What Is Customer Retention? Definition and Guide

Guide to customer retention.

You’ve heard it time and time again. It’s cheaper to get current customers to make a repeat purchase than it is to find new customers. It’s true for many businesses, especially in the crowded ecommerce arena, where clicks and conversions always seem to be increasing in cost. This is the science of customer retention.

When was the last time you looked for opportunities to re-engage customers to get them to come back? If you’ve yet to market to current customers after the sale, now is a good time to build a cohesive strategy for customer retention. Let’s look at how to get started.

What is customer retention?

Customer retention is the practice of increasing a business’s repeat customer rate and extracting additional value from those customers. The goal of customer retention is to ensure a customer makes repeat purchases, is satisfied with a company’s services, and does not defect to a competitor. 

Why is customer retention important?

You want to ensure the customers you worked so hard to acquire stay with you, have a great customer experience, and continue to get value from your products. Focusing on customer retention has a number of benefits:

Higher average order value

A high customer retention rate means your customers trust your products and your company. That means, they’re more likely to buy more from your company with each visit. 

Bain & Company conducted a study that showed the longer a customer had a relationship with an online retailer the more that customer spent in a given period of time. For example, in apparel, the average repeat customer spent 67% more in months 31 to 36 of their shopping relationship than in months 0 to 6. 

Increase profits

Longtime customers are more willing to branch out and try other products from a company they trust and from sister companies. Higher customer satisfaction increases your profits across all product lines.

The same Bain & Company study found that web shoppers were more willing to buy different types of products from the online retailers of their choice. For example, almost 70% of Gap online customers stated they would consider buying furniture from Gap. 

Better relationships with brand ambassadors

Your longtime customers are also your brand ambassadors. Word of mouth is still considered one of the best marketing strategies today.

Take a look at the case study of Dropbox to see how true that is. Back in 2008, it was difficult to market a service like Dropbox—no one really understood the importance of something like cloud storage and it was difficult to explain. However, through its referral program it was able to grow its user base from 100,000 to four million in only 15 months. 

More cost-effective to sell to existing customers

It is more cost-effective to retain your customers than to find new ones. For example, in the graph below, each store has 100 customers buying a $10 item each month.

The theoretical light purple store is retaining 5% of those customers each month, and the dark purple store is retaining 10%. As you can see, the 5% increase can lead to rapid growth that is difficult to match with straight acquisition.

customer retention graph

Customer retention rate metrics that matter

The key to improving your customer retention rate is understanding the underlying key metrics. But what are these metrics? How do you measure them? More importantly, how do you improve them?

Answering these questions will equip you with the tools you need to build a customer retention strategy that has a significant and lasting impact on your store’s profitability. In order to do that, let’s look at three of the most important customer retention metrics and examine why they matter.

1. Repeat customer rate

customer retention rate on graph

Repeat customer rate is the backbone of customer retention. It measures the percentage of customers willing to make a second purchase from you. Measuring your repeat purchase rate is an excellent way of evaluating how well your retention strategy is actually working. The higher this metric is, the more willing customers are to return to your store.

When it comes to measuring retention metrics, it’s easy to get lost in a sea of complicated calculations. Thankfully, calculating your repeat customer rate is fairly straightforward and only requires two pieces of information:

Number of customers with more than one purchase

This refers to the number of customers who have made more than one purchase in a specific period of time. I recommend looking at an entire year to see the big picture.

Number of unique customers

This is the number of different customers that purchased from your store in a distinct time frame. Note that this is different from number of orders.

Fortunately, this is calculated for you in your Shopify reports. Should you want to do this manually, all you need to do is divide the number of customers with more than one purchase by the number of unique customers.

When you write out this equation, it looks like this:

# of Customers That Purchased More Than Once / # Unique Customers

2. Purchase frequency

Purchase frequency shows you how often customers are coming back to buy from your store. This is especially important when you consider that repeat customers are often responsible for a significant portion of a store’s annual revenue—depending on the product category.

Calculating your store’s purchase frequency is similar to calculating repeat purchase rate. Using the same time frame you chose for your repeat purchase rate (e.g., a single month), divide your store’s total number of orders by the number of unique customers.

When you write out this equation, it looks like this:

# of Orders Placed / # Unique Customers

3. Average order value

AOV

Once you understand repeat purchase rate and purchase frequency, it’s time to maximize how much each of those purchases are worth. This metric is known as average order value, and refers to the amount of money a customer spends in your store on each transaction.

Just like purchase frequency, your average order value should be calculated using the same time frame you set for your repeat purchase rate. From there, all you have to do is divide your yearly revenue by the number of orders your store processed. Shopify reports also calculate this number for you.

When you write out this equation, it looks like this:

Total Revenue Earned / # Orders Placed

4. Customer lifetime value

Whether you hope to increase these metrics one at a time or simultaneously, the ultimate goal of retention marketing is to increase customer value. Customer value is the final piece of the puzzle because it helps you understand how much each customer is actually worth.

In order to calculate it, you need to already have a handle on your purchase frequency and average order value. By multiplying these two values together, you can truly see the fruits of your labor and understand the power of retention marketing.

Customer Value = Purchase Frequency x Average Order Value

5. Churn rate

The customer churn rate is the percentage of customers who’ve stopped being your customers during any given time period. There could be a number of reasons for your customer churn rate to increase. Reasons like:

  • Customer expectations weren’t met (bad experience with product or customer service)
  • Found a cheaper or better alternative
  • If it’s a subscription service, their payment method could have expired
  • Network failures

The goal is to keep your customer churn rate as low as possible. But first, you need to find out what your rate is. To do that you can follow the equation written below.

churn formula

Customer retention strategies

Here are a few top tips and strategies to follow when thinking of ways to increase customer retention:

  • Use customer accounts. Accounts can make repurchasing easier by giving customers instant access to previous orders and pre-filled shipping information. The trick is to provide the option to create an account after the first order has been placed.
  • Improve your customer support. Support systems help you effectively communicate with your customers and provide them with the right level of support. Having a live chat or help desk tool available can turn a customer question into a sale or a customer complaint into a resolution, whether they come in on site, through email, or via social media.
  • Start a customer loyalty program. Brand loyalty programs, sometimes referred to as customer retention programs, are an effective way to increase purchase frequency because they motivate customers to purchase more often in order to earn valuable rewards.
  • Send engaging emails. Emails give you the opportunity to build a good customer relationship before and after an initial purchase. A great way to get started is with follow-up emails. A week after a customer’s first purchase, send them an email that says “thank you for your purchase.” 
  • Send a discount after the first purchase. Sending a discount code for their next purchase with a first-time order is a great way to nudge them to come back. For this reason, discounting can also be an effective way to bring back customers that haven’t purchased in a while.
  • Collect customer feedback. Feedback allows customers to get involved and to feel heard. Rather than being reduced to a number on a spreadsheet, your customers will feel more invested and therefore be more loyal if they feel as though their feedback is valued. 
  • Start a referral program. A referral program uses your existing customers to refer new customers to check out your company. Usually, that includes some sort of incentive, like a discount code or value match deal (“Give $20 get $20”). 
  • Offer personalized shopping experiences. Brands that excel at personalization generate 40% more revenue on average than those that don’t. This could entail personalized product recommendations, customized experiences, and tailored product education. 
  • Consistently delight customers. Delighting a customer means exceeding their expectations. Offering great customer service, giving promotions, sharing personal stories, or even including gifts can all contribute to this. 
  • Offer fast delivery. People don’t like to wait long for their orders to arrive. Recent data shows nearly half of shoppers abandon their shopping carts due to long shipping times. 
  • Makes returns easy. Some 33% of repeat customers would abandon a retailer if they have a difficult return experience. Returns are a part of good customer service and making them easy and pain-free builds trust with your customers. 

Customer retention examples 

Everlywell

customer retention email example

Make sure to send personalized messages regularly. Everlywell does this beautifully, sending personalized emails that offer new products or sales to its list. Making additional product recommendations and sending invitations for upcoming sales and promotions for new products are great ways to keep the conversation going with first-time buyers.

If you have a product that is perishable, consumable, or otherwise needs to be refreshed over time, knowing your products’ lifespan and sending well-timed emails can be the perfect way to bring back dormant customers. This tactic can be particularly effective because, ideally, you’ll be delivering the right message to the right person at the right time.

Luxy Hair

Luxy Hair mentions in its FAQ section that its hair extensions will last three to six months, on average, or up to a year depending on wear.

luxy hair retention example

Knowing this, Luxy could set up a series of automated emails to go out after three months, six months, and one year that explain to customers the benefits of a fresh set of hair extensions. These emails would help educate a first-time buyer, keep Luxy top of mind, and encourage repeat business, all while providing customers with a great experience.

In all of your post-sale marketing communications, remember to remind customers of why they bought from your brand in the first place. Getting them to come back rests on your ability to show them why an additional purchase is worth their time and money.

Dia & Co. 

Dia & Co is a clothing brand that specializes in creating clothes for plus-size women. After Dia & Co began its most recent referral program, its referral links were shared over 50,000 times. Forty thousand customers shared those links, and in the first month, the program saw about 22 conversions per day.

dia & co

Pepper

A good example of personalization comes from Pepper. Pepper is a bra company that helps women find the right bra size for them. It does this by having customers take a 45-second fit quiz that results in a personalized recommendation based on that customer’s answers. 

Pepper customer survey

West Path

West Path is an ethically sourced clothing brand started by surfers in San Diego. In every West Path package, a West Path sticker is included. It’s a small thing, but it’s unexpected and something extra. For the small cost of a couple extra cents, West Path can bring a smile to customers’ faces and have West Path stick out in their minds. 

west path

Chubbies

A return management system helps you handle all aspects of a return for your customers. It allows your customers to initiate the return, and you to manage and track the returns, relist the items in your inventory, and monitor the financial impact to your books. 

Chubbies has a great example of a good return management system. The online men’s clothing retailer offers free returns—free exchanges within 90 days and full refunds within 30 days of purchase.

All you have to do is enter in your order number and either a shipping ZIP code, email, or phone number into an online form and you can start and complete a return with very little fuss. 

returns system

When to focus on customer retention

What you sell has a huge impact on which strategy you should focus on. A retailer selling high-end leather furniture is going to be categorically different from a store selling tea and coffee.

A store whose customers purchase high-value items frequently will have the highest customer lifetime value (CLV). These are the types of stores that have the most to gain from a solid retention strategy.

when to consider retention

In general, as you move to the right across this matrix you should start focusing more and more on retention. But remember, you should never ignore one or the other. It's about finding a balance that makes the most sense for your business.

Whether you should focus more on customer acquisition or retention is heavily influenced by where your store is in its lifecycle. A store that started yesterday is vastly different from one that’s been up and running for many years.

Take a look at the timeline below for general guidance on your store’s potential investment levels.

  1. Just starting: When you’ve just started your store there is one thing you should be focused on: getting customers. At this point your acquisition efforts should completely trump retention. Focus on strategies and tactics that will help you grow your customer base.
  2. Gaining traction: You now have loyal customers and you are getting sporadic sales. At this stage you can begin to introduce retention elements to encourage each customer to buy more. My recommendation would be to start with automated email campaigns that focus on encouraging a past customer to purchase from you again.
  3. Consistent: You aren’t quite an ecommerce juggernaut, but sales are growing. This is the point where you should begin to think about mixing in more retention with your acquisition efforts. You can look at starting a referral and/or a loyalty program, and getting more serious with marketing automation.

Your retention strategy is how you maximize the profitability of each customer.

  1. Established: You are now an established ecommerce store. A common problem for retailers of this size is finding ways to continue to grow. Acquisition may be leading to a lot of one-time purchases, but a retention strategy can get customers to buy more often, which increases their lifetime value. At this stage, you should be serious and deliberate about your retention efforts.
  2. Well-established: At this stage your store has made it past the initial gauntlet. You’ve achieved many early successes and you have a lot of processes and automations in place. Now is the time to focus heavily on retention.

Aside from the current stage your store is in, you’ll also want to tailor your strategy based on what you sell.

Build your customer retention strategy today

Your current customer base is the best asset your store has. Customers already know your brand, they know your products, and they appreciate your service.

Focusing your time and energy on improving the experience for this group, as opposed to always trying to find new customers, can be a powerful way to supercharge revenues for your store. Make customer retention a priority from this day forth!

Illustration by Rachel Tunstall


Customer retention FAQ

What is good customer retention?

A good customer retention rate for ecommerce brands is around 35%.

What are the top 3 keys to customer retention?

  • Provide an excellent product.
  • Engage with your customers through every channel (social media, email, etc.)
  • Use feedback, reviews, and surveys to better understand your customers.

How do you improve customer retention?

Begin by figuring out how many of your customers are returning customers. Then use retention tactics like smooth customer onboarding, offering incentives, and great customer service to keep your customers happy and feeling appreciated.

How do you measure customer retention?

Take the total number of customers in a certain period and subtract it from the total number of new customers you’ve acquired during that same period. Then divide that number by the total number of customers at the beginning of the designated period and multiply that by one hundred.
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