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Strategy

Measuring Customer Retention: Five Magical Metrics to Demystify ROI

Why do so many marketers neglect the lucrative practice of measuring customer retention? Because the whole thing can feel like a mystery. Here are five metrics — complete with formulas — to demystify long-term ROI …

Aaron Orendorff
July 31 2017

No one skimps on acquisition metrics. Cost per click, cost per conversion, return on ad spend, SERP rank, domain authority, new-visitor bounce rate …to name a few.

Many companies, however, do skimp on measuring customer retention metrics.

Unfortunately, a new relationship doesn’t pay like an old one. Especially in ecommerce. While acquisition feeds the ego, retention feeds the bottom line.

Tempkin Group’s 2016 “ROI of Customer Experience” explains that — compared to new visitors — loyal customers are …

  • 5x more likely to purchase
  • 4x more likely to send a referral, and
  • 7x more likely to accept an offer

Before you can optimize for those kinds of returns, you have to be able to measure. So, which metrics matter when it comes to customer loyalty and retention? Below are five metrics to guide you on your path to long-term ROI.

#1 Customer Retention & Churn Rate

Customer Retention Rate (CRR) and Customer Churn Rate (CCR) are the golden standards of measuring customer retention success. They’re big picture metrics that together, can tell you if your retention rate is healthy or sick. If it’s the latter, you can then move towards the diagnosis and the cure.

In other words, both metrics provide the most value when grouped with the other key performance indicators (KPIs) we’ll discuss shortly. While powerful, CRR and CCR shouldn’t be the be-all-and-end-all of your retention metrics; they should be the foundation.

The formula for measuring your CRR is relatively straightforward.

First, determine a period over which to record. Depending on your product or customer lifecycle, this can be anywhere from a month to a fiscal quarter to a full year. Then, take the number of customers at the start of that period (S), the number of customers at the end (E), and the number of new customers acquired during (A) and apply them to this formula:

Customer Retention Rate (Measuring Customer Retention)

For instance, if you started a quarter with 5,413 customers (S), lost or did not receive any repurchases from 1,759 customers, but acquired 2,322 new customers (N), your CRR would look like this:

S = 5,413 (start)

E = 5,413 (start) – 1,759 (lost) = 3,654 (end)

A = 2,322 (acquired)

CRR = ((3,654-2,322)/5,413) x 100 = 24.6%

CRR reveals a baseline against which to measure your past performance and industry averages.

Customer Churn Rate (CCR) is essentially the inverse of retention.

This one’s incredibly simple … at least to calculate. All you need are the total number of customers at the start of a specific time period (S) and the total number of customers at the end of that period (E):

CCR = ((S – E)/S) x 100

CCR = ((5,413 – 1,759)/5,413) x 100 = 67.5%

Once you’ve determined both, the next metric defines how much each customer is worth.

#2 Lifetime Customer Value

Lifetime Customer Value (LCV) is the bread and butter of commerce metrics everywhere, revealing not only how much the average customer is spending, but how loyal they are.

Loyalty is nothing more than customers repeatedly spending money and trusting you to deliver an amazing experience time after time.

To get a baseline, you’ll need the average value of a single sale (SSA), the number of repeat transactions in a given period of time (RTA), and your average retention period per customer (RP):

Lifetime Customer Value (Measuring Customer Retention)

For example, if most customers purchase from you on a monthly basis with an average order value of $40 and you expect to retain your customers for six years then:

SSA = $40

RTA = 12 (months)

RP = 6 (years)

LCV = $40 x 12 x 6 = $2,880

The higher your LCV, the longer (on average), customers will stick with you, and the more money they’ll spend in the long run. This metric will also remind you of the importance of retaining high-paying customers.

In addition to the formula above, Kissmetrics provides two additional equations to measure LCV:

Image via Kissmetrics

Regardless of your formulation, approaching LCV with a one-size-fits-all mentality is a mistake. Instead, LCV can vary significantly based on specific customer segments, which is where we’ll turn next.

#3 Customer Segment Values

Among metrics for measuring customer retention, Customer Segment Values (CSV) takes the prize for most complicated. But also, the most informative.

Understanding how various customers statistically interact with your website, emails, SaaS product, and advertisements are crucial to increasing your customer retention rate. Of course, segmenting your customers, iterating upon those segmentations, and using engagement rates to measure and optimize is an intricate game.

To streamline this metric, you can use tools like Optimove — which specializes in measuring, creating and optimizing these segments as they relate to retention. Drip offers similar services for email marketing and BounceX for online customer acquisition.

At the very least, you’ll need to construct three customer segments: high, mid, and low commitment. To do so, start with your own mid-commitment segment based on the following averages:

  • Order value
  • Purchases per month (or your equivalent product cycle)
  • Lifetime customer value
  • Email open and click-through rates
  • Digital engagements per month (i.e., website visits or app use)

Other factors — like social media interactions and digital ad engagement — can be taken into consideration as well. The above data points will give you a mid-commitment segment from which to then build the others around.

Here’s the big idea …

Customers should be grouped with the aim of correlating their monetary value with telltale signals regarding their current commitment status.

Funneling these metrics into your dashboards or spreadsheets not only gives you a general idea of where your customer loyalty lie but also tells you where it’s going to lie. What’s more, by creating low-commitment and high-commitment segments, you can:

  1. Anticipate customers at a high risk of churn and mitigate
  2. Focus your attention on moving mid-commitment customers upwards
  3. Reward and invest in your high-commitment customers based on the 80/20 principle

CSVs are your crystal balls of measuring customer retention: they tell you who to pay attention to and who to invest in.

#4 Buying Patterns & Product Cycles

Buying patterns represent the seasonal tendencies of customers and product cycles, their use — whether from release to loss of popularity or from purchase to repurchase.

Buying patterns are the barometer of your market’s hot and cold times. There are predictable peaks and dips in profitability for every industry. In B2C ecommerce, these patterns are tied to cultural events — like Black Friday, Cyber Monday — and seasonality. In B2B ecommerce, these patterns typically revolve around the fiscal calendar and budgetary concerns.

How does this help when measuring customer retention?

Finding your industry’s rhythm is crucial for retaining customers when they aren’t purchasing. Knowledge is power and — when it comes to customer retention rates — knowledge about when your customers buy and don’t buy is most powerful.

Product cycles, on the other hand, are the rhythms of a single product. As Investopedia explains, each product has four stages: introduction, growth, maturity, and decline. To develop and define your own, Gifographics offers a fantastic free template that’s fully customizable:

Measuring when a product is at each stage makes for happy, loyal customers. It should also set the tempo for introducing new products.

There are obvious KPIs that will help you measure the patterns of your products and industry, namely:

  • Seasonally adjusted revenue
  • Previous product growth rates
  • Time to product-use completion, and
  • High-commitment reorder patterns

Even more important than the numbers is using the collective implications from the data to determine the best time to release a new product and how you can engage with customers during a low-commitment season.

#5 Customer Engagement Rate

At the risk of stating the obvious: the more engaged your customers, the higher your retention rate.

According to Accenture, 47% of customers say that “engaging with them in innovative and creative ways to provide a multi-sensory experience influences their overall feeling of loyalty toward a brand or company.”

In today’s world of extensive and flexible technology, creative customer engagement is easier than ever. Unfortunately, attempting to engage customers isn’t enough. You need to know if it’s working.

Start by making a list of all the various engagement points (i.e., communication channels) your company offers. The usual suspects include:

  • Website
  • App
  • Email
  • Chat
  • Phone support
  • Social media
  • Off-site advertising

Next, get detailed about all the ways to measure engagement via those channels. By recording things like email open and click through rates, website visits, bounce rates, and session times, or even individual recordings of onsite behavior, you’ll be able to tell if your attempts at customer interactions are working. Engagement with retargeted ads is equally vital, as is measuring in-app activity and usage.

Additionally, consider the following sub-metrics:

  • Percent of returning online visitors
  • Referral sources
  • Time on site or time in-app
  • CTR of retargeted ads aimed only at current customers
  • Abandoned cart rate among existing customers

And here’s the key: once you’ve identified all the various engagement metrics, correlate those with your customer segments based on CLV.

As you adjust your retention strategies according to what you learn about your customers and the type of content they like to engage with, you’ll also be able to measure how much that interaction is worth.

Measuring Customer Retention without the Mystery

When it comes to your increasing ROI, customer loyalty stands apart from acquisition because it’s far easier and more lucrative to sell to an existing customer than a new one. Measuring customer retention might not be as sexy as acquisition, but it is critical to success.

With these metrics — CRR, CCR, LCV, Customer Segmentation Values, Buying Cycles and Product Patterns, and Customer Engagement Rates — you’ll be able to gauge exactly how loyal your customers are.

More importantly, you’ll be able to optimize with real data and the right tools … which is exactly where we’ll look in just a couple of weeks.

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Aaron Orendorff

Aaron Orendorff is the founder of iconiContent, where he’s busy “saving the world from bad content.” He’s also a regular contributor at Mashable, Entrepreneur, Lifehacker, Fast Company, Business Insider, Content Marketing Institute, and more. Connect with him on Twitter or Facebook.

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