Which Customer Retention Metrics Do I Need To Measure Customer Loyalty?
Loyalty is practically its own form of currency, especially for eCommerce stores. When customers are loyal to your store, they offer greater customer lifetime value (CLV) which in turn, generates more revenue for your business.
If you want your eCommerce store to be as successful as possible (and who doesn’t?), measuring customer loyalty with key customer retention metrics will show you how many of your customers are coming back to your store again and again. With that data, you can make smart improvements to your business to further boost customer loyalty.
Let’s take a closer look at how customer loyalty and customer retention are related and which key customer retention metrics you can start using right now to gauge and track your customer loyalty.
Customer Loyalty & Retention
Customer loyalty is a term used when a customer continues to buy from a particular brand, company, or business. It results from positive experiences and interactions with your business.
The main implications of customer loyalty are:
- Loyal customers generate more referrals.
- Loyal customers will continue buying from you.
- Loyal customers aren’t actively looking for alternate suppliers.
- Loyal customers are less susceptible to competitors’ marketing.
- Loyal customers are more receptive to your other products and services.
- Loyal customers are more understanding of issues and troubleshooting.
- Loyal customers are more likely to provide feedback and reviews which you can use to improve your retention.
Customer retention is your ability to sell to customers who have already made purchases from you. It’s a unique metric because it accounts for both your ability to acquire new customers as well as your ability to keep those customers. In short, your retention metric is about turning new customers into repeat customers which makes it a useful metric to measure and track.
The Importance of Retention
Retaining a solid base of loyal customers is highly profitable. For one thing, returning customers spend up to 67 percent more than new customers. And when you consider the high cost of marketing, acquiring new customers is on average, 6 to 7 times more expensive than retaining your current customers.
Most businesses see an average of 25 to 40 percent of total revenue coming from their returning customers. However, it’s estimated that a mere 5 percent increase in retention can result in a revenue increase of between 25 and 95 percent, so customer retention is an invaluable metric that happens to be particularly useful for measuring customer loyalty.
What Influences Retention?
Price influences retention in an obvious way. When your products or services are priced competitively, your customers are more likely to come back when they need your offerings in the future. However, if your prices are too high, they’ll be unlikely to buy from you again.
Site performance is an easily overlooked but major influence in retention. If it’s difficult to navigate your website, the checkout process is buggy or confusing, or the site is slow, customers will likely give up and simply find what they need elsewhere.
Delivery refers to how quickly you ship orders, the speed of delivery, and how much you charge for shipping. If you charge too much for shipping or if it takes too long to deliver orders, customers are unlikely to order from you again.
Customer service can either boost or reduce your retention. Strong customer service can be reassuring to customers who are considering buying from your store.
Loyalty programs have become a great way of encouraging repeat business. In effect, a loyalty program rewards your customers for their patronage and offers an incentive to make additional purchases in the future.
Saved payment details is one you may not have expected, but being able to store payment details for future purchases is a huge convenience for online shopping. With many people making purchases on mobile devices, it’s inconvenient to input payment details for every transaction. Plus, offering the ability to store payment methods for future use significantly reduces cart abandonment rate.
Retention Metrics for Measuring Customer Loyalty
Customer retention measurement is important as it offers a way of measuring customer loyalty. Fortunately, there are a number of useful retention metrics with which you can measure the loyalty of your customers.
Customer Retention Rate (CRR)
Your customer retention rate, or CRR, is the quintessential customer retention metric and an ideal place to start measuring customer loyalty. Basically, your customer retention rate reflects the percentage of customers who remained loyal over a specific period of time.
Customer retention rate is important because it offers a quantitative interpretation of a qualitative attribute. If your rate is low it means you’re keeping fewer customers, and customer loyalty is low; however, if your retention rate is high, more customers are loyal to your business.
Though 100 percent retention is the ideal maximum, all businesses see some amount of customer loss, or churn. Studies have shown that while it varies from industry to industry, the average retention rate usually falls below 20 percent.
Customer Retention Rate Formula
You need three data points to calculate customer retention rate: number of customers at the start of a period (CS), number of customers at the end of a period (CE), and number of customers acquired during that period (CA).
To calculate, subtract CA from CE, divide that number by CS, then multiply that figure by 100 to convert it into a percentage.
How To Improve The Customer Retention Rate:
- Set realistic expectations. If you make promises to customers that you might not be able to keep, they’re unlikely to become repeat customers.
- Implement anticipatory services. If your eCommerce store offers services, send reminders for upcoming invoices. If you can anticipate your customers’ needs, it shows your customers that you’re on top of things.
- Set (and monitor) your team’s key performance indicators. Use key performance indicators (KPIs) to monitor the performance of your employees. If customer retention rate and your team’s KPIs are low, improving customer service with some behind-the-scenes improvements could boost customer loyalty and retention.
- Leverage social media. Interacting with your customers one-on-one on social media or through email is how you build relationships, which inspire loyalty and retention.
- Solicit feedback from customers. Surveys can be a great way of gauging customer experience. If multiple customers mention a problem or shortcoming, addressing the problem could boost customer retention rate.
Customer Churn Rate (CCR)
Customer churn rate, or CCR, represents the ratio of customers you acquire and lose soon thereafter. Customer churn rate and customer retention rate are like two different sides of the same coin; the churn side represents customers lost over a period while the retention side represents customers retained over a period.
Your churn rate — also called attrition rate — is a great metric for gauging customer loyalty. A low CCR is indicative of higher customer loyalty because there are fewer customers lost, but a high CCR indicates a larger percentage of customers lost and implies lower customer loyalty.
Customer Churn Rate Formula
There are two ways to calculate the customer churn rate. The first way is to piggyback off your customer retention rate because, in essence, customer churn rate is your retention rate subtracted from 100 percent.
Alternately, CCR can be calculated using a simple formula that requires just two data points: the number of customers at the start of a period and the number of customers lost over that period. To calculate, you simply divide customers lost by the number of customers at the start of that period, then multiply that value by 100 to get the percentage.
Customer Lifetime Value (CLV)
Of all the retention metrics we’ll cover, customer lifetime value is arguably the most important to measure, but it also happens to be one of the most confusing to calculate.
Customer lifetime value indicates the health of your store by showing you how much your customers are spending during their customer lifecycles. When your customers are loyal, they tend to spend more at your eCommerce store, yielding greater lifetime value.
In theory, it sounds like it should be a simple thing to calculate, but it requires you to know a number of other metrics for your eCommerce store.
To calculate customer lifetime value, multiply the amount of money the average customer spends per year by the average customer lifespan. This will give you a value for how much revenue on average you should expect from every customer over his or her lifecycle.
Repeat Customer Rate
Ultimately, loyal customers are the ones that make multiple purchases. Therefore, it follows that your repeat customer rate would be a great measure of customer loyalty.
Your repeat customer rate is simply the percentage of your customer base that has made more than one purchase. To calculate your repeat customer rate, divide the number of customers who have made multiple purchases over a period of time by the number of total customers for that same period, and then multiply by 100 to get a percentage.
Though repeat purchases don’t necessarily equate to loyalty, the likelihood that a customer becomes loyal to your eCommerce store grows with every purchase.
The most loyal customers are receptive to products in addition to the one they intended to buy. For instance, if a customer goes to your eCommerce store for a specific type of item and ends up buying both the intended item and an item from a totally different product category, there’s a strong indication the customer is loyal to your store.
So your upselling ratio is a measure of customers who were “upsold” and added unrelated products to their orders, against the number of customers who bought only one product. The formula is the number of customers who made multi-item purchases divided by the number of customers who made single-item purchases.
Retention Metrics for Loyalty Programs
Loyalty programs offer lots of opportunities for using retention metrics to gauge customer loyalty. The idea behind customer loyalty rewards programs is to retain more customers by giving them incentives to make additional purchases. So if your loyalty program isn’t performing very well, it’s a strong indicator of poor customer loyalty.
When you offer a loyalty program, your participation rate is the percentage of your customers who are enrolled in your customer loyalty rewards program. To calculate your participation rate, divide the number of customers who are enrolled in your loyalty program by your total number of customers.
Redemption rate is a metric that indicates the success of your loyalty program. Basically, the idea is to determine what percentage of your loyalty program participants are actually using the perks that are offered or earned through the program. Calculating your redemption rate is quite simple: Divide the number of perks redeemed by the number of perks issued.
Active Engagement Rate
Similar to the redemption rate, your active engagement rate reflects the percentage of your total customers who are engaging with your loyalty program. The formula for active engagement rate is the number of customers who have used your loyalty program divided by your total number of customers.
Use Retention Metrics to Gain More Loyal Customers
To be clear, this isn’t an exhaustive list of retention metrics. While every metric is illuminating for one reason or another, we focus on the retention metrics that are most directly tied to customer loyalty to allow you to get a read on how many of your customers will come back to your eCommerce store again and again.
While some of the metrics we’ve highlighted may not be relevant to your business — like the metrics for loyalty programs — most referenced here will give you a solid start in measuring customer loyalty. As you use these metrics to gauge and track customer loyalty, you’ll recognize the importance of cultivating loyalty from your customers for the longevity of your eCommerce business.
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