What is Retention Rate? (with Proven Strategies for Ecommerce Stores)

Unlock insights on retention rate and discover its crucial impact on your eCommerce store with this in-depth article
Customer Retention Rate

Imagine launching a dazzling promo campaign that perfectly showcases your product’s charm, and voila – you’ve just attracted 100 new customers!

 

Many ecommerce store owners might celebrate these quick wins with a champagne toast before swiftly moving onto the next big thing. But here’s the twist: the first purchase is merely the opening chapter in a customer’s journey with your brand.

The crucial next step? Focusing on retaining as many new customers as possible by elevating the customer experience.

 

Regrettably, average retention rates hover around a mere 38% across ecommerce companies.

 

While some might attribute low retention to fierce competition, the most successful stores recognize its importance, striving to enhance customer experiences and, in turn, their lifetime value

For all the dedicated ecommerce warriors out there, let’s dive into the nitty-gritty of retention rates, including a look at calculating it through cohort analysis.

 

Let’s get going! 

What is Retention Rate?

In ecommerce, the retention rate is the percentage of customers who stick around after their initial purchase within a specific timeframe.

 

For example, if you gained 100 customers in Month 1 and still have 50 of them actively buying by Month 12, that’s a milestone worth celebrating. However, if only 5-10 customers remain by Month 12, it’s a clear signal to revamp your customer retention strategies.

 

Keep in mind, the retention rate often mirrors how much your customers adore your brand.

And this isn’t only about your products or customer service, as crucial as they are.

Here’s a quick retention case study to explain the point:

If you’ve ever cherished a pet, you understand the heartache of losing one. Losing a beloved dog is heart-wrenching for most people.

 

While we don’t expect headlines mourning our pets, a few sincere condolences can certainly soften the blow. 

But Chewy, an online pet store, elevates this to an entirely new level. Chewy keeps tabs on pets’ birthdays and other significant occasions, expressing wishes and sentiments, showcasing genuine care for their customers’ furry friends

 

The cherry on top? This gesture fuels word-of-mouth marketing and strengthens Chewy’s social presence, boosting sales and retention without additional costs.

https://twitter.com/iamelbaum/status/1569472167536111616 

Retention Case study

“This kindness is appreciated and will long be remembered.”

 

It’s when brands touch customer lives this way that they build lasting loyalty. 

By simply tracking and celebrating customers on their special pet milestone dates, Chewy makes them feel valued. And customers keep coming back to the company to experience more of it. 

 

There it is: good retention rates.  

This is just a glimpse of how to make a good customer experience better. Stay tuned for more inspiring case studies in our upcoming articles. But before diving into strategies to boost customer retention, let’s first unpack the technical side of tracking this vital metric.

How to Calculate Retention Rate using Cohort Analysis

Relying solely on a basic formula to track and calculate retention rates often falls short in effectiveness. To truly understand how many customers you’re retaining month-on-month, you’ll need a better method or framework.

Cohort Analysis is one method. It can effectively track and analyze your monthly retention rates and trends. You can also forecast customer behavior using it. 

 

Now, don’t let the term ”Cohort Analysis” intimidate you.

A “cohort” simply refers to a group of something, like customers. Cohort analysis, then, involves examining the behavior of these groups over time.

 

This method organizes data by the initial purchase month of customers and tracks their subsequent purchases over time.

An example of a cohort could be customers you onboarded in January. Then, those onboarded in February could be another cohort. Likewise, the 50 customers you onboarded via a special discount or sale could be another cohort. 

 

You can create cohorts as you please to fit your specific needs. 

Let’s examine a customer cohort to better understand their retention rate.

Retention Rate using Cohort Analysis

 

Now let’s understand how to look at this table. 

You can study cohort analysis horizontally and diagonally.

Cohort chart study

 

In a horizontal view, ‘Month 0’ represents the initial month when a customer makes their first purchase.

Cohorts - Horizontal

Cohorts - Horizontal 2

 

Consider January is Month 0, marking when 35 customers initially purchased. Then, February becomes Month 1 for the January cohort, March is Month 2, April is Month 3 and so on.

Horizontally, this approach lets you track the number of customers retained each month, from Month 1 to Month 11, following their initial purchase (Month 0).

With the January cohort case, all 35 customers acquired in Month 0 were retained in Month 1. Month 2 saw only 30 of those customers being retained. Following this pattern, only 18 of the initial 35 customers were retained in Month 9. 

 

Now, examining the table diagonally reveals another perspective.

Cohorts diagonal study

cohort analysis diagonally

The diagonal view reveals the total number of customers purchasing from you in a given month. 

 

Starting in January, we had 35 customers making purchases.

For February, the total was: 18 new customers in February + 35 retained from the January cohort = 53 customers.

In March, the count was: 22 new customers in March + 18 retained from the February cohort + 30 retained from the January cohort = 70 customers.

 

April’s customer figures 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.

By the end of April, this means a total of 87 customers have made purchases from your store. 

 

This approach outlines how to effectively interpret cohort analysis. 

Now that we’re versed in reading cohort data, let’s explore how to calculate and analyze retention rates for these groups.

To calculate the retention rate, we will use the following formula:

(Number of customers retained / Total customers acquired originally) X 100

For instance, to calculate the retention rate at month 4 for the January cohort, divide 25 (retained customers) by 35 (originally acquired customers) and multiply by 100.

Retention rate calculation 1

 

That will give us a retention rate of 71%

Retention rate calculation 2

 

Similarly, this method applies to calculating retention rates for each cohort.

Retention rate cohort

 

This approach enables us to analyze the retention rate of each customer cohort over a specific period, as well as the overall retention rate for all customers during that time

 

So the retention rate of January customers’ cohort is 26%. However, we see that a diagonal analysis reveals the month’s overall retention rate across all customers.

 

For example, October’s retention rate considering all customers was 76.5%. By December, the retention rate was 68.12%.

This data is valuable for making key business decisions, and to pinpoint where your customer retention may be slipping.

Looking to Boost Customer Retention for Your eCommerce Business?

Here are nine proven strategies to achieve just that:


  • Provide Exceptional Customer Support

Standing out in how you serve your customers helps them remember you easily.


  • Enable a Smooth Onboarding Process

Welcome your customers without obstacles initially, and they won’t go elsewhere for their next purchase. 


  • Create Customer Loyalty Programs

Assure your customers that you’ve got their backs for good and they’ll do the same. 


  • Create Memories Through Fabulous Customer Experience 

Lasting positive memories also make customers last longer with your brand.


  • Provide Exclusive Offers/Deals

Make them feel special and they’ll give your brand special consideration.


  • Personalize Emails (and Everything Else) 

More of the above.


  • Proactively Engage Customers 

Let them know you’re here to hear them out. They’ll keep tuning in and respond to what you have to say and sell.


  • Connect on Social Media 

Be where your customers are most likely to hangout and they’ll stay around. Even better if you hand out some goodies like special coupons now and then.


  • Gather Customer Feedback

Don’t let your customers’ words about your business go to waste. Else they’ll view sending time with it as a waste.  

Wrapping it up…

Mastering the art of retention rates isn’t just about numbers; it’s about nurturing lasting relationships with your customers. Understanding and applying cohort analysis gives you the insights needed to develop your strategies effectively. 

Remember, each customer retained is a testament to your brand’s value and a stepping stone towards sustainable growth. Implementing the nine strategies we’ve discussed can transform your customer retention game. 

 

But don’t stop there – always be on the lookout for innovative ways to keep your customers engaged and loyal. After all, in the dynamic world of ecommerce, the brands that thrive are those that consistently evolve with their customers’ needs. 

So, take these insights, apply them creatively and watch your customer base not just grow, but flourish.

Frequently Asked Questions (FAQ)

  • What is Churn Rate?

Churn rate is the opposite of retention rate. It is the total number of customers 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.

 

  • How to calculate Profit Adjusted Retention Rate?

Measure the profit from retained customers as a percentage of the total profit from all customers at the beginning of your chosen timeframe.

 

  • How to calculate Sales Adjusted Retention Rate?

Calculate the sales from retained customers and then express this as a percentage of the total sales from all customers at the start of your measurement period.

Bloom Analytics Team

Bloom Analytics Team

A powerhouse team of industry experts driving innovation in Shopify analytics.
Bloom Analytics Team

Bloom Analytics Team

A powerhouse team of industry experts driving innovation in Shopify analytics.

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