Peter Drucker wrote, “What’s measured improves.” If you can measure something that you do regularly, you can figure out ways to improve it. Be it your personal fitness score or your business customer retention, anything that is measured can be improved.
If you are a data-obsessed marketer, there is one KPI that you should always have a finger on. It is customer retention. Modern-day customers have fickle loyalty. PwC’s Future of Customer Experience study found that 32% of customers would stop doing business with a brand they loved after one bad experience.
There are a handful of metrics that your business should watch to measure how customers are being retained. They help you place a finger on what is working and what needs to be improved.
Key Customer Retention Metrics to Monitor
There are hundreds of retention metrics that your business can monitor, but monitoring the right ones will save time and effort. These 6 customer retention metrics will help businesses assess performance and retain their existing customers.
Loyalty
According to a Bain & Co. study, a 5% increase in customer retention produces more than a 25% increase in profit.
There are two handy metrics you can use to measure the loyalty of your customers:
Customer churn rate
Also known as attrition rate, customer retention rate is the number of customers who stopped using your product/service during a given time frame.
How to calculate
Churn rate is calculated by dividing the number of churned customers during a period by the number of customers you had at the beginning of the period.
| Customer churn rate formula: (Customers beginning of the month – Customers end of the month) / Customers beginning of the month |
For example, if you started the month of January with 400 customers and ended the month with 380, the churn rate will be calculated as below:
(400-380) / 400 * 100 = 5%.
Repeat Purchase Probability (RPP)
Repeat purchase probability is the probability of a customer making a repeat purchase. RPP looks at each customer and the number of transactions that they have made during a given time frame, like monthly, quarterly, or yearly. A high measure of RPP indicates that customers are loyal to the business.
A food delivery app might monitor this number monthly, while a travel app might monitor it annually.
How to calculate
RPP is calculated by dividing the number of purchases made by the customer during the period divided by the total number of customers who purchased during the period.
| Repeat purchase probability formula: Number of customers that purchased X times / Total number of customers |
Redemption Rate (RR)
Redemption rate is basically a check of how far your loyalty programs are faring. It measures the percentage of loyalty points or rewards that customers have redeemed. A higher RR indicates that customers value loyalty points and use them for active engagement with your business.
How to calculate
There are two components you need to calculate the redemption rate. The number of points redeemed by customers during a period of time and number of points issued during the same period. RR is calculated by dividing the number of points redeemed by the number of points redeemed.
| Redemption Rate formula: Number of points redeemed / Number of points issued |
Revenue maximization
If you are a business keen on growth, you would want to consistently improve your revenue. Here are some metrics that help measure current revenue levels and also helps identify areas for improvement.
Average order value (AOV)
AOV is the measure of money spent by your customers for each order. The higher the average order value, the better your profitability. As your existing customers spend more on each order, the overheads for acquiring new customers and to run operations reduce proportionately.
How to calculate
AOV is calculated by dividing the total revenue for a period by the total number of orders (after removing canceled orders) for the same period.
| Average order value formula: Total revenue for the period / number of completed orders |
Profitability per Order (PPO)
For every successful order completed, there is a specific amount that you have to shell out for operations. You earn a profit only when there is a surplus after reducing such expenses. Profitability per order helps measure the surplus you are able to generate per order.
How to calculate
Before calculating PPO, you must determine the fixed average profit margin. A different profit margin can be set for each customer segment, pricing plan or product category.
To calculate, PPO, multiply the total revenue with the average profit margin and divide it by the total number of orders.
| Profitability per order formula: Total revenue for the period * Average profit margin / Total number of orders |
Purchase Frequency (PF)
Purchase frequency indicates how often the average customer buys from your business. A higher count or frequency is a good sign of customer retention. However, the frequency may vary from business to business depending on the type of product sold or service being rendered.
How to calculate
Purchase frequency is calculated by dividing the total number of orders during a period by the total number of unique customers. The count of unique customers is used to prevent
| Purchase frequency formula: Number of orders for the period * Number of unique customers for the same period |
Customer retention
In addition to metrics that help measure loyalty and revenue maximization, there are two other metrics that help measure the core retention rate of your business. Those metrics are:
- Customer lifetime value
- Redemption rate
Customer Lifetime Value (CLV)
Customer Lifetime Value is an approximate measure of the profit that your business will gain from the continued relationship with the customer for the foreseeable future. It takes into account the previous transactions that the customer has had with the business.
A higher CLTV means that the business does not have to incur heavy costs for new customer acquisition. CLTV also helps plan an accurate budget for customer acquisition costs.
How to calculate
Calculating CLTV requires three components — purchase frequency, average order value and average customer lifespan. Multiplying all these three components gives a fair view of CLTV.
| Customer Lifetime Value formula: Purchase frequency * Average order value * Average customer lifespan |
There is also another way of approaching this formula. It works by reducing the cost of acquisition and retention from the average customer lifespan.
In that case, the formula will be as below:
| Customer Lifetime Value formula: Purchase frequency * Average order value * Average customer lifespan (Acquisition Cost + Retention Cost) |
Revenue maximization begins with customer retention
Circling back to Peter Drucker’s quote, if you can measure your customer retention KPI from time to time, you will be able to find ways to maximize it. With a customer engagement platform like CleverTap, you can steer retention strategies in the right direction and build targeted campaigns across channels to increase retention rates.
