Customer Retention Rate: the formula to work it out and 3 ways to increase it (along with your income)

Tasa-de-retencion-doofinder

Do you know how many of your customers are new and how many are recurring?

If you don’t, I’m afraid you may be losing money.

Capturing new buyers is great, but it’s much more costly than getting your current clients to buy again.

That’s why we’d like to tell you what retention rate is, a metric that will help you improve the overall profitability of business.

The thing is, selling to the same client is much more profitable. ;)

Here we go.

👉 What retention rate is and why it’s so important

Customer retention rate is expressed as a percentage and measures a company’s client loyalty during a specific period of time.

That is, it indicates a business’ ability to retain its clients over a period of time.

  • If it has a high retention rate, its clients are loyal and buy there frequently.
  • If it has a low rate, it has lots of new clients, but very few of them repeat.

If you have loyal customers, your retention rate is higher, and so is your income thanks to the recurring purchases they make. And let’s not forget, a second purchase doesn’t involve the initial acquisition cost.

Plus, these customers may also become brand ambassadors by recommending your products to friends and relatives, which improves your business’ overall profitability. ;)

✅ Fostering customer loyalty is better than capturing new clients

As you can see, keeping clients is easier and more profitable than getting new ones.

A study by Sailthru confirms it:

  • Getting a new client is 5x as costly as keeping an existing one.
  • You have between a 5% and 20% chance of having a new client buy in your shop, but between 60% and 70% with existing clients.
  • Increasing the customer retention rate by 5% can increase your revenue between 25% and 95%.

That means it’s of the utmost importance to work on your retention rate to foster client loyalty and increase your sales.

👉 How retention rate is calculated

Customer Retention Rate is also known by its initials, CRR.

To work out your CRR, you must set the time period, which could be a month, a quarter, a semester, a year, etc.

Once you’ve established the time period, make a note of:

  • S: Total number of clients at the beginning of the period.
  • E: Number of remaining clients at the end of the period.
  • N: Number of new clients you’ve captured during that time.

Here’s the formula to calculate it:

CRR = (E – N) / S

That is, [(final number of clients – new clients) / initial clients] x 100

Let’s see an example to make sure it’s clear:

  • You have 500 registered clients at the beginning of a quarter.
  • During this quarter, you launch several marketing strategies to capture new clients and you get orders from 800 new buyers.
  • You have 1000 clients at the end of the quarter.

In this case, your retention rate would be [(1000 – 800) / 500] x 100 = 40%

In other words, you’ve managed to keep 40% of your buyers.

👉 What is the optimal retention rate for an e-commerce?

There are no specific values for a good or bad retention rate – it actually depends on the kind of business and sector.

Let’s go back to the previous example in which you kept 40% of your current clients.

Is that good or bad?

Well, it depends.

In theory, 100% would be ideal, as that would mean that you kept all your existing clients. But that figure is unrealistic – you’ll always have clients who stop buying from your shop.

For example, if you sell items that are bought frequently (such as food or contact lenses), keeping “only” 40% of your clients may be a bad figure.

But if you sell more sporadic items (such as electrical appliances or furniture), it may be a really good figure.

Since it’s a sector-dependent value, there are two ways to determine if your retention rate is good or bad.

Let’s take a look at both.

✅ 1. Compare it with your previous retention rates

For example, by comparing it on a monthly (or even annual) basis, you can track the trends:

  • If you have an increasing retention rate, you’re doing something right but must spot what it is and focus on it.
  • If you have a decreasing conversion rate, you’re losing customers, so it’s crucial that you find the reasons why and fix them.

The key, as always, is to keep track of your results systematically and analyze them objectively.

✅ 2. Compare your retention rate with your competitors

This information might not be easy to find, but it will come in quite handy if you can since you’ll get a better idea of how exactly your market functions.

Look up your sector’s average and compare yours with that of the competition. Some collectives or public bodies publish annual reports featuring this kind of information.

For example, this report by Windsor Circle analyzes the data from a number of companies (without giving any names) and shows trends regarding annual retention rates.

👉 3 ways to increase your e-commerce shop’s retention rate

Now that you understand the importance of increasing your retention rate (and how fostering client loyalty can help you), let’s take a look at different ways to do it.

✅ 1. Know your client better than yourself

According to the Pareto principle, 20% of your clients can generate 80% of your sales.

That’s why you should know who makes up that profitable 20% of your business and they should be the basis of your strategy. Your priority should be to meticulously define your buyer persona profile.

Once you find out…

  • their wishes
  • their needs
  • their problems

…you can determine how to keep them happy so they come back to your online shop again and again (since you’re the one who knows them best).

Personalizing the way you communicate with your customers as much as possible will make them feel important and appreciated.

Here are some ideas on what you can personalize:

  • Communication through email: Don’t settle for newsletters – send them emails with personalized offers on their birthday or when they’ve spent a certain amount in your store.
  • Packaging: Sending unique and original packaging will foster good memories among your clients.
  • Recommended products: Send them emails with suggestions based on items they’ve purchased recently or show banners on your website based on the items they’ve just added to the cart (a product bundling strategy).

The more important your customers feel in your e-commerce shop, the more likely they are to come back and have another pleasant experience.

✅ 2. Pamper each of your e-commerce purchasers

We all like to be treated well.

That’s why your customer service is crucial to foster client loyalty and generate recurring purchases thanks to engagement. 

This also ties into customer experience; if your clients have a better experience than they thought, they’ll remember you more often and come back to your e-commerce sooner.

Any improvements to:

  • the purchase process
  • the after-sales service
  • simple reminders about their wish list

…can make all the difference between a good and bad experiences.

Can we give you an idea?

Use Doofinder, our search engine, to help your clients find what they’re after in your e-commerce so they have a perfect buying experience.

✅ 3.  Adapt your offers to exactly where your users happen to be

This relies on optimizing your customer lifetime value, which is the estimated net value a client contributes to your e-commerce business during the entire commercial relationship.

To that end, you need to know what stage of the value cycle your customers are in since some strategies will be more effective than others depending on how far along they are.

  • Introduction: When a customer visits your website for the first time (through ads on Facebook, Google AdWords, or thanks to your SEO strategy), you have to convince them to make their first purchase by gaining their trust through a good content marketing strategy.
  • Growth: Your client already knows you and places orders with some frequency. This is the right stage to use email marketing and cross-selling tactics (even better if you combine this with an autoresponder). ;)
  • Maturation: The commercial relationship is robust and your client places orders on a regular basis. This is the right stage to keep your retention rate high by launching loyalty programs or using alternative techniques to enhance engagement
  • Decline: The worst moment possible – your customer hardly ever places orders and eventually stops altogether. You must try your best not to lose them. You can make them personal, specific offers so they feel appreciated again.

Extending the maturation stage is key to keeping your retention rate high.

👉 Satisfied with your retention rate? 

Had you really thought about your e-commerce’s retention rate before reading this post?

Now that you know what it is and how important it is for your business, you should start working to keep it as high as possible.

The higher your retention rate is, the more profitable your store will be. ;)

P.S. This is a very important metric for your business, but there are others that you should also be keeping track of to measure your results and check if the strategies you’re implementing are the best possible tactics for your e-commerce.

That’s why we recommend you read:

We’ll leave you alone for now – you have plenty of work to do. ;)