Customer Retention Metrics & KPIs
In the previous chapter, we introduced the connection between customer retention and profitability, by way of factors like customer satisfaction and brand loyalty. These are important concepts to understand. However, to assess the performance of your business in these key areas, there are several metrics that you should familiarize yourself with. Customer Retention KPIs KPIs, […]
Customer Retention Metrics & KPIs
In the previous chapter, we introduced the connection between customer retention and profitability, by way of factors like customer satisfaction and brand loyalty. These are important concepts to understand. However, to assess the performance of your business in these key areas, there are several metrics that you should familiarize yourself with.
Customer Retention KPIs
KPIs, or "key performance indicators," are metrics that you can calculate and track to assess the performance of your business.
In fact, it's likely you already are looking at certain KPIs to track the health of your business. Most business owners do. Here, we want to show you precisely the metrics you need to understand the connection between customer retention and profitability — and which factors to focus on.
Note: For the sake of keeping things as simple as possible, we're going to standardize the terms used in the formulas you'll see below.
Nearly all of these metrics can be measured over a finite period of time, so we're going to assume you're calculating them on a quarterly basis.
- S = Number of customers at the start of the quarter
- E = Number of customers at the end of the quarter
- N = Total number of new customers (acquired during the quarter)
- C = Total number of customers during the quarter
- RC = Total number of return or repeat customers within the quarter
- P = Total number of purchases
- PC1 = Total number of purchases made by a given customer (i.e. "Customer 1")
- T = Time, or length of the period being measured
- R = Total revenue earned during the quarter
- O = Number of orders during the quarter
Customer Retention Rate (CRR)
Customer retention rate is a direct assessment of your ability to keep customers after acquiring them. We've explained why customer retention makes your business profitable, and the higher your CRR, the higher your profits should be during a given period.
To calculate your CRR, you'll take the number of customers you have at the end of the quarter, remove any new customers gained during the quarter, and divide by the number of customers at the start of the quarter. Multiply by 100 to make the resulting number a percentage, and you have your customer retention rate.
CRR% = [(E-N)/S] x 100
Churn rate — specifically, customer churn — is a metric that tells you the rate at which you lost customers over the course of the quarter. This is essentially the inverse of customer retention rate, but many business owners prefer it as a more direct assessment of their weakness in retaining customers.
To calculate customer churn rate, first calculate the number of customers you lost in the quarter by taking the number at the start minus the number at the end and removing the number of new customers gained as well.
Customers Lost (CL) = S - E - N
Then divide that by the number of customers you had at the start. Multiply that by 100 and the product is your churn rate, expressed as a percentage.
Churn% = CL / S x 100
Repeat Customer Rate (RCR)
Where customer retention rate is an overall assessment of your ability to attract customers more than once, repeat rate is more detailed about what percentage of your customers are returning and how that impacts your business.
To calculate, just take the number of customers who have shopped more than once at your store and divide it by the total number of customers. The result is your repeat rate.
RCR% = RC / C x 100
This is important because it's at the heart of the comparison between the value of new business and repeat business. Research suggests that if your business has just 8% repeat customers, they'll be responsible for around 41% of your revenue.
Purchase Frequency (F)
At this point, you know your general rate of customers retained and lost, and you know how many of your customers are repeats. Now it's time to dig a little deeper into the impact repeat customers can have on your business.
Purchase frequency identifies how often a given customer makes a purchase at your store. There are, however, several ways to understand it.
Let's start with the purchase frequency of a single customer — "customer 1". Simply divide the number of purchases one customer makes in a period by the length of that period.
F(C1) = P(C1) / T
You can also get this metric as an average for all customers, assessing the overall loyalty in your brand. Simply take the total number of purchases made during the quarter by all customers and divide by the total number of unique customers.
AF = P / C
Average Order Value (AOV)
Average order value is the average size of any given purchase made during the quarter. To find your AOV, all you need to do is divide revenue earned by the total number of orders.
AOV = R / O
Customer Satisfaction (NPS)
This one is a little different because it involves using the results of a survey to gauge your customers' likelihood of promoting your brand to their friends and peers. Let's imagine that you survey 100 customers, asking them to rank your brand from 0 - 10 based on their willingness to recommend.
- 30 people (30%) answer 0-6. These are your detractors.
- 20 people (20%) answer 7-8. These are your passives.
- 50 people (50%) answer 9-10. These are your promoters.
To find your net promoter score (NPS), the first thing you'll want to do is disregard the passives. These are people whom you can assume will not mention your brand either positively or negatively to their peers.
Subtract the percentage of detractors from promoters. In this case, you'd have an NPS of 20, which is slightly over the midpoint of 0. This means more of your customers are likely to recommend your business than the reverse.
Gross Margin (GM)
Your gross margin is a metric that tells you how much you're making in profit from your store over a specific period of time. To calculate it, you'll take your revenue from that period (R) minus your cost of goods sold (COGS), then divide the difference by R.
GM% = (R - COGS) / R
Customer Lifetime Value (LTV)
Customer lifetime value is a measure of the total value of all the purchases any single customer has made or will make from your business. The problem here is that you can't see into the future, so how can you know how much a person will spend?
There's actually an equation that uses KPIs that you've already calculated to create a projection of customer lifetime value. You'll multiply your average order value by purchase frequency, gross margin, and the likelihood of losing a customer. This calculation essentially tells you how much any given customer will spend in the quarter or before they stop being a customer.
LTV = AOV x F x GM x (1/Churn)