What metrics can be used for analyzing customer retention?
Conducting customer retention analysis requires a knowledge of certain metrics and key performance indicators. Analytic techniques include retention cohorts, churning date forecasting, and a/b testing to determine the impact on specific customers or groups of customers. To begin your analysis, you need to have collected the right data from your customers, using analytics and CRM software and customer feedback loops.
Customer retention metrics that matter :
— Repeat customer rate :
This is the number of customers who return to shop with you within a certain amount of time.
To calculate the repeat customer rate, you need the number of customers that purchased more than once and divide this number by the total number of unique customers.
The equation will look like this:
# of Customers That Purchased More Than Once / # Unique Customers
— Repeat purchase rate or Purchase frequency :
This is the percentage of customers who make repeat purchases. This is similar to repeat customer rate except that it measures the percentage of customers who make repeat purchases rather than just measuring how often they come back.
To calculate the Repeat purchase rate, you need to divide the total number of customers who have purchased more than once by the total number of customers.
# of Customers Who Made a Repeat Purchase within the time frame / Total Number of Customers
— Purchase frequency :
The average number of purchases made by a customer within a certain amount of time. This is a crucial statistic to grasp since it represents how many times your clients buy from you. This KPI is generally measured in days, weeks, or months depending on your business type.
To calculate purchase frequency, you need to divide your total number of orders by the number of unique customers for the same time frame.
The equation will look like this:
= Number of Purchases with a period (days, weeks, or months) / the number of unique customers for the same time frame.
— Customer lifetime value (CLTV) :
This is the total revenue expected to be generated by a customer during their lifetime. Your company should aim for a CLV that increases or remains steady, as this demonstrates that you're retaining your customers and their purchases are growing as a result. If your CLV is diminishing, it means that your customer base is shrinking and you need to look at why.
The simplest formula to calculate customer lifetime value is the following:
CLV = Average Order Value x Purchase Frequency x Retention Period
— Average revenue per user (ARPU) :
This is the average revenue that your company gets from a customer. If your ARPU is decreasing, it could mean that your customers are buying less from you and it could be a sign that the customer's relationship with your brand is deteriorating.
To calculate the average revenue per user, you need to divide your total number of orders by the number of unique customers in a certain time.
= Total Revenue Generated During Period / Number of Users During Same Period
— Average order value (AOV) :
The average amount of money that a customer spends when they purchase from your store. If the AOV of your customers is increasing, it means that you are acquiring high-value customers who will bring in a lot of revenue. If the AOV is decreasing, it could be an indication that your customers are spending less money than usual and your business is losing revenue.
To calculate AOV, you will need to divide total revenue by the number of orders.
= Total Amount of revenue made / Number of orders
— Churn rate :
This is the number of customers who have left your business divided by the total number of active customers. The churn rate represents an important KPI since it shows the percentage of customers who have stopped doing business with you. Keep in mind that churn rate can be influenced by several factors and you need to take all these into account before drawing any conclusions. Some common signals include :
- Reduced recency–frequency–monetary value scores
- Poor or non-response to a targeted offer or a campaign
- Decreasing levels of customer satisfaction
- Dissatisfaction with on-site experience
- Dissatisfaction with customer service
- Reduced share of customer
- Increasing inbound calls for technical or product-related issues
- High return rate
- Late payment of an invoice, and querying an invoice
It's always better to identify early signals of customer churn so that you can take pre-emptive actions.
To calculate the churn rate, then divide your number of users who have stopped doing business with you by the total of customers at the start of the period.
Churn rate = (# of customers who have left / total customers) * 100
— Churn Cohort Analysis :
This analysis is used to determine the number of customers who have left your business or stopped doing business with you, during a certain time frame. It's important to note that the drop-off rate is different for each cohort. For example, if you have 100 customers at the beginning of October, and 25 of them leave by the end, your drop-off rate will be 25%. Comparing cohorts and periods could allow you to bring this metric into context.
For example, you could pinpoint if certain customers acquired from a Google ads campaign during January stayed with your business until the end of February or if this campaign attracted customers with a higher churn rate. Alternatively, if your customer support is reporting a higher return rate in the same period, this might be an indication of why your churn rate is increasing.
To perform this analysis, you need to divide the number of customers who have left by the total number of active users at the beginning of that period.
= (# of churned / # of active users during the beginning of that period) * 100
— Net promoter score (NPS) :
This metric is used to measure customer satisfaction and loyalty, by asking your customers how likely they are to recommend your business. This metric is important for evaluating customer experience since it allows you to determine if your customers are satisfied with the interactions they have had on your site.
On a scale of 0 to 100, an NPS of -100 would mean that all your customers are extremely dissatisfied with your business and they wouldn't recommend it to their friends.
To calculate average NPS, you will need to divide the number of promoters (customers who score your business with a rating of nine or ten) by the number of detractors (customers who score your business with a rating between six and eight).
= Number of Promoters / Number of Detractors
— Customer Satisfaction Score (CSAT): This metric is used to measure how satisfied your customers are using a combination of technical tools, such as customer support surveys and feedback forms. This metric is important for ensuring customer satisfaction since it enables you to understand which customers are more satisfied and how they feel about your offerings.
The CSAT score is calculated using the survey data. These scores are most often presented in a percentage - ranging from 0% to 100%.
A simple way to calculate customer satisfaction score is to divide the number of satisfied customers by your total number of received responses and multiply it by 100
= (Number of Satisfied customers / total number of received responses) x 100