calculating loyalty & retention metrics
TRANSCRIPT
Calculating loyalty & retention metrics.
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01. Maximizing Revenue from Existing Customers . . . . . . . . . . . . . . . . . .
02. Bringing More Customers Back to Shop Again . . . . . . . . . . . . . . . . . .
Average Order Value (AOV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Profitability Per Order(PPO) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase Frequency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Time Between Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
03. Tracking Retention Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repeat Customer Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer Lifetime Value (CLV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
04. Measuring Customer Loyalty Online . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redemption Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loyal Customer Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
05. Retention Metric Best Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benchmark Your Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Check Metrics Monthly . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Use a Rewards Program as a Hub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
By now you know every metric associated with the sale of a product on
your store, and the conversion flow associated with it. Facebook ad
conversions, add to carts, and on site conversion rates are all important
to maximize your revenue, but only to a certain point.
Hypothetically, every online business will reach a point where they can
no longer grow by acquiring new customers. There are only a finite
number of people in the world that can potentially buy your products,
and acquiring new customers is getting expensive!
If you want to stay competitive you need to focus on maximizing the
value of your existing customers, and establish a sense of brand loyalty.
This book will focus on showing you the metrics you need to track when adopting a customer retention strategy, while also showing you how to measure customer loyalty online.
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Looking for a more in-depth overview of what’s going to be covered in this eBook?
READ HERE
Retention is about getting customers who have purchased from you
before to come back and purchase again. It is also about maximizing the
revenue of those purchases. With rising acquisition costs, it is important
to maximize the value of every sale.
Maximizing Revenue from
Existing Customers
Average Order Value (AOV)
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To Calculate:
Total Revenue # of Orders Taken÷
This calculation shows you how much revenue the average purchase on
your site generates for you. This is important to know because it tells
you how much you can afford to spend to acquire a new customer.
Unfortunately, it is often more expensive to acquire a customer than
your average order value. This means you have to choose whether to
retain this customer or increase your average order value.
While you can try to retain this customer, we’ll cover that later. Here are a few tips to increase your average order value.
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1. Free Shipping ThresholdsThis is one of the easiest ways to increase average order value: simple
set a threshold that a customer must spend in order to receive free
shipping. According to UPS, 61% of shoppers abandon their cart if they
can’t get free shipping. This can turn into a positive when you set a free
shipping threshold.
The fact that the majority of shoppers will leave your site if they can’t
get free shipping also means that they will actively pursue it. You can
motivate them to spend a little more in order to receive free shipping.
The important thing here is to make the threshold obtainable.
Find your AOV and make a threshold that is 15%-20% above that. If you
set it too high, shoppers will see it as a hassle rather than a
benefit. Setting your threshold too high is one of the most common
mistakes according to Entrepreneur.com.
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2. Use Cross-SellsCross-selling is presenting additional items that a shopper might see
as valuable. Usually this is done by looking at what they have put
in their basket and recommending products that complement that
item. Let me explain with an example.
When shoppers look at a product on bodybuilding.com, the website
also recommends two products that are intended to be purchased
with it. If I look for Omega-3 capsules, the site also recommends a
protein powder and multivitamin of the same brand.
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Bodybuilding.com uses a system to automatically present cross-sells,
but you don’t have to be that high-tech. Smaller merchants can
simply place a static recommendation on a product listing. This could
be putting a recommendation to jelly on all peanut butter listings or
toothpaste on all tooth brush listings.
Cross-sells are a great way to boost average order size because they
remind your customer of products they may have forgotten, or didn’t
realize they needed.
You provide them with additional value and they provide you with
additional order value. It is a win-win!
Learn more about how to improve your store’s average order value.
READ HERE
Profitability Per Order (PP0)
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While average order value is a great benchmark, it does not tell the
whole story. If you are only selling low margin items, your AOV is not a
great benchmark. Your profitability per order, on the hand hand, shows
you how much profit you are brining in on the average order.
You can increase PPO in similar ways to your AOV - you just need to be
sure you are pushing your highest margin items. Use a Related Items
section that only shows your 8 highest margin items such as your house
brands.
You can also give incentives for purchasing high margin items. This
works great when combined with a points-based loyalty program.
Simply reward extra points for your high margin items, or only offer
points on your house brands. This is particularly effective in the
supplements industry.
To Calculate:
Total Revenue x Profit Margin
Number of Orders÷
The purpose of a customer retention strategy is to encourage people to
come back and shop with you more often. Your goal is to turn every first
time shopper into repeat business. Here are the metrics you will need to
measure whether shoppers are coming back to shop again.
Bringing More Customers
Back to Shop Again
Purchase Frequency
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To Calculate:
Total # of Orders
(365 Days)
# of Unique Customers
(365 Days)
÷
Purchase frequency is a measure of how often your average customer is
shopping with you during a given period of time (usually a year). As you
bolster your customer retention efforts you will see your purchase
frequency increase. Even a 0.5 increase in purchase frequency can have a
big impact.
Here are a few tips and tricks you can use to get your customers
to shop with your more frequently.
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1. Retention EmailsThese are emails that are sent out to existing customers (aka those who
have made a purchase before). They can range in complexity from a
simple “we miss you” email to a tailored email based on previous
purchase information.
The goal of these emails is to inspire them to come back and make
another purchase from your store.
Here is an example I have put together to illustrate the two tactics
explained earlier.
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The key to any retention email is offer personalization, relatable offers,
and an incentive. The personalization can be as simple as addressing the
customer by name or by offering them something related to what they
purchased before - in this case, ties.
Finally, you need to give the shopper a reason to return. In the tie
example it is with a coupon code they can use. But you can employ other
incentives like points in a rewards program.
2. Rewards ProgramsA rewards program can actually help with both average order value and
purchase frequency. The enrolment in a rewards program encourages
a customer to shop with you again instead of choosing a competitor.
Once a shopper is enrolled, you can use points to motivate them to
shop more frequently.
You can also team up your email marketing and rewards program to
increase purchase frequency (as mentioned before). You can use points
in your emails as an incentive to get customers to return. Show them
the point balance they have, and what they can spend those points
on. You could also give extra points on certain days to encourage
customers to buy now.
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Points are a great incentive because you can show a customer’s current
balance instead of discounting the purchase further.
Looking for more tips on how to increase your purchase frequency?
READ HERE
Time Between Purchases
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To Calculate:
365 Days Purchase Frequency÷
Your purchase frequency shows you how many times a year a customer
is buying. This is helpful to see if retention marketing efforts are
working, but it is not the most actionable metric. Time between
purchases turns purchase frequency into a more useable metric.
Time between purchases shows you how long a typical customer goes
before making a repeat purchase. This is a good metric to know because
it allows you to tailor email marketing campaigns. If you know the
average customer goes 7 weeks between purchases, you can start
sending promotions during week 6 to get them back a little sooner than
they normally would. Time between purchases will vary significantly
between industries. If you are selling furniture you will see a longer time
between purchases than if you are selling coffee.
The best practice is to try and find another merchant in your industry
that you can compare to. If you can’t find a comparable merchant just
use your current frequency and continue to try to improve from there.
Your repeat customers are now spending more per order, and you are
getting them to come back more often. You are in an amazing place!
Now you will need some metrics to track the overall performance of
retention marketing.
Tracking Retention
Efforts
Repeat Customer Rate
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To Calculate:
# of Customers ThatPurchased More ThanOnce
# of Unique Customers(365 Days)
÷
Your repeat customer rate is the percentage of your customer base that
are repeat purchasers. The average repeat purchase rate in ecommerce
fluctuates between 10% and 20% depending on the industry. If your
store falls in or below this range, you could benefit from a retention
marketing strategy.
There are many ways to boost your retention efforts including loyalty
rewards programs, retention email campaigns, and a customer relation
management software. These are strategies may require a long term
commitment, but they will also get you amazing results. The best way to
measure the long term effects of these retention strategies is to take a
look at the change in your repeat customer rate. Measure where you are
now, then start a customer loyalty program and watch your repeat
customer rate increase.
Customer Lifetime Value (CLV)
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While you can try to retain this customer, we’ll cover that later. Here are a few tips to increase your average order value.
To Calculate:
AOV Purchase Frequency Lifespanx x
Customer lifetime value is the one metric to rule them all in customer
retention. It is a measure of how much an average customer is worth to
your store over the course of their entire shopping life. The problem is
that calculating it can be very complex.
Take a look at this Google search:
These equations are daunting if you don’t have a finance or math
degree.
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While these are the most accurate ways to calculate CLV, they are far
from the easiest. These types of equations are overkill for most online
businesses. The calculation on the previous page is a much simpler way
to get a workable CLV figure.
The three components of the equation are average order value
(described in section 1), purchase frequency (described in section 2),
and customer lifespan, which I will explain now.
Your customer lifespan is the average amount of years someone will
shop with you. I know this is difficult metric to determine especially if
you don’t have years of data to look at. I suggest that you use 1 year
for modest forecasting and 3 years for more ambitious forecasting.
Learn more about your customer lifespan and how to effectively calculate your CLV.
READ HERE
A loyalty rewards program is an amazing way to both increase your
retention metrics and create loyal brand advocates. In this section we
will show you how to calculate metrics that prove whether a rewards
program is effective or not. One of these metrics require a rewards
program to measure, but the other is a measure of general loyalty.
Measuring Customer
Loyalty Online
Redemption Rate
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To Calculate:
# of Points Spend Total # of PointsIssued
÷
This metric shows you what percentage of the points you are issuing are
actually being redeemed on a reward. Your rewards members see real
value in your program when they are able to redeem points on a reward,
not necessarily when they are earning the points.
This metric shows you whether your program members are engaged and
loyal, or just sitting in your program idly. A good rule of thumb is that
you should see a 20% redemption rate in your program after 6 months.
Your program needs time to catch on. Looking at your redemption rate
after a month or two will not give you an accurate depiction of how well
your program is performing. If after 6 months you still see a redemption
rate of less than 20% you should look into your program for changes to
boost member engagement and participation. A low redemption rate
does not mean a loyalty program won’t work, but rather shows you have
not found the right structure for your customers.
Loyal Customer Rate
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To Calculate:
# of Customers ThatHave Purchased 4+ Times
# of Unique Customers÷
This metric is similar to your repeat customer rate with one main
difference: this metric looks at customers you can classify as loyal rather
than just repeat.
Getting a repeat customer (2 purchases) is great, but getting a loyal
lifetime customer is better. We have noticed that after a customer has
purchased 4 or more times, they will stick with you long term.
Your loyal customer rate shows the percentage of your customer base
that you can classify as loyal. This will obviously be less than your repeat
customer rate, but these customers are worth even more. The beauty of
this loyalty measurement is that you do not need a rewards program to
calculate it.
If you think that your current customer loyalty is high without a
program, you can use this metric to evaluate it. If it is not as high as you
had thought, or you think it could be higher, you can start a loyalty
rewards program with Smile.io to boost it.
Retention marketing and the associated metrics are much different than
standard ecommerce metrics, and are not as simple as opening up
Google Analytics. Because retention marketing is a long term solution,
you need to keep on top of your metrics for proper reporting.
Retention Metric Best Practices
Benchmark Your Metrics
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Retention marketing is a long term ecommerce strategy. If you want to
measure performance, you need to know where you started and how far
you have come. That is why we recommend measuring the metrics in
this book now so you can see where you currently stand.
Once you start to introduce more tactics you can look back and see how
much of an impact they have had. It is easy to make small steps towards
big results, and tracking this progress allows you to truly see how far you
have come.
Check Metrics Monthly
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Retention metrics will not change drastically overnight. Like a good
marinade, they need some time to take effect. This is why you should
continually check in on how your retention and loyalty metrics are
doing. You should look at these metrics at least once a month to
compare where you started to where you are now.
You will not be able to make changes to your strategy if you are not
tracking what is working and what might have been a costly misstep.
Use a Rewards Program as a Hub
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Trying to keep tabs on all of your retention marketing tools and tactics
can be difficult. That is why we recommend using a rewards program as
a hub for retention marketing (since we do make and sell them).
Many rewards programs (like Smile.io) allow you to run multiple
retention efforts at the same time. With a rewards program, you can
reward points for different profitable actions, send retention-focused
emails, and keep track of retention-related stats.
This central hub makes it much easier to implement retention marketing
as a focus for your business. If you want to get started with a rewards
program, visit www.smile.io today!
