Did you know, that it’s cheaper to get current customers to make a repeat purchase than it is to find new customers. When was the last time you made an effort to re-engage customers to get them to come back? If you've yet to market to current customers after the sale, now is a good time to build a cohesive strategy for customer retention. Let's look at how to get started.

What is Customer Retention?

Customer retention is the collection of activities a business uses to increase the number of repeat customers and to increase the profitability of each existing customer.

Customer retention strategies enable you to both provide and extract more value from your existing customer base. You want to ensure the customers you worked so hard to acquire stay with you and continue to get value from your products.

In short, acquisition creates a foundation of customers while your retention strategy is how you maximize revenue for each one.

When to focus on customer retention

Whether you should focus more on acquisition or retention is heavily influenced by where your store is in its lifecycle. A store that started yesterday is vastly different than one that’s been up and running for many years.

Acquisition vs. Retention

Just starting: When you’ve just started your store there is one thing you should be focused on: getting customers. At this point your acquisition efforts should completely trump retention. Focus on strategies and tactics that will help you grow your customer base.

Gaining traction: You now have customers and you are getting sporadic sales. At this stage you can begin to introduce retention elements to encourage each customer to buy more. My recommendation would be to start with retention email campaigns that focus on encouraging a past customer to purchase from you again.

Consistent: You aren’t quite an ecommerce juggernaut, but sales are growing. This is the point where you should begin to think about mixing in more retention with your acquisition efforts. You can look at starting a loyalty and/or a referral program as well as getting more serious with marketing automation.

Your retention strategy is how you maximize the profitability of each customer.

Established: You are now an established ecommerce store. A common problem for retailers of this size is finding ways to continue to grow. Acquisition may be leading to a lot of one time purchases, but a retention strategy can get customers to buy more often which increases their lifetime value. At this stage, you should be serious and deliberate about your retention efforts.

Well-established: At this stage your store has made it past the initial gauntlet. You’ve achieved many early successes and you have a lot of processes and automations in place. Now is the time to focus heavily on retention.

Retention rate

Aside from the current stage your store is in, you'll also want to tailor your strategy based on what you sell.
How retention fits your business

What you sell has a huge impact on which strategy you should focus on. A retailer selling high-end leather furniture is going to be categorically different than a store selling tea and coffee.

A store whose customers purchase high value items frequently will have the highest customer lifetime value (CLV). These are the types of stores that have the most to gain from a solid retention strategy.

Retention matrix

In general, as you move to the right across this matrix you should start focusing more and more on retention. But remember, you should never ignore one or the other. It's about finding a balance that makes the most sense for your business.

Customer retention metrics that matter

The key to improving customer retention is understanding the underlying metrics. But what are these metrics? How do you measure them? More importantly, how do you improve them?

Answering these questions will equip you with the tools you need to build a retention strategy that has a significant and lasting impact on your store’s profitability. In order to do that, let’s look at three of the most important retention metrics and examine why they matter.

  • Repeat customer rate
  • Purchase frequency
  • Average Order Value (AOV)

Repeat customer rate

Repeat customer rate is the backbone of retention marketing. It measures the percentage of customers willing to make a second purchase from you. Measuring your repeat purchase rate is an excellent way of evaluating how well your retention strategy is actually working. The higher this metric is, the more willing customers are to return to your store.

How to calculate repeat customer rate

When it comes to measuring retention metrics, it’s easy to get lost in a sea of complicated calculations. Thankfully, calculating your repeat customer rate is fairly straightforward and only requires two pieces of information:
-Number of customers with more than one purchase

This refers to the number of customers who have made more than one purchase in a specific period of time. I recommend looking at an entire year to see the big picture.
-Number of unique customers

This is the number of different customers that purchased from your store in a distinct time frame. Note that this is different from number of orders.

Fortunately, all you need to do is divide the number of customers with more than one purchase by the number of unique customers.

When you write out this equation, it looks like this:

Number of Customers That Purchased More Than Once / # Unique Customers

Purchase frequency

Purchase frequency shows you how often customers are coming back to buy from your store. This is especially important when you consider that repeat customers are responsible for 40% of the average store’s annual revenue.

How to calculate purchase frequency

Calculating your store’s purchase frequency is similar to calculating repeat purchase rate. Using the same time frame you chose for your repeat purchase rate (e.g., a single month), divide your store’s total number of orders by the number of unique customers.

When you write out this equation, it looks like this:

Number of Orders Placed / # Unique Customers

Average order value

Once you understand repeat purchase rate and purchase frequency, it’s time to maximize how much each of those purchases are worth. This metric is known as average order value, and refers to the amount of money a customer spends in your store on each transaction.

How to calculate Average Order Value

Just like purchase frequency, your average order value should be calculated using the same time frame you set for your repeat purchase rate. From there, all you have to do is divide your yearly revenue by the number of orders your store processed. Shopify reports also calculates this number for you.

When you write out this equation, it looks like this:

Total Revenue Earned / Number of Orders Placed

Customer value: The big picture of retention

Whether you hope to increase these metrics one at a time or simultaneously, the ultimate goal of retention marketing is to increase customer value. Customer value is the final piece of the puzzle because it helps you understand how much each customer is actually worth.

In order to calculate it, you need to already have a handle on your purchase frequency and average order value. By multiplying these two values together, you can truly see the fruits of your labor and understand the power of retention marketing.

Customer Value = Purchase Frequency x Average Order Value

Now is the best time to create a customer retention strategy to see how improving each of these metrics can help grow your business.

Keep customers to grow your business

Your current customer base is the best asset your store has. Customers already know your brand, they know your products, and they appreciate your service.

Focusing your time and energy on improving the experience for this group as oppose to always trying to find new customers can be a powerful way to supercharge revenues for your store.