How To Calculate Customer Retention Rate For Your Ecommerce Store

Guides & Tips
August 28, 2023

How To Calculate Customer Retention Rate For Your Ecommerce Store

What happens to your hard-won customers after their first point of purchase? 

In most cases, you put in the effort to acquire them in hopes that most of them stick around for the long haul. But the important question is, do you put in the same costs towards retaining them as you did to acquire them? We hope that most of you screamed, "No!"

And although customer retention is usually spoken about when it comes to SaaS companies and other types of business with high customer churn rates, you can still track it with ecommerce stores too. It's especially relevant if your brand offers a subscription product.

The problem is businesses are obsessed with the marketing funnel which ends with conversion, and they sideline the funnel which starts after conversion. It looks something like this:

Image of the double-edge funnel
Image Source

When you start focusing on retention, you also need to understand what customer retention rate is, and how you can calculate it. That way, you can have a better understanding of how well your retention strategy is working to retain an existing customer. In this blog, we're going to talk about customer retention rate, what the retention rate formula is, and how you can use it to get the most out of your customer base.

What is customer retention rate?

Simply put, customer retention rate (CRR) indicates the percentage of customers who come back to buy from you (repeat purchases) within a specific time period. It helps you understand how profitable and how loyal your customers are after their first purchase and how likely they are to come back to you.

It's affected by multiple factors such as the quality of your product, their checkout experience, your customer service, and how you nurture them after their purchase.

How to calculate customer retention rate? 

Customer retention rate is usually calculated within a given period. It can be anything between 30 days to a year or more. Based on your timeframe, here are the other metrics you'll need: 

  1. The number of new customers you've gained during the period.
  2. The total customers you had at the beginning of the period (or the beginning of the month).
  3. The total customers you have at the end of the period (or end of the month).

The customer retention rate formula is:

Customer retention rate formula

All you need to do is plug in the details in the above formula. 

Let’s understand this better with an example:

Say you calculate the customer retention rate on an annual basis.

  • Start of period customers: 1,050
  • End of period customers: 1,000
  • New customers gained: 350

This will make your retention rate:

(1000-350/1050) * 100 = 61.9%

💡 The given period of time is often based on your own goals. Ask yourself, "What does it take for a customer to be profitable?" That way, if you're acquiring your average customer at a loss, you'll be meas

What is customer churn rate?

Customer churn rate tells you how many customers stopped repurchasing your products. For subscription-based companies, it tells you how many customers unsubscribed to your product.

The equation for customer churn rate is:

Customer churn rate equation

💡 For simplicity, we won't go into revenue churn rate. But you can read about it in this article.

What is customer lifetime value?

Customer lifetime value is the total amount a repeat customer will spend on your store. It's simply the dollar amount they spend in total on your store over their lifetime.

Your customer lifetime value is:

Customer lifetime value equation

Where your customer value is:

Customer value equation

What are the tools you can use to track customer data?

Now that you have a grasp of how to measure retention rate, let's dive into the tools specific to the different types of strategies that can streamline the entire process after the first conversion.

But before getting into it you need to understand that your tech stack should not be too complicated. Because the more you scale the higher your cost of implementation will get.

Launch a loyalty program

Loyalty programs are a well-established strategy for a reason – they provide a cost-effective way to keep customers coming back for more. But how exactly do they work?

Loyalty programs reward your loyal customers for every interaction they have with your brand. This means that the more they shop or engage with your brand, the more points, discounts, or exclusive perks they earn.

But, these programs are a two-way street – along with rewarding customers it also benefits your business in a number of ways. How? They can increase repeat purchases, boost the lifetime value of a customer, and even provide valuable customer data.

And yes, we have data to back up this claim! Take Rareform for instance. By launching a loyalty program with the help of Rivo, the company increased its 30-day repurchase rate by 26.9%

Here's how Rivo helped them:

  • With the help of Rivo’s tier-based feature, they implemented a tiered loyalty program. This means the more a customer interacts with their brand, the more they level up! 
  • Each tier has unique benefits to reward their loyalty and encourage them to keep coming back for more. 
  • There are also different ways to earn points on Rareform's Loyalty Program as can be seen in this image:
screenshot of Rareform's loyalty program

Use email marketing for loyalty program 

Emails give you direct access to your customer's inbox without a huge investment. But the trick here is not to exploit this access by spamming them. If you do that, your strategy will backfire and you'll end up losing customers.  

With Rivo, you can set up email sequences once someone buys from you and send them offers, discounts, and reminders at a regular interval of time. Some effective ideas for your customer retention strategy include:

  • Confirmation email with welcome offer: Send them an order confirmation email with details about their shipping, and an ETA for order delivery, and thank them for buying from you. Along with that, add a welcome coupon that they can redeem in their next purchase.

Here’s an example of a good email marketing campaign from Allbirds. Rather than a mundane receipt, customers are greeted with a heartfelt thank-you note, once they confirm an order.

Screenshot of allbirds email
  • Replenishment email with discount: Suppose the product you sell needs to be replenished over time like a face wash or a moisturizer. If you have a rough estimate of how long it can last, send well-timed emails to re-engage customers and remind them about restocking it before they run out. Also, to make it more appealing, give them an exciting offer to buy now.
  • Incentivize them to subscribe: Giving a discount to your current customers on your products if they subscribe (i.e.: subscribe and save!) is a great way to increase your revenue.
  • Review requests with a reward: Send personalized emails to check on your customers and see how they like the product. Plus, request them to leave a review in return for a review. It'll do two things for you: encourage them to buy again and build social proof for other customers. A win-win.

Use SMS marketing to entice new customers

The effectiveness of email marketing is high, but so is the competition for attention in a customer's inbox. 

On top of that, there is always a possibility of landing in the spam, right? But, what if you could communicate directly with your customers via text message? 

Whether you’re announcing a new product, sharing a special offer, or updating them on their order status, SMS is another great tool that will help you increase your repeat purchase rate.

SMS marketing is particularly effective during peak shopping seasons when email inboxes are overflowing, paid advertising costs soar, and consumer attention is limited.

Here's an example of how Rareform sends SMS reminders to their past customers by integrating Rivo and Postscript: 

SMS marketing from Rareform

How important is customer support in creating a good retention rate?

You can spend a ton of money trying to acquire customers. And you can do it successfully without a good customer experience. But, regardless of the number of customers that you acquire, you'll continue experiencing low retention rates if your customer support (or product, for that matter) doesn't meet expectations. Customer satisfaction can make (or break) your user retention rate.

Plus, how can you expect your customers to refer your product to their friends (for the future growth of your brand) if you're not addressing customer feedback the way you should be?

If you meet your customer expectations, it'll reflect in your customer retention metrics.

Why is it important to measure customer retention rate?

Every company wants to boost revenue, and measuring customer retention rate is a big part of that. The importance of retention rate goes way beyond just predicting your earnings. It also gauges how loyal your customers are, and how profitable your business is.

  • Measures the effectiveness: Customer retention rate gives a clear, numerical picture of how well your business is holding onto customers. It's not just a vague sense of "things are going well" - it's a measurable metric that shows the direct impact of your retention strategies. This allows you to track progress over time and see if your efforts are actually working.
  • Data-driven decision-making: When you know your retention rate, you can make smarter choices. Instead of guessing where to spend your time and money, you can focus on the strategies that are keeping your customers around. So, if you’re using loyalty programs and email marketing to retain your customers and you notice a considerably high retention rate, you know you’re on the right track. This means you’re not just throwing darts in the dark; you’re hitting the bullseye. 
  • Understanding customer satisfaction: According to a survey by Redpoint Global, a whopping 74% of consumers stick with a company because they feel understood and valued. And it is with the help of retention rates that you can understand how satisfied your customers are with your product or service. Because here's the thing: when your customers are happy, they become your biggest advocates. They'll rave about your brand to anyone who will listen, bringing in even more customers.

What is a good customer retention rate?

Determining your ideal CRR depends a lot on what kind of business you're in. For ecommerce businesses, anything above 30% is considered a good CRR, and anything below that should be taken care of.

However, when it comes to setting a CRR benchmark for your company, several external factors come into play. You've got to consider pointers such as:

  • How do you sell your product?
  • What are your costs to get new customers?
  • How big is your potential market?
  • What are your competitors’ rates?

If you're running a subscription-based business model, customer retention rate is likely one of your most important metrics. It'll help you gauge how much you should be spending to acquire the first subscriber in the first place, as well as understand your customers' behaviors.

Is customer retention more important than customer acquisition? 

Customer acquisition is important for the growth of your brand. Customer retention is important for the profitability of your brand. You shouldn't really prioritize one over the other. But, if you're not investing in your customer retention strategies, you're likely not building a sustainable (or profitable) brand. Since acquisition can be really expensive, retention needs to be focused.

Conclusion

Building customer loyalty is the most strongest and time-tested strategy for improving your customer retention rate. But it's a gradual process that requires dedication and effort to nurture relationships and gain trust over time. 

By prioritizing an exceptional customer experience even after the first purchase point, launching a loyalty program to build a community of brand advocates, and rewarding them for their support, you'll be able to do better cross-selling and increase your retention rate and your profit margin significantly. 

Want to know how? Schedule a demo with Rivo and we'll walk you through the entire process.