discover exactly who your retained customers are. This information is invaluable to e-commerce businesses. Segmenting retained customers allows you to understand what keeps them returning to your products and how they derive value from doing business with you.
Opens Pathways to Increase Revenue
It may seem counterintuitive, but knowing where customers gain value from your product can help you target customers who are at risk of churning. Knowing what keeps customers returning will help you tailor your messaging to less frequent customers, further improving retention rates and increasing revenue from retained customers.
2 Simple Retention Rate Formulas for Your Business to Measure Customer Loyalty
Factors in Retention Rate Formulas
Before diving in, it will be helpful to understand the terminology used in the following retention rate formulas.
- Actions refer to purchases, subscriptions, or renewals.
- The Time Period refers to the recent period during which a customer may have taken an action. This can vary depending on industry expectations and how your business operates, but it typically ranges from a recently finished month to a recently finished quarter.
- Lookback Period refers to the overall period that is being compared to the period described above. Again, the length of the lookback period varies but usually ranges from the last year to all-time.
Formula 1: Retention and Churn
The first way to think about retention is to relate it to churn. As mentioned before, retention and churn are effectively opposites: retention denotes customers who stay while churn denotes customers who drop off.
With this in mind, here’s the formula that has found to work well for many e-commerce stores:
|Retention rate =||# of customers who made an action during the given time period and the overall lookback period|
# of customers who made an action during the lookback period
Note that this formula does not use actions themselves as factors, but instead uses the number of customers who make those actions. After all, it’s customers who are retained, not purchases.
This formula is simple to calculate and easy to monitor, making it a great calculation for e-commerce businesses to keep in their metrics toolkit.
Here’s an example: Company A has 45 customers who purchased between January 1 and December 31 as well as between December 1 and December 31. During the entire year, the company had 150 individual customers. This calculates to a retention rate of 30%.
Formula 2: SaaS Retention Rate
If your business falls into the realm of SaaS or utilizes a subscription model, this formula is suited to your needs. It’s not too dissimilar from the previous formula, but it’s great for framing the actions customers take as activity versus inactivity, rather than focusing on individual purchases over a given period.
|Retention rate =|
# of active customers at end of the time period — # of new customers acquired during the time period
# of customers at beginning of time period
For example, Company B had 120 customers on January 1. On December 21, they had 131 customers and acquired 30 new customers throughout the year. This results in a retention rate of 84%.
The retention rates in these first two examples are quite dissimilar, but SaaS and e-commerce companies may see different trends in their retention rates because of how those industries operate. This is why it’s important to research your industry’s typical retention rates—you need to understand what benchmarks are attainable for your business goals.
Maximize Your Retention Rate
You can improve retention with smart email, retargeting, and marketing campaigns. By sending your customers’ value-added messages, offers, and product recommendations, you can re-engage segments who may be ready to churn and, as a result, boost your e-commerce business’s retention rate.