There are several different approaches to measure retention. Using the wrong method, or focusing on the wrong customer retention metrics, causes several inconsistencies in reporting.
Inconsistencies lead to poor decision making, budget shortages or overages, and missed opportunities.
Below, we cover the key customer retention metrics for retail and eCommerce, and how to measure them.
How to Measure Customer Retention
“Companies can only truly claim to be customer-centric by systematically tracking their customers' results,” says Greg Daines, CEO of ChurnRX.
It’s clear that companies need to measure customer retention just as heavily as any other KPI, but there are disagreements on how to measure customer retention effectively, while also weighing its importance against other customer data– such as direct feedback.
Calculating customer retention rates with a simple formula isn’t so straightforward. You have to weigh other factors, such as customer lifetime value (LTV), churn rates, and acquisition costs. Also, determine the level of importance of retention for your business.
If you’re a diamond company, customers might buy something and not return for several years. Does that still count as retention for your company?
Likewise, if you have a subscription service, would retention count as the number of customers that continue their subscription for a set amount of time, or those that pause their subscription and return in a month or two vs those that never return?
These factors can all dramatically alter your calculations and how you weigh their importance.
That said, you must be able to calculate all customer retention metrics to make a full assessment.
Customer Retention Metrics
Bed, Bath, & Beyond is a prime example of why a focus on the right metrics, particular customer retention metrics, is important for growth.
Bloomberg recently reported that Bed, Bath, & Beyond didn’t take online shopping seriously, didn’t listen to their customers, and made poor decisions with their products because of it.
When their sales were plummeting, and before they reached the point of no return in which they could’ve taken action to save their business, they could have paid attention to key metrics of customer churn, average spend and purchase frequency, and retention rates.
While your business may not be in the same position as Bed, Bath, & Beyond, if you’re not paying attention to key customer retention metrics, you could be.
Here are the key customer retention metrics you should measure:
Customer lifetime value
The lifetime value (LTV) of your customers is the amount of revenue you expect to generate from a single customer over their lifetime, or at least the dedicated lifetime of using your product or service.
It’s essentially based on your future relationship with the customer.
How to calculate customer lifetime value
It’s best practices to calculate LTV with customer acquisition cost (CAC). The ratio between the two shows whether or not you’re profitable.
The formula for calculating LTV is:
LTV = (revenue per customer - CAC - customer service cost) / (churn rate + discount rate)
Customer Retention Rate
Customer retention rate is the number, or percentage, of customers that continue purchasing from your brand after their first purchase. Most brands measure retention rates annually, but this will vary by brand and industry.
Just as we mentioned earlier, a subscription service may count customer retention as the percentage of customers that continue their subscription month after month, versus cancellations.
How to Calculate Customer Retention
If you’re just looking for a basic calculation for customer retention rate (CRR), follow this simple formula:
CRR= ((E-N)/S) x 100
Where S represents the start, E represents end, and N represents the period of measurement.
Customer churn is the percentage or number of customers (or revenue) who purchased from your brand and never purchased again (or haven’t purchased within the time period you’ve set as your retention parameter).
How to Calculate Customer Churn
The churn rate formula is:
(Lost Customers ÷ Total Customers at the Start of Time Period) x 100
Product Return Rate
Product return rate is the number of products sold vs the number returned by customers for any particular reason.
How to Calculate Product Return Rate
The calculation for product return rate:
(Units Returned ÷ Units Sold) x 100 = Return-Rate-Percentage%
Net Sentiment is an alternative metric to the Net Promotor Score, and one often considered more accurate because it collects real-time data via unstructured text from online conversations (such as those happening on social media and in forums). It gives companies a more complete “voice of the customer” than other customer retention metrics.
How to Calculate and Gain Insight from Net Sentiment
The formula for calculating net sentiment:
Net Sentiment = positive conversation – negative conversation
In this formula, the number 1 represents every positive conversation, 0 represents neutral, and -1 represents negative conversations.
Divide the total net sentiment by the number of sourced posts collected within a given time frame to represent this number as a percentage.
Once you’ve calculated your net sentiment, separate reputational conversation – press coverage and owned media – from actual feedback (though you can also do this before your calculation). You’ll notice that most conversations about customer experience are predominantly negative, since customers are more likely to post complaints over positive information.
To do this, you have to have the right tools to segment the data. Most machine learning (ML) and natural language processors (NLP), which you’d use to collect this data, don’t offer segmentation.
Net Promoter Score (NPS)
Net promoter score is a scoring system used to understand how attached or detached a customer feels to the product they’re using.
It’s often used as a leading indicator of retention, and the foundation of many customer retention strategies.
How to Calculate and Gain Insight from NPS
The basic formula for NPS:
% of promoters – % of detractors= NPS
You get a number between -100 and 100.
Generally, you base NPS on feedback collected through surveys.
To gain insights into how your customers really feel, and how many are true promoters of your brand, you have to segment their responses into three categories:
- Promoters (scored 9-10)
- Passives (scored 7-8)
- Detractors (scored 6 and under)
Subtract the number or percentage detractors from promoters to get your NPS.
The best way to visualise this data is in a dashboard that has the ability to track your NPS changes over time, as well as organise and categorise their open-ended responses to find commonalities.
Share those results with teams across all customer touch points to inform and build into your retention strategies.
Should you completely trust your NPS?
NPS may be a great indicator of overall CX health, but any seasoned CX manager or product leader knows it shouldn’t be the north star.
Because you can have a great NPS without retention and growth, and vice versa.
“It’s crazy that I still meet product leaders who mention their North Star is ‘NPS’. NPS as a north star can be deceiving, misleading and at times harmful. Who cares if the experience was ‘pleasurable’. The key focus on a product shouldn’t be to deliver “pleasure” it should be to deliver ‘core value,’” says Moe Ali, CEO at Product Faculty.
Retention is arguably a better indicator of value, because they’re actually returning to purchase more products from you. Anyone can give you praise then never return, but truly loyal customers come back again and again.
Though, as always, it’s worth considering and analysing both to get as part of a bigger picture.
Why You Need to Better Understand Customers to Improve Customer Retention
Customer surveys and subsequent NPS scores have dominated how companies learn about their customers and their experiences to inform any optimisation and retention efforts. But what customers say and what they do don’t generally match.
Additionally, each customer-facing team may prioritise different information and separate metrics. You can’t prioritise customer retention with disconnected or overlapping data, causing you to miss opportunities and face inaccuracies in reporting.
In other words, surveys and NPS scores alone aren’t enough to constitute customer knowledge. In fact, they may lead to missed opportunities and inconsistencies in your reporting.
Innovative CX leaders use a better way to track and analyse customer data and drive customer retention, at scale – Unified Customer Intelligence.
Unified Customer Intelligence analyses text and unstructured data in a centralised database, so you can get a full picture of what your customers think and feel about your product, operations, support, and services. Collected data comes from reviews, direct feedback, conversations, and support interactions.
If you want insights into your customers' entire journey, including the reasons they decide to keep buying from you or why they choose competitors, you need a way to measure and track all data sets. You need Unified Customer Intelligence.