Customer Retention Definition:
Customer Retention refers to the rate at which customers continue to purchase goods or services from a business over time.
Understanding your customer retention rate is also a way of understanding your churn rate, which is the rate at which customers stop spending with your business. These are key metrics to measure the success of a company; the higher your retention rate and the lower your churn, the healthier and more profitable your company will be.
This is a huge topic for DTC brands, especially in ecommerce. So much of the conversation in ecommerce centers around how to engage, delight, and retain more customers without the advantages of an in-store experience. Closing the gap between you and your customers' needs is everything for a thriving ecommerce business.
There’s so much you can do in the digital space to add value to your customer journey and engage them with the right content and products at the right time.
In this article, we’re going break down everything you need to know about customer retention and common questions including:
- Why is customer retention important?
- How do you measure customer retention?
- What thought leaders are saying about customer retention
- How to increase customer retention
- Customer retention FAQ
- Measuring customer retention with Peel
Why is customer retention important?
Customer retention and customer churn rates are essential metrics for businesses to monitor. Retention is heavily impacted by how effectively you can improve your repurchase rate and add to your customer lifetime value (CLV). Those are critical practices for any business.
Key reasons why customer retention is so important for DTC brands:
- Investing in customer retention is more cost effective. It’s 5-7x cheaper to retain a customer than it is to acquire a new one. And that customer acquisition cost (CAC) only continues to grow as digital platforms charge a premium for advertising.
- Improving your customer retention rate is a practice in improving customer loyalty, which is a profitable business practice. Higher customer loyalty drives an increased willingness to both purchase frequently and in higher volume. Customers who feel that they’re getting value from your brand experience will always spend more.
- When you launch new products or you have specific products you want to sell in a given season, it’s easier to engage loyal customers who are already deeply affiliated with your brand. That makes cross-selling and upselling much more effective.
- When customers are happy with their experience, they are more likely to talk about your products, recommend them to friends (word of mouth referrals), and post about them on social media; there’s nothing like good old user generated content (UGC) to promote the quality and credibility of your brand.
How do you measure customer retention?
To get a simple calculation of your customer retention rate you just need a couple figures from your post-purchase data. For the given period of time, you need the number of customers you had at the beginning of the period, how many customers you acquired during that period, and the number of customers you have at the end of the period.
Here’s how to calculate retention rate in 3 easy steps:
Step 1: Take your number of customers at the end of the period and subtract the number of customers you acquired during the period.
Step 2: Divide the number you got in step 1 by the number of customers at the beginning of the period.
Step 3: Take the number you got in step 2 and multiply by 100 to get the percentage of your customer retention rate.
Number of customers at the beginning = 116
Number of customers acquired = 72
Number of customers at the end = 128
Step 1: 128 - 72 = 56
Step 2: 56/116 = .48
Step 3: .48 x 100 = 48
Customer retention rate = 48%
Businesses should aim to increase their customer retention rate as much as possible. You always want customers coming back to spend with you.
In ecommerce, a good retention rate for regular customers is in the 30-40% range. And should be even higher for subscribers (if you have a subscription side to your business).
What ecommerce thought leaders are saying about customer retention
There are a lot of amazing ecommerce thought leaders who are constantly dropping great advice on Twitter and LinkedIn. Here are some super insightful pieces of retention advice floating around social media:
Eli Weiss, Sr. Director CX & Retention at Jones Road Beauty, is always a voice we turn to for sage advice in the retention realm. From his super insightful newsletter All Things CX & Retention to his podcast, Down to Chat with fellow ecom and retention guru Cody Plofker, he’s always got something helpful to share.
Check out a couple snippets from this thread on retention and what drives customers to repurchase:
Couldn’t agree more with the sentiments here. Improving retention and increasing your repurchase rate isn’t about mass emailing your customers. That’ll get you bounces and unsubscribes aplenty. It’s really about personalizing post-purchase messaging based on their interests, needs, and stage of the customer journey!
You can check out the entire thread here.
Next is another friend of Peel, Kait Stephens dropping some serious knowledge about the power of great social proof/testimonials. Kait is the CEO and Co-founder of Brij, the QR Code-activated, digital experience builders. Here’s what Kait discussed recently on LinkedIn:
Totally agree with Kait here. It’s kind of the “actions speak louder than words” vibe. They’re still words, sure, but social proof in the form of posts, testimonials, reviews, recommendations, etc. have real-life action behind those words. New, prospective customers who are just discovering your brand love to hear what real-life users are saying about your product.
And how do you get great social proof? Through building a legion of loyal customers and fans of your product. It starts with a great retention strategy; it all goes hand-in-hand!
Next up is a simple but effective tweet from ecommerce subscription mainstay Recharge. During their ChargeX event in DC, they live tweeted many of the most important drops from their speaking engagements.
If we ever needed great evidence to lean into retention marketing, this is it:
No need to elaborate on this one. Pretty much speaks for itself!
How to increase customer retention
Increasing your customer retention can seem like a mountain to climb. This is especially true for DTC brands who are competing in an ecommerce landscape that’s packed with competitors. Luckily, there are some things you can do that have proven to work time and time again for brands who are looking to retain more customers.
Increasing retention isn’t just about dishing out discounts. We all know that Black Friday is a big deal for boosting sales, but you can’t recreate that every week or every month. If you’re trying to entice customers to come back and purchase with discounts too often, you may be damaging your brand value, creating a false comfort level with your pricing, and killing off serious potential for growth.
So, we’ll stay away from simply offering discounts. It’s great to do from time to time, but here are the best repeatable strategies that will help you increase your customer retention:
- Customer journey from a loyalty perspective
- Customer journey from a product perspective
- Reward customer loyalty
- Build a community
- Create a referral program
1. Understanding your customer journey from a loyalty perspective
We’ve discussed at length about how personalizing the customer journey leads to higher customer lifetime value. Along with that, we’ve been helping brands focus on the idea that personalizing your marketing communications is best done when you’re meeting your customers at their given stages of the journey from a repurchase and loyalty perspective.
That’s why we added RFM Analysis to Peel. It automatically gives you 10 distinct groups based on how recently, how often, and how much customers are spending with you. Using that as the building blocks for personalizing your re-engagement messaging goes a long way. There’s a big difference between what you should say and offer to brand champions compared to how you try and reactivate groups who’ve fallen out of your sales cycle.
Whether you’re calculating RFM Analysis yourself, using Peel to automate it, or segmenting customers with your own method, using customer behavior and purchase frequency is really effective for starting your personalization efforts. If you want tips on how to engage customer groups, check out our 2-part guide.
2. Crafting your customer journey from a product perspective
There’s so much you can do with customer segmentation to improve your retention rate. One of the key things to start with is delivering content that highlights what your customers are specifically interested in. The days of sending mass eblasts with boilerplate content that features all the same products are over.
The best part about this is that everything you need lives in your post-purchase data.
Two great tools for knowing what your customers are likely to buy next are Market Basket Analysis and Product Purchasing Journey.
Market Basket Analysis shows your most commonly purchased product combos. This can be helpful for deciding what types of product bundles will be most relevant to your customers. You can manually do your basket analysis but it’s a bit of a lift from pulling and cleaning the data to formatting it in tables. Peel automates the process, giving you an instant look at your Market Basket Analysis.
Purchasing Journey gives you the most common purchasing paths from product to product. It shows you “if a customer buys product X in their first purchase, they are most likely to buy product Y in their 2nd purchase, and product Z in their 3rd purchase” and so on. You end up with a map that looks like this:
3. Reward customer loyalty
Creating a rewards program for your customers incentivizes them to return and make more purchases with your brand over time. As a customer, there’s nothing better than purchasing a product and getting a token of appreciation that delivers actual value to your brand experience.
It’s a win-win for you and your customers. Loyalty programs have proven to be some of the most effective customer retention strategies for so many brands.
OWYN, the purveyors of healthy, plant-based protein shakes that have “Only What You Need” in them, is an example of a brand with a great loyalty program! They do a lot for their loyal customers.
Their Club OWYN Rewards page gives you a full breakdown of why you should purchase from their online store and get exclusive rewards with every purchase:
Not only are they incentivizing you to make more repeat purchases by letting you know that you get rewards with every purchase, but they also have some brilliant ways of further engaging you.
They give you points for following them on social media and for sharing them on Facebook. They also give you 100 points on your birthday and even help you get over the line of signing up with 50 points for creating an account:
They take it a step further by giving you a breakdown of how easy it is to redeem your rewards points and showing you they dollar value of different points levels.
If you’re looking for a great structure for loyalty rewards and inspo for starting a program, OWYN really knows what they’re doing. And there’s no doubt that their most loyal customers love coming back for more purchases when it’s so worth their while!
4. Build a community
Bringing people who have the same interests together is always a positive experience for brands. If you can create a digital environment where customers who love your product can share stories, images and video engaging with your brand, it’s a major asset to your brand and retention efforts.
It can be as simple as a hashtag, or a feature section on your site, etc. Oats Overnight is a great example of this, encouraging their fans to use #ditchthespoon on Instagram, which makes for a great gallery of people loving their products.
Sometimes it just takes the right re-exposure to a product while scrolling on the ‘gram to get a customer to repurchase. Plus, creating a community can have other positive effects like direct discourse with customers to get feedback and improve the brand experience.
5. Create a referral program
A good referral program helps your brand on 2 fronts. First, it incentivizes your customers who already love your products to spread the word and help attract new customers. Second, it rewards those loyal customers who help you bring in new customers by giving them something in return. It can be a big percentage off their next purchase, or a gift card, or some other special promotion.
Some brands, like sustainable menswear brand Frank & Oak, go even deeper on their referral programs, creating incentives to become an affiliate. They work with major commercial websites, bloggers, influencers and more, offering them a commission percentage on sales that come through their channels, plus other exclusive promotions and access to marketing assets.
Their affiliates become another branch of their marketing efforts helping to legitimize their brand in media circles both major and niche.
Bottom line, when done right, a referral program helps with both ends of the funnel: acquisition and retention.
Customer Retention - Frequently Asked Questions
We’ll run back through some of the most important, frequently asked questions about customer retention for ecommerce.
What is customer retention and why is it important?
Customer Retention refers to the rate at which customers continue to purchase goods or services from a business over time. Retention is incredibly important for retail and ecommerce brands because the more customers you have returning often to make purchases on your site, the healthier your business. Relying on new customers and too much emphasis on new customer acquisition without a focus on retaining those customers isn’t a sustainable practice for ecommerce businesses.
How much more cost effective is it to retain customers than acquire new customers?
Most studies suggest that it’s between 5-7x more expensive to acquire new customers than to retain existing customers. But the stats that should really convince ecommerce businesses to lean into retention is that increasing your retention rate by just 5% can have massive impacts on your bottom line. Depending on the business that 5% increase in retention can translate into 25-95% increase in profits over time. The ceiling for positive impact from retention marketing is incredibly high!
What are the main benefits of customer retention?
Major benefits of customer retention include:
- It’s much cheaper to retain customers than to attract new ones.
- Increasing loyalty in customers encourages them to purchase more and often.
- Upselling and cross selling to existing customers to increase average order value (AOV) is much more effective than with new customers.
- Happy customers whom you’ve retained often refer new customers; never underestimate word of mouth referrals!
Measuring Customer Retention with Peel
Phew. 😅 That was a lot to go over with retention. If you were looking to simply learn more about the subject for your brand, we hope you found some helpful information and examples of customer retention in ecommerce.
If you’re looking for a great way to start retaining more customers and improving your retention marketing, we highly suggest you try Peel free for 7 days.
We provide all the post-purchase data for your store analyzed and visualized in formats that work for everyone. Seriously, you’ll be able to take action on day 1 of the trial that will make a serious impact on your customer retention.