In this highly competitive, dog-eat-dog business environment, customer retention is king. Simply stated, customer retention is the act of bringing customers back for more, but customer retention analysis and tracking is anything but simple. And, after all, if you can’t measure customer retention, you can’t manage it, and if you can’t manage it, you can’t harness the power of retention marketing to grow your business. Approximately 65 percent of a company’s revenue comes from the repeat business of existing customers, so stop neglecting your most valuable clients.
According to a recent U.S. News and World Report study, a typical American business will lose 15% of its customers each year. In order to survive and flourish, a company must increase the retention rate of its existing customers as well as encourage these regular customers to refer new clients to its business. Whether an existing client has made only one purchase or twenty, retention marketing helps you bring them back for repeat business.
A customer retention rate is the percentage of a company’s existing customers who are kept or retained during a measured period, and it indicates how well the company is doing in generating loyalty among its customer base. Can you measure loyalty? You sure can, with the help of customer retention analysis. You just need to set metrics. Here are three of the most important customer retention metrics you need to measure repeat purchase behavior:
The Repeat Customer Rate (RCR) is the backbone of retention marketing and measures the percentage of customers who are willing to make a second purchase from you. The higher this metric is, the more likely it is that customers will return to you. In order to calculate your RCR, you need two pieces of information:
Your Repeat Customer Rate is the number of customers with more than one purchase divided by the total number of customers. What makes your RCR metric so important is the fact that repeat customers comprise about 8% of your customer base, yet they are responsible for generating over 40% of your annual revenue. It’s like a snapshot of your entire retention marketing strategy and a litmus test of its effectiveness.
The Purchase Frequency (PF) is tied to your repeat customer rate, and your retention rate will fall if the purchase frequency falls. Your PF indicates how often the average shopper buys something from you. It can be calculated by dividing the total number of orders you received in a one-year period by the total number of customers you had that year. The Purchase Frequency measures how often customers are coming back to buy from your store, so naturally it is higher among repeat customers.
Closely related to your Purchase Frequency is the Time Between Purchases (TBP) metric, which shows you how many times a year a customer buys from you. Once you learn how long it takes the average customer to buy again, you can predict purchasing patterns and implement retention strategies to tug at their purse strings. Your TBP is an invaluable metric for maximizing revenue, and it is easily derived by dividing 365 days by your purchase frequency (PF).
You need to know the actual worth of each purchase, and the Average Order Value (AOV) metric gives you the average amount of money each customer spends per purchase. The more your existing customers spend per transaction, the less you’ll need to pursue new customers through costlier techniques. Your AOV is the money metric, and it is calculated by dividing the total amount of revenue you’ve taken in by the number of orders processed.
Please note that this number does not show your profit margin, and you’ll need to subtract expenses and the cost of the goods to get an accurate look at your profit. Whether it’s a new acquisition or an old regular customer, your goal is the same: to make them spend more of their hard-earned money in your store. A great way to increase your average order value is to offer tempting product bundles.
The above marketing retention metrics are important, but they don’t show the whole picture, which is the real value of each customer. Since the goal of customer retention technology is enhancing customer value exponentially, you should multiply the Purchase Frequency by the Average Order Value to find the real value of a customer. Retention marketing is slowly but surely gaining acceptance throughout the marketing industry because the cost of acquisition has gone through the roof lately. Using customer retention technology whenever possible could have the power to make or break your business.