Any metric that doesn’t effectively and accurately measure your goals is nothing but a distraction, a shiny object disguised as important data. Chasing after “vanity metrics” can steer you in the wrong direction.
The term “vanity metrics” is most commonly used in the context of social media marketing, where it’s all too easy to heed the siren call of follower counts and similar measurables that don’t actually move the needle for your business. But as all types of marketing become increasingly data-driven, vanity metrics can rear their heads anywhere if you aren’t careful.
Ecommerce marketers are arguably just as likely to track unhelpful KPIs as anyone else. And when it comes to measuring retention, online retail is fraught with complexities and traps. Should store credit gift recipients be measured differently from others? How about reorders? What if some of your customers are on subscription plans?
Oh, and what about people who return a relatively high percentage of the merchandise they buy? What if someone regularly spends a lot of time on your site and does make purchases, but rarely?
If you really want data’s help keeping your customers around, you need to know what you’re looking at and why it matters. Wipe the slate clean, and start from scratch, think about which questions you’re looking to answer with these metrics.
What are you actually looking to improve?
Do you want your loyal customers to buy more often? Do you want them to purchase more diverse products, more expensive products, or a higher volume of products? Depending on your answers, you’ll want to measure different things and try different retention tactics.
Let’s go over some of the first and most telling retention metrics you’ll want to look at, what each is best for, and what some ecommerce experts have to say about their value.
#1 Repeat Customer Rate
First, let’s start simple with repeat customer rate. This is calculated by dividing your total repeat customers by your total customers.
To find those figures, check the customers section of your ecommerce platform analytics. There you should find your overall customer number and the breakdown of how many are new vs. returning.
Image source: https://glew.io/tip/calculate-repeat-customer-rate/
This is a great measure of the overall pulse of your customer experience, as it’s a summary of how many people are willing to come back to you after their first transactions. You can look at the repeat customer rate of different cohorts, marketing campaigns, or acquisition channels to help gauge the long-term value of various segments and channels.
From newer companies looking to understand their first customers, to more seasoned businesses ready to improve their customer experience, this is a great place to start. It’s a simple formula for useful data that can easily show you where to focus next. Refer to it when formulating your plans and learn where to place your retention marketing focus.
Your repeat customer rate, the percentage of your customers who have placed more than one order, is the most important metric for ecommerce retention tracking. Whilst metrics like customer satisfaction and refund / return rates are helpful, they are not end goals. They will only lead to a higher repeat customer rate. If you have a higher repeat customer rate, you’ll earn more money from every new customer, and you’ll be able to spend those additional funds to attract more new customers. Ultimately, the higher your repeat customer rate is, the higher the potential of your business is.
#2 Average Order Value
This is another simple one to find. Measure your average order value (AOV) by finding your revenue total and dividing it by the total number of orders. As with most “big” numbers, they’re likely right on your shop’s main analytics dashboard.
If you have a decent repeat customer rate, the next step in your retention strategy might be to prioritize looking at and improving your AOV.
Focus on it when you’re looking to derive more revenue value from loyal customers. This metric can reveal what kind of customers you’re attracting with different efforts, and how well your upselling efforts and overall sales funnel works once you do.
Where and when in the purchase experience can you encourage more spending?
Instead of getting customers to buy more often, you may want to focus on getting customers to spend more when they’ve already got their virtual wallets out.
I think it’s important to look at average order value over the lifespan of the customer profile, as this helps you see the moment (or moments) when customers start falling off. With the help of a cohort analysis of your customers, you can start to pinpoint how their needs change and evolve as time passes, and you can better predict the moments when they begin to churn – along with a lot of other key behaviors. I think a lot of marketers and merchants make the mistake of only looking at sales total as an indicator of success/growth. It’s so much more involved than that. Taking a deep dive into the numbers and really studying customer behavior can help you track and optimize a slew of important KPIs that help your business grow for the long-term.
#3 Customer Retention Rate
Think of your customer retention rate (CRR) as the sum of all parts.
It’s a measure of how all the specific tactics and numbers in your retention strategy come together – it gives you a glimpse of how customers are feeling about you in a given period.
Retention rate can be calculated using the cohort analysis feature in Google Analytics. When looking at big-picture strategy or looking for a quick snapshot of your customers, retention rate will tell you how your retention efforts are doing over time or across areas.
Each time a customer comes back, they are deepening their relationship with your brand – and because most of us enjoy productivity, this can form into a habit. I reordered a few things today on Amazon, for example, without even thinking about purchasing in an alternative way. They have me locked in. But if their CRR was dropping hard every two months, they’d need to explore ways to shore up the problem.
#4 Customer Lifetime Value
Finally, look to customer lifetime value (most commonly abbreviated as CLV, but CLTV and LTV are often used as well) to see the zoomed-out, long-term revenue value of your average customer. Another pillar metric, many other areas of your business depend on it too.
For example, an imbalance of CLV and customer acquisition cost (CAC) is believed to be a common startup killer. Look to CLV to see how profitable and sustainable different strategies or acquisition efforts really are in the long-term – to measure the extent to which the up-front costs associated with a certain effort truly pay off.
It’s worth determining which customers have the highest CLV. According to one recent study, the top 1% of ecommerce customers are worth up to 18 times more than the average customer. For some businesses, these top performers are the people who make regular small purchases, while for others, it’s those who commit to a big purchase once a year—more likely, it’s something in between. Regardless, identifying your best customers is a matter of ROI, not just for a single purchase, but over the life of your relationship with that customer.
To calculate CLV, you need a few other metrics first. Fortunately, you can get the end number using a tool like Google Analytics, with either custom dimensions or custom metrics – both of which Lunametrics shows you how to set up in this helpful post.
CLV can be the metric you need when you’re struggling with sustainability. As mentioned before, spending too much on customers that aren’t worth it is a dangerous sign, and keeping a close eye on CLV compared to your CAC can help keep that in check.
Eyes off the Vanity
Given the higher value of returning and long-term customers, analyzing and understanding retention metrics is key to finding quick wins. They’ll show you the highest value and lowest hanging fruit areas of your business’s customer lifecycle.
Improving just one of these metrics a mere 5% can have more value than a much larger increase at the top of your funnel. In comparison, these KPIs make almost everything else look as surface-level as Facebook likes.