Why Retention Rate is Your Most Important Metric
Having a short adventure may seem fun at the beginning, but building a long-term relationship is far more rewarding. Lighters can’t warm you for good. If you're short-sighted and don’t maintain the fire burning, you’ll end up freezing.
In the game of retail, it’s exactly like romance. You start building relationships with people looking to have your expectations met. With a lot of effort, you convince them to buy from you. And they do. Once. And then you don’t hear from them anymore. According to statistics, only three out of 10 customers are placing a second order on e-commerce websites.
But is this true for all the companies out there? No. The best-in-class companies aren't affected by this symptom. Are they selling different goods? No. Are they using a magic wand to get lucky and find only the loyal customers out there? No. Are they treating their customers differently? Definitely, yes. That's the vital ingredient for their continuous growth: customers that choose them over and over again.
Habit forming is the crucial ingredient that makes Amazon.com or Starbucks dominate in their industries.
A Starbucks customer has a lifetime value of $16,000 with an average order value of $8. That means he’s returning and buys from Starbucks 200 times. That’s its growth engine.
If you're interested to know how big the impact of retention rate can be for a retailer, mind the graph below. All the data is computed taking into consideration a year-over-year growth rate of new customers of 50 percent.
Yes. You’ve got that right. After six years, the revenue will be almost three times (273 percent) higher if you have a 70 percent retention rate than if you have a retention rate of 10 percent. Of course, that will also affect the customer acquisition cost, as returning customers are also generating word-of-mouth.
OK, so why aren’t all retailers customer-centric? According to the research below, the main cause is the company’s culture.
So, no matter how crucial it is for a business to be customer-centric, if the top executives don't realize its importance, it’s gonna be ignored.
The paradox is that even if high growth is every company’s mantra, it can’t be achieved without aligning all the company’s departments around understanding, measuring and improving the main drivers of growth, which are the same for ages: customer lifetime value, retention rate, customer satisfaction.
Order-centric companies that sell to anonymous masses of customers will slowly vanish.
Becoming a customer-centric company is often a political and technical game.
As you can see below, there are companies where the customer service is already there, but the marketing teams are still communicating product or price, positioning the company in a shady zone, from where it’s hard to differentiate.
Depending on your company’s maturity level, you, as a professional, can try to change things on the outside by the way you talk with customers, but my suggestion is to change things on the inside, as this is the most important factor to get there: a company that has a mantra about providing value for its customers, not profit for itself.
Given my experience in the e-commerce industry, I've created a four-step framework to become customer-centric: awareness, research, strategy and experimentation.
This is the phase when you determine the need to optimize retention rate and you drive a sharp analysis of your customers. You evaluate customer lifetime value (LTV), customer acquisition costs (CAC), and create customer cohorts. Basically, you take a deep dive into the numbers you already have to discover a clear picture on where you're standing right now in the relationship with customers you've already acquired.
In this step, you'll need the proper tools — business intelligence tools and, of course, Google Analytics. To make this action happen, you'll also need the right people to extract the numbers and connect the dots — i.e., an e-commerce manager and a business analyst.
Now that you are aware of the situation of your eCommerce business, it’s time for the second step.
In this part of the RRO methodology (retention rate optimization), you have the crucial role to define buyer personas and discover the purchasing barriers they have.
The key part of this step is to segment the customers based on three main criteria: recency, frequency and monetary value. This is the RFM model segmentation that allows you to create cohorts considering the time of the last order (recency), how many orders they placed in a specific time range (frequency) and how much they spent (monetary value).
In addition to the RFM Model, I recommend you analyze the NPS (net promoter score) of your customers. This key metric will show how likely it is for customers to promote your business to others. Word-of-mouth is probably the best marketing channel since it's based on the recommendation of someone you know that had an experience with the same product you're interested in purchasing. Once you know the NPS, focus on transforming the unhappy customers (passives and detractors) into promoters. You'll not only improve the retention rate, but you'll also create a special relationship with customers.
Based on the insights you have from the previous steps, assess the impact of each strategical idea and discover how it will affect the business. The dream team for this step has an e-commerce manager, a business analyst and a data analyst. Together they must settle aspects such as insights impact, time to impact, hypothesis prioritization, ease score, etc. You can use this template to give ratings to each idea; this model will help you set them in the right order for you to implement next.
Last but not least, this is when you submit the most important hypothesis to implementation. Continuous experimentation is crucial to improve the on-site experience for your visitors and customers. Drive different experiments for every segment you discovered in the beginning of this process and communicate with them on all the available channels — email, remarketing, next on-site visit, etc. You can even give a courtesy call after each order to ask them about the experience they had or if there's something you can improve. Letting customers know that you care about them and value their opinion will make them feel special. This particular feeling could be the incentive that will drive them again to your e-commerce store, and not your competitor’s.
To sum it up, before moving on with the normal way of doing business, acknowledge how much money your business is losing at this moment for not considering the retention rate. Now is the right time to pay more attention to the customers you already have; they're the key to long-term success for any e-commerce business.
Valentin Radu is the CEO of Omniconvert, a conversion rate optimization (CRO) software that can be used for A/B testing, online surveys, traffic segmentation, web personalization and more.