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The Complete Guide to
Calculating Loyalty & Retention Metrics
Measure Customer Loyalty Online
RedemptionRate
Loyal Customer Rate
RetentionMetricBestPractices BenchmarkYourMetrics
CheckMetricsMonthly
UseaLoyaltyProgramasaHub
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MaximizingRevenuefromExistingCustomers
AverageOrderValue(AOV)
ProfitabilityperOrder(PPO)
BringMoreCustomersBacktoShopAgain PurchaseFrequency
TimeBetweenPurchases
TrackingRetentionEfforts
Repeat Customer Rate
CustomerLifetimeValue(CLV)
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Table of Contentsaka What’s What and Where to Find It
Maximizing Revenue from Existing Customers
Retention is aboutgettingcustomerswhohavepurchasedfromyoubeforetocomebackandpurchaseagain.Itisalsoabout maximizing the revenue of those purchases. Withrisingacquisitioncosts,itisimportanttomaximizethevalueofeverysale.
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By now you know every metric associated with the sale of a product on your store, and the conversion flow associated with it. Facebook ad conversions, add to carts, and on site conversion rates are all important to maximize your revenue, but only to a certain point.
Hypothetically, every online business will reach a point where they can no longer grow by acquiring new customers. There are a finite number of people in the world that can potentially buy your products. I know that may seem impossible, but stay with me!
Acquiring new customers is getting expensive! If you want to stay competitive you need to focus on maximizing the value of your existing customers, and establish a sense of brand loyalty.
This book will focus on showing you the metrics you need to track when adopting a customer retention strategy, and will also show you how to measure customer loyalty online.
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This calculation shows you how much revenue the average purchase on your site generates for you. This is important to know because it tells you how much you can afford to spend to acquire a new customer. Unfortunately, it is often more expensive to acquire a customer than your average order value. This means you have to choose whether to retain this customer or increase your average order value.
Average Order Value (AOV)
# of Points Spent
# of Points Issued
Divided by = AOV
Tips to Increase Your AOV:While you can try to retain this customer, we’ll cover that later. Here are a few tips to increase your average order value.
Free Shipping Thresholds
This is one of the easiest ways to increase average order value: simple set a threshold that a customer must spend in order to receive free shipping. According to UPS, 61% of shoppers abandon their cart if they can’t get free shipping. This can turn into a positive when you set a free shipping threshold.
The fact that the majority of shoppers will leave your site if they can’t get free shipping also means that they will actively pursue it. You can motivate them to spend a little more in order to receive free shipping. The important thing here is to make the threshold obtainable.
Find your AOV and make a threshold that is 15%-20% above that. If you set it too high, shoppers will see it as a hassle rather than a benefit. Setting your threshold too high is one of the most common mistakes according to Entrepreneur.com.
Set a shipping threshold that is 15%-20% above your AOV to maximize the benefit to the customer.
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While average order value is a great benchmark, it does not tell the whole story. If you are only selling low margin items, your AOV is not a great benchmark. Your profitability per order, on the hand hand, shows you how much profit you are brining in on the average order.
You can increase PPO in similar ways to your AOV - you just need to be sure you are pushing your highest margin items. Use a Related Items section that only shows your highest margin items such as your house brands. 8
Use Cross Sells
Cross-selling is presenting additional items that a shopper might see as valuable. Usually this is done by looking at what they have put in their basket and recommending products that complement that item. Let me explain with an example.
When shoppers look at a product on bodybuilding.com, the website also recommends two products that are intended to be purchased with it. If I look for Omega-3 capsules, the site also recommends a protein powder and multivitamin of the same brand.
Bodybuilding.com uses a system to automatically present cross-sells, but you don’t have to be that high-tech. Smaller merchants can simply place a static recommendation on a product listing. This could be putting a recommendation to jelly on all peanut butter listings or toothpaste on all tooth brush listings.
Cross-sells are a great way to boost average order size because they remind your customer of products they may have forgotten, or didn’t realize they needed.
You provide them with additional value and they provide you with additional order value. It is a win-win!
Want more AOV tips?
Profitability per Order (PPO)
Total Revenue x Avg Proft Margin
# of Orders
Divided by = PPO
You can also give incentives for purchasing high margin items. This works great when combined with a points-based loyalty program. Simply reward extra points for your high margin items, or only offer points on your house brands. This is extremely effective in the supplements industry.
We’ve got some great examples of how to incentivize your customers with house brands.
Bring More Customers Back to Shop Again
Thepurposeofacustomerretentionstrategyistoencouragepeopletocomebackandshopwithyoumoreoften.Yourgoalistoturneveryfirsttimeshopperintorepeatbusiness.Herearethemetricsyouwillneedtomeasurewhethershoppersarecomingbacktoshopagain.
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Purchase frequency is a measure of how often your average customer is shopping with you during a given period of time (usually a year). As you bolster your customer retention efforts you will see your purchase frequency increase. Even a 0.5 increase in purchase frequency can have a big impact.
Purchase Frequency
Total Orders (365 Days)
Unique Customers (365 Days)
Divided by = Purchase Frequency
Tips to Increase Your Purchase Frequency:Here are a few tips and tricks you can use to get your customers to shop with your more frequently.
Retention Emails
These are emails that are sent out to existing customers (aka those who have made a purchase before). They can range in complexity from a simple “we miss you” email to a tailored email based on previous purchase information.
The goal of these emails is to inspire them to come back and make another purchase from your store. Here is an example I have put together to illustrate the two tactics explained earlier.
The key to any retention email is offer personalization, relatable offers, and an incentive. The personalization can be as simple as addressing the customer by name or by offering them something related to what they purchased before - in this case, ties. Finally, you need to give the shopper a reason to return. In the tie example it is with a coupon code they can use. But you can employ other incentives like points in a loyalty program.
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Points are a great incentive because you can show a customer’s current balance instead of discounting the purchase further.
Loyalty Programs
A loyalty program can actually help with both average order value and purchase frequency. The enrollment in a loyalty program encourages a customer to shop with you again instead of choosing a competitor. Once a shopper is enrolled you can use points to motivate them to shop more frequently.
You can also team up your email marketing and loyalty program to increase purchase frequency (as mentioned before). You can use points in your emails as an incentive to get customers to return. Show them the point balance they have, and what they can spend those points on. You could also give extra points on certain days to encourage customers to buy now.
Looking for more tips on how to increase AOV and purchase frequency?
Look no further.
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Your purchase frequency shows you how many times a year a customer is buying. This is helpful to see if retention marketing efforts are working, but it is not the most actionable metric. Time between purchases turnes purchase frequency into a more useable metric.
Time Between Purchases
365 Days
Purchase Frequency
Divided by = Time Between Purchases
Time between purchases shows you how long a typical customer goes before making a repeat purchase. This is a good metric to know because it allows you to tailor email marketing campaigns. If you know the average customer goes 7 weeks between purchases, you can start sending promotions during week 6 to get them back a little sooner than they normally would. Time between purchases will vary significantly between industries. If you are selling furniture you will see a longer time between purchases than if you are selling coffee.
The best practice is to try and find another merchant in your industry that you can compare to. If you can’t find a comparable merchant just use your current frequency and continue to try to improve from there.
Tracking Retention Efforts
Yourrepeatcustomersarenowspendingmoreperorder,andyouaregettingthemtocomebackmoreoften.Youareinanamazingplace!Nowyouwillneedsomemetricstotracktheoverallperformanceofretentionmarketing.
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Your repeat customer rate is the percentage of your customer base that are repeat purchasers. The average repeat purchase rate in ecommerce fluctuates between 10% and 20% depending on the industry. If your store falls in or below this range, you could benefit from a retention marketing strategy.
Repeat Customer Rate
Customers That Have Purchased More Than Once
Unique Customers (365 Days)
Divided by = Repeat Customer
Rate
x 2There are many ways to boost your retention efforts including customer loyalty programs, retention email campaigns, and a customer relation management software. These are strategies may require a long term commitment, but they will also get you amazing results. The best way to measure the long term effects of these retention strategies is to take a look at the change in your repeat customer rate. Measure where you are now, then start a customer loyalty program and watch your repeat customer rate increase.
Start boosting your retention metrics.
Still not sure if a loyalty program is right for your business?
Let’s find out.
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Customer lifetime value is the one metric to rule them all in customer retention. It is a measure of how much an average customer is worth to your store over the course of their entire shopping life. The problem is that calculating it can be very complex.
Customer Lifetime Value (CLV)
AOV x Purchase Frequency x Lifespan
= CLV
Take a look at this Google search:
These equations are daunting if you don’t have a finance or math degree. While these are the most accurate ways to calculate CLV, they are far from the easiest. These types of equations are overkill for most online businesses. The calculation on the previous page is a much simpler way to get a workable CLV figure.
The three components of the equation are average order value (described in section 1), purchase frequency (described in section 2), and customer lifespan which I will explain now.
Your customer lifespan is the average amount of years someone will shop with you. I know this is difficult metric to determine especially if you don’t have years of data to look at. I suggest that you use 1 year for modest forecasting and 3 years for more ambitious forecasting. You can learn more about your customer lifespan in our CLV post (link in sidebar).
The easy way to calculate Customer Lifetime Value.
Measure Customer Loyalty Online
Acustomerloyaltyprogramisbothanamazingwaytoincreaseyourretentionmetricsandcreateloyalbrandadvocates.Inthissectionwewillshowyouhowtocalculatemetricsthatprovewhetheraloyaltyprogramiseffectiveornot.Oneyouwill needa loyaltyprogram tomeasure,but theother is ameasureofgeneralloyalty.
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This metric shows you what percentage of the points you are issuing are actually being redeemed on a reward. Your loyalty members see real value in your program when they are able to redeem points on a reward, not necessarily when they are earning the points.
Redemption Rate
# of Points Spent
Total Points Issued
Divided by = Redemption Rate
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This metric shows you whether your program members are engaged and loyal, or just sitting in your program idly. A good rule of thumb is that you should see a 20% redemption rate in your program after 6 months.
Want to boost your program engagement?
Look no further.
Your program needs time to catch on. Looking at your redemption rate after a month or two will not give you an accurate depiction of how well your program is performing. If after 6 months you still see a redemption rate of less than 20% you should look into your program for changes to boost member engagement and participation. A low redemption rate does not mean a loyalty program won’t work, but rather shows you have not found the right structure for your customers.
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This metric is similar to your repeat customer rate with one main difference: this metric looks at customers you can classify as loyal rather than just repeat.
Loyal Customer Rate
Customers That Have Purchased
4+ Times
Unique Customers
Divided by = Loyal Customer Rate
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Getting a repeat customer (2 purchases) is great, but getting a loyal lifetime customer is better. We have noticed that after a customer has purchased 4 or more times, they will stick with you long term.
If you think that your current customer loyalty is high without a program, you can use this metric to evaluate it. If it is not as high as you had thought, or you think it could be higher, you can start a customer loyalty program like Sweet Tooth to boost it.
Your loyal customer rate shows the percentage of your customer base that you can classify as loyal. This will obviously be less than your repeat customer rate, but these customers are worth even more. The beauty of this loyalty measurement is that you do not need a loyalty program to calculate it.
Retention Metric Best Practices
Retentionmarketing and the associatedmetrics are muchdifferentthanstandardecommercemetrics,andarenotassimple as opening upGoogleAnalytics. Because retentionmarketingisalongtermsolutionyouneedtokeepontopofyourmetricsforproperreporting.
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Benchmark Your Metrics
Retention marketing is a long term ecommerce strategy. If you want to measure performance, you need to know where you started and how far you have come. That is why we recommend measuring the metrics in this book now so you can see where you currently stand.
Once you start to introduce more tactics you can look back and see how much of an impact they have had. It is easy to make small steps towards big results, and tracking this progress allows you to truly see how far you have come.
Check Metrics Monthly
Retention metrics will not change drastically overnight. Like a good marinade, they need some time to take effect. This is why you should continually check in on how your retention and loyalty metrics are doing. You should look at these metrics at least once a month to compare where you started to where you are now.
You will not be able to make changes to your strategy if you are not tracking what is working and what might have been a costly misstep.
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Use a Loyalty Program as a Hub
Trying to keep tabs on all of your retention marketing tools and tactics can be difficult. That is why we recommend using a loyalty program as a hub for retention marketing (since we do make and sell them).
Many loyalty program like Sweet Tooth allow you to run multiple retention efforts at the same time. With a loyalty program, you can reward points for different profitable actions, send retention-focused emails, and keep track of retention-related stats.
This central hub makes it much easier to implement retention marketing as a focus for your business. If you want to get started with a loyalty program, click the button on the next page. You can also get in touch with the author to discuss retention metrics.
About the AuthorAlex McEachern is a Customer Loyalty Spe-cialist and the primary author on the Sweet Tooth Blog. He writes frequently on ecom-merce, retention, and customer loyalty.
Add him on Twitter @alexmcea
Connect with him on LinkedIn alexmceachern
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Get Started Contact the Author
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