Ok, so you’ve finally put together that brilliant promo campaign, highlighting all the sweet little details of your product, and when you made it live, you’ve gained 100 new customers!
Hurrah! Mission successful, right?
Well, not really.
Most ecommerce store owners pop open Champagne bottles to celebrate short successes, and move on to their next big campaign.
What they fail to understand is that first purchases are just the beginning of a customer’s journey with their brand.
The next big step should be to focus on retaining the maximum number of customers they’ve acquired, by improving customer experience.
Sadly, however, retention rates tend to be as low as 38% across ecommerce companies.
While some merchants may sweep it under the rug stating high competition, successful stores take retention rates seriously and work to provide the best experiences to increase the lifetime value of their customers.
So, for all those hard working dedicated ecommerce merchants, we delve into some key concepts of retention rate in this article, including how to calculate it using cohort analysis.
Now without further ado, let’s get started!
What is Retention Rate?
In the ecommerce space, retention rate is the total percentage of customers retained within a given time period. Meaning, these customers have made their first purchases in your store and for better or worse, decided to stick around for more.
Here’s an example.
Let’s say you’ve acquired 100 customers on Month 1, and at the end of month 12, you still have 50 customers buying from you, then it’s time for celebration.
But at month 12, if you have 5-10 customers left, then you may seriously need to pivot your customer retention strategies. We’ll look at some of them in a bit.
You should also remember that retention rate is directly proportional to how much your customers love your brand.
And we’re not talking just about your products or customer service (though they’re critical).
Here’s a quick retention case study to explain the point:
If you’ve ever had a pet that you really loved, then you know how painful it is to lose one.
For me, it was devastating when I lost my sweet little dachshunds.
Though we may not expect a huge media article expressing the loss of our beloved pets, a few heartfelt condolences from friends & family could definitely ease the pain.
But Chewy, an online pet product store, takes it to a whole nother level.
We’ll let the image speak for itself.
“This kindness is appreciated and will long be remembered.”
It’s these kinds of experiences that drive customers to stay with your brand for a longer time.
Chewy tracks pet’s birthdays, special events, and other important days, and conveys their wishes & regards continually by genuinely caring about their customer’s pets.
Using this element of surprise, companies like Chewy continue to delight thousands of their customers who come back to them for more.
The best part is that it enables word-of-mouth marketing and a strong social presence, which will propel your sales & retention at no extra cost.
And that’s how you retain customers.
This is just one case study, there are many more inspirational studies, which we will share in a different article.
Now before we look into some strategies to increase customer retention, let’s look at some technical aspects of how to track retention as a metric.
How to Calculate Retention Rate using Cohort Analysis
Unfortunately, tracking and calculating retention rate is not very effective when you just use a simple formula to figure out retention rate for a set of customers.
To truly understand how many customers you’re retaining month-on-month, you’d need a better method or framework.
Cohort Analysis is one such method that lets you track retention rate effectively and help you analyze monthly trends. You can also use it to predict future customer behavior.
Now do not be bewildered with this big term called Cohort Analysis.
Cohort means a group of customers. Analyzing the behavior of that group of customers over a period of time is called cohort analysis.
It organizes data by initial purchase month of customers, and stream of subsequent purchases through time.
For example, the customers you acquire in January is one cohort. And the customers you acquire in February are another cohort. Likewise, if you ran a special discount campaign for valentine’s day and acquired 50 new customers, then you can consider them as one cohort of customers.
Let’s look at a cohort of customers and analyze their retention rate.
Now let’s understand how to look at this table.
You can study cohort analysis horizontally and diagonally.
When you look at it horizontally, month 0 is the first month a customer has made their first purchase in your store.
So taking the January cohort as an example, it is the first month when 35 customers made their first purchase and it is considered as Month 0. Then comes February which is month 1 for the January cohort, March is month 2, April is month 3, and so on.
And horizontally, we can track the number of customers retained each month from month 1 to march 11, after their first purchase in month 0.
Considering the January cohort once again, in month 1, all 35 customers acquired in month 0 were retained. In month 2, only 30 customers from month 0 were retained. In that pattern, as of month 9, only 18 of the 35 customers were retained.
Now let’s look at this table diagonally.
If you need to find the total number of customers that purchased from you in a given month then you need to look at the table diagonally.
Let’s start with January, where total customers that bought from you were 35.
In February, total customers were: 18 (bought for the first time in Feb) + 35 (retained customers from January cohort) = 53.
In March, total customers were: 22 (bought for the first time in Mar) + 18 (retained customers from Feb cohort) + 30 (retained customers from Jan cohort) = 70.
In April, total customers were: 21 (bought for the first time in Apr) + 22 (retained customers from Mar cohort) + 16 (retained customers from Feb cohort) + 26 (retained customers from Jan cohort) = 87.
So at the end of April, totally 87 customers bought from your store.
And that’s how you need to read cohort analysis.
Here’s an in depth guide of cohort analysis for you to understand more.
Now that we understand how to read cohorts, let’s look at how to calculate retention rate for these cohorts and then analyze it.
To calculate the retention rate, we will use the following formula:
(Number of customers retained / Total customers acquired originally) X 100
So, for example, if you need to calculate retention rate as of month 4 for January cohort, then you need to divide 25 (customers retained) with 35 (customers originally acquired) and multiply with 100.
That will give us a retention rate of 71%
Likewise we calculated retention rates for every cohort.
Now we can analyze retention rates of each cohort of customers within a given time period. And also the retention rate for the total number of customers within the given period.
So the retention rate of January customers’ cohort is 26%.
But when we look at it diagonally, we’ll find the retention rate for all the customers as of that month.
For example, in October, the retention rate based on all the customers was 76.5%.
And as of December, the retention rate was 68.12%.
You can now use this data to make important business decisions or analyze where you are losing customers.
How can you improve customer retention for your ecommerce business?
Here are 9 proven strategies that can improve your customer retention.
- Provide Exceptional Customer Support
- Enable a Smooth Onboarding Process
- Create Customer Loyalty Programs
- Create Memories Through Fabulous Customer experience
- Give customers exclusive offers/deals
- Personalize emails (and everything else)
- Proactively engage customers
- Connect on social media
- Gather customer feedback
Frequently Asked Questions (FAQ)
Q. What is Churn Rate?
A. Churn rate is the opposite of the retention rate. It is the total number of customers that you’ve lost in a given time period.
So if you’ve acquired 100 customers, retained 70, and lost 30, then the churn rate is 30%.
You can calculate it by using Churn rate = 1 – retention rate.
Q. How to calculate Profit adjusted retention rate?
A. To calculate profit-adjusted customer retention rate, take the profit earned from the retained customers and express it as a percentage of the profit earned from all customers at the start of the timeframe you wish to measure.
Q. How to calculate Sales adjusted retention rate?
A. To calculate sales-adjusted customer retention rate, take the value of sales made from the retained customers and express it as a percentage of the sales achieved from all customers at the beginning of the timeframe you want to measure.