Heralded as a silver bullet in guaranteed revenue streams, customer retention is still largely a minefield for many businesses. With around 20% of customers not returning to nearly a third of businesses after their first purchase, retention is becoming a big problem in many businesses.
Depending on what industry you’re in, acquiring a new customer can be 5 – 25 times more expensive than retaining an existing one. Research by Bain & Co.suggests that by increasing your customer retention rates by just 5%, you could expect to see a profit spike of between 25% and 95%.
Retention is not an exact science, however, there are some key metrics that will help you to better understand the value of your customers, how well you’re retaining them and how likely they are to be advocates of your business.
Below are 5 powerful (and simple!) calculations that will help you to see where you stand in the retention stakes and offer up some interesting insight into your retention strategy.
Repeat Purchase Rate (RPR)
In short: how many of your customers buy from you more than once? RPR is a good indication of how loyal your customers are to you. It demonstrates the value you are delivering to your customers.
An RPR falling between 20-40% (or higher!) is typically a good range to aim for.
It is important to bear in mind that your RPR will vary greatly on the kind of products you’re selling. Consumables products are likely to be purchased much more frequently than something that might be a one-off (machinery, tools, equipment and the like).
Customer Acquisition Cost (CAC)
The cost to acquire your customers is an imperative metric to calculate. Playing a major role in understanding the value of your customers to your business and also the ROI generated per customer acquisition.
One of the simpler, but just as helpful, customer retention metrics to calculate is your CAC:
You could also calculate the average cost of acquiring customers through different sales and marketing channels using the same formula but substitute the entire cost of sales and marketing with the cost of a single paid channel.
Customers acquired via online advertising methods may vary greatly to the cost of acquiring customers at a trade show.
Customer Lifetime Value (CLV)
The lifetime value of your customer shows how much your average customer is worth over their lifetime. It is a powerful calculation that can help to dictate your sales and marketing budgets. Your CLV indicates how much an average customer is worth to your company once they’ve been acquired.
When evaluated in conjunction with your Customer Acquisition Cost, your average CLV can be used to refine and adjust your acquisition strategy to ensure maximum value from each customer.
Average Order Value (AOV)
Another simple metric, your Average Order Value is exactly what it says on the tin: the amount spent on average by each customer every time they buy from you over.
Better understanding your AOV can help to refine your sales and marketing strategies to improve ROI. Encouraging your existing buyers to spend more per transaction can have a huge impact on your AOV. Consider cross and up-sale offers that entice customers to increase the value of their basket in your store, not your competitors.
For example: if your customer is buying reams of paper alone from you, why not offer a discount on toner? Not only does this make your customer’s shopping experience smoother, but your AOV will increase with the additional purchases.
Net Promoter Score (NPS)
Your Net Promoter Score evaluates how likely your customers are to recommend your business. Calculating your NPS is a little more time consuming than the other metrics but a helpful metric nonetheless.
Working out your NPS involves surveying your customers with one simple question: “On a 1-10 scale, how likely is it that you would recommend [your company] to a friend or colleague?”
Respondents are then grouped into Promoters (score 9-10), Passives (score 7-8) or Detractors (score 0-6).
Those categorized as Promoters are loyal advocates where Passives tend to be ‘just satisfied’ and easily tempted by the competition. Detractors are unhappy customers with high churn rates and can account for up to 80% of negative word of mouth.
A Net Promoter Score above 0 is considered ‘good’, above 50 considered ‘excellent’ and above 70 is ‘world class’.
Calculating your NPS is a powerful way to understand which of your customers are satisfied and least likely to churn. It also identifies customers that may be at risk and desperately need your attention. NPS is also helpful to track customer satisfaction with specific products, departments, stores or even customer service teams.