Customer Retention Optimization, Tips & Strategies

What is Customer Retention and How Should You Measure It on Shopify?

By HappyPoints on February 24, 2021 2 Comments

customer retention

As a Shopify store owner, customer retention is the key to a sustainable business. The joys of doing business are having people purchase what you’re selling. Especially when you’re just starting. At this stage of your business, you’re all about getting the sales and that’s okay. Customers are only just getting to know you.

But as your business grows, making sales then starts to go beyond just having random people from the internet patronize you. What you want then is to build a strong business-to-customer (B2C) relationship. Selling more to existing customers sets you up to become a well-established seller in your industry. It also increases your profitability.

How can you get customers to keep coming back to your store? This is what customer retention is all about. In this article, we would be discussing all you need to know about customer retention. Plus you get to learn how you can measure your customer retention capabilities for your business.

What is Customer Retention?

what is customer retention

Let’s start by properly defining what customer retention is. Customer retention is the summary of campaigns a business embarks on to keep its customers revisiting to purchase. The aim is to have as many repeat customers while making the most profit from each of these individuals.

Customer retention allows your business to achieve its full potential. In doing this, your customers get better value from your offers while you get more profit from the returning customers. How is this possible?

The work of customer retention starts from targeting and acquiring them. There would be no purchasers to retain if you don’t have any in the first place. Be that as it may, immediately after a new customer has made their initial purchase, you activate your retention techniques to keep them coming back. 

Customer retention strategies are numerous and based on your business model. You can adapt these strategies to suit your Shopify store. Another article will share the details about them.

Today, we’ll be talking all about customer retention as it affects your business. How you can know if you’re achieving your customer potential or if there’s room for improvement.

Customer Retention for your Business

customer retention for your business

It’s one thing to read all the methods to help you make more profit as a business owner on Shopify. Then, it’s another thing to learn about what would work for your exact business model. That exactness is what we aim to deliver for you here.

How often purchasers buy your product is a major determinant in choosing your retention strategy. The other factor to check is the price range of your products. Businesses dealing in high-value products with high demand have the most to benefit from good client retention.

As your business grows, you normally would provide more high-end offers that give purchasers more value. This points to the fact that your business’ age is quite crucial to predict how deliberate you should be with client retention.

In the next section, we would elaborate on knowing when to focus more on client retention as a business owner.

Acquisition vs Customer Retention: Which should you focus on?

acquisition vs customer retention

Always have this at the back of your mind that at each point in your business, you only have to find the right balance between client acquisition and retention. One doesn’t completely knock out the need for the other.

That you’re focusing on either customer retention or acquisition should be largely informed by your store lifecycle. Now, most likely, there would be a link between your store lifecycle and its age, it is not a given. Whichever way, what you need to pay attention to here is the lifecycle.

A store’s lifecycle is a gauge of its overall number of sales and customer acquisition. So, it doesn’t take into context how long you’ve been in operation. Rather, you should be concerned with the number of sales you have made so far. And how many customers made these purchases. 

Having cleared that up, let’s delve straight into the different stages in a Shopify store’s lifecycle to further drive this discussion home.

1. Just Started:

This stage covers those who have just set up their Shopify eCommerce store. What qualifies a business for this stage is zero sales and no customer base. The whole 100% focus here is on client acquisition, there’s nothing to retain.

2. Getting Traction:

If you take your client acquisition strategies seriously, it results in landing your first few sales. A business that is getting traction is not one that has closed a few sales and nothing more. Rather, it’s a business that is consistently closing an average of one to five sales in a week on an average. 

At this rate, you should start looking at devoting 15% of your marketing plans to client retention. A good way to go here is to use email campaigns to keep previous purchasers abreast of useful products from your store.

3. Consistent Seller:

The consistent seller defines a stage where your Shopify store makes at least one sale per day consistently. This is a stage where your business is winning over customers’ hearts. What you want to do is turn that liking into loyalty with a solid retention strategy. Introducing a referral/loyalty program here (taking up about 30% of your marketing) would be golden.

4. Established eCommerce Business:

As an established eCommerce store, your target should be to improve your customers’ lifetime value (more discussion on this later). This means working actively to turn one-off purchases into returning customers. 

At this rate, you would be getting about 10 sales per day on an average. Splitting your overall customer targeting into half to cover acquisition and retention of customers would serve your business best. This way, you get more visitors and you’re prepared to keep them coming back.

5. Well Established/Authority Seller:

This is the last stage in the lifecycle of an ecommerce business. You’re at a stage where you don’t necessarily have to worry about building a reputation. On a norm, over 10 sales pull in per day. Your business is seen as an authority in your industry.

For your business to have kept going to this stage, it means you already have retention techniques in place. What to do now is to be innovative with your retention techniques. The goal here is to keep already loyal customers thinking about your store when they see your product.

Measuring Customer Retention using Metrics

measuring metrics

Up until now, we have discussed what customer retention is and why it is important for your eCommerce store on Shopify. Now, it’s time to talk about the numbers involved. Why is it important to keep tabs on the metrics? I’ll explain.

Business is a game of numbers. Stocking, sales, number of customers, profit, or loss, are all figures that speak measures about the state of your business. Just like each of these factors, client retention can be tracked to offer insight into how your business is performing.

There are a few of these metrics that can be used to measure how effective your customer retention is. What you need to worry about includes: What do these metrics mean? How do you calculate them? And also, how do you improve them?

Here are a few common customer retention metrics you should look into:

1. Repeat Customer Rate

If you need a figure that paints a direct picture of how effective your customer retention has been, then your Repeat Customer Rate does just that. It’s a measure of how much of your customers are ready to keep patronizing your business.

This metric is easy to calculate. What you need first is the number of purchasers who bought more than once. Then, the total number of customers for that timeframe in question. You then divide the number that purchased more than once by the total number of customers to get your Repeat Customer Rate. The higher the figure, the more effective your strategy is.

Repeat Customer Rate (RCR) = #Customers who bought more than once/ #Total customers

2. Purchase Frequency

Much like the repeat customer rate, the purchase frequency talks about buyer’s behaviour. Instead of pointing to the number of buyers that return to your store, this metric gives you an idea of how frequently they buy your products. A high purchase frequency indicates effective retention. 

The purchase frequency is calculated by dividing the number of buy orders within a given timeframe by the number of individual buyers.

Purchase Frequency (PF) = #Orders/ #Individual buyers

3. Average Order Value (AOV)

Putting your customer retention metrics into money terms is quite vital. The average order value does this for you. What this measures is the likely amount one buyer spends on their purchases. The more each buyer spends on each transaction, the more money for your store.

To calculate the AOV, you need the total revenue for the period under view. You also need the number of buy requests or orders within that time frame. Dividing the revenue by the number of orders gives you your AOV. The higher this metric, the more potential client retention has to offer your business.

Average Order Value (AOV) = Total revenue/ #Orders

4. Profitability Per Order (PPO)

This is a derivative of the AOV. The profitability per order (PPO) value indicates the amount of profit you’re generating per order. Instead of just stopping at the amount buyers spend per visit, you can further narrow it down to how much profit you’re generating.

To calculate this, divide the net income by the number of orders. The net income is a subtraction of the expenses from revenue. As is expected, the higher your PPO, the more profit your store has made.

Net Income = Total Revenue – Total Expenses

Profitability Per Order (PPO) = Net Income/ #Orders

5. Customer Lifetime Value (CLV)

Your customer lifetime value is the singular metric that directly informs what actions to take for your client retention strategy. The value obtained here gives a rough idea of how much should be put into targeting new customers or focusing on the existing ones. 

Usually, the acquisition cost is much higher compared to retention cost. That’s why it would be more profitable to target previous customers to purchase more than to spend more money on acquiring new prospects.

When the CLV is high, that means each customer you get is likely to spend more than their initial purchase. Hence, you only need a pool of the market to generate good revenue. On the other hand, if the CLV is low, it means you need to gather more customers to measure up to generate good revenue for your business.

To calculate the CLV, you need to have your store buyers’ purchase frequency and the average amount they spend per order, AOV. These two figures can be multiplied to get your customer lifetime value.

Customer Lifetime Value (CLV) = Purchase Frequency (PF) x Average Order Value (AOV)

In essence, the customer lifetime value can be defined as the number of money customers are spending in your store, and how often they do so. Metrics like this are determined by your product type and demand.

How to Measure Customer Retention Metrics using Shopify Reports

Shopify offers you an easy route to access important metrics to determine your customer retention performance. Some of the metrics we have mentioned here can be seen directly on the analytics page. Some others are presented under different names. Even at that, most of the metrics present there are not discussed here.

For the purpose of this article, I will be dwelling on the metrics that relate to client retention. From the Analytics dashboard, you’ll find the Average Order Value. This is the backbone of all other metrics and is calculated for you by Shopify Reports.

Shopify analytics

Next up after the Analytics dashboard, you should pay attention to the sales, customers, and behaviour report pages. These would give you info useful to get your repeat customer rate and the purchase frequency.

From these analytics and reports, you can easily weigh how well your retention strategies are working. Shopify report tools make it easier for online store owners to keep track of their customer retention metrics and monitor their business growth.

Conclusion

The goal of your business should be to increase your customer lifetime value. Here a few ideas you could work on introducing high-value products, making a purchase more seamless to increase purchase frequency, among other client retention strategies.

Want more tips and strategies to improve your customer retention, visit our blog as we regularly update new exclusive content.

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