Retention Rate: What's It and Why it's Vital for E-commerce
It's impossible to manage a thriving firm without paying attention to the user retention rate. Any percentage of customer churn will harm a business and reduce revenue. If your eCommerce business is starting up or you are already at the peak in this sector, concentrate on maintaining and making money from the consumers you already have rather than investing your time and energy on new users you might not eventually retain.
The customer retention rate is a crucial business metric that highlights how many users decide to stick with your business over time. It also provides insightful information about the success or failure of your promotional or engagement initiatives. Do you know that you risk losing high-value buyers if you don't monitor your enterprise retention rate?
Does this sound shocking to you? For those that aren't aware before now, yes, it's alarming. Keep on reading as we explore the nitty-gritty of retention rate and why it matters in e-commerce.
What Is Retention Rate?
Retention rate is the proportion of clientele (audience, users, e.t.c.) a company keeps over time (quarterly, monthly, weekly). It's an important performance indicator used to forecast revenue and advancement in an enterprise. Generally, a business will gain subscribers (and money) if the percentage of retention surpasses the rate of acquisition. However, a lower retention rate than customer acquisition rate results in an overall decline in users
In other words, a high buyer retention rate would result in a minimal churn rate for an enterprise.
How do I Calculate the Retention Rate?
Before adding up the numbers, establish the period you would like to measure for your store's retention rate or any business you want to evaluate. For instance, some retailers compute retention rates yearly, while others do quarterly or monthly. After deciding on the period, you will then factor in the following parameters below:
- The total number of users at the start of that period (A);
- The total number of users remaining within that period (B);
- The total number of new users you acquired within that period (C).
From the parameters above, the formula for calculating retention rate is:
Retention Rate = [(B-C)/A] x 100
That's to say, subtract the total number of new users you acquired C) from the number of users remaining (B). Divide the value you obtain by the total number of users at the start of that period.
Example 1: Customer Retention Rate
ADB advertising limited had 400 subscribers at the beginning of the first quarter. On the last day of the first quarter, 380 high-value subscribers will remain there. Calculate the retention and churn rate.
Solution: Subscribers at the start of the period = 400 (A)
Subscribers remaining at the end of the period = 380 (B)
Number of lost customers within that period = 20 (C)
Number of customers gained = 0 (D)
Using the formula: [(B-D)/A] x 100
Retention Rate = [(380)/400] x 100
Retention Rate = 95%
From the example above;
Churn Rate = [(C)/A] x 100 = (20/400) X 100 = 5%
What are the mistakes to avoid when calculating the retention rate?
Not accounting for retention rate at various stages of users' lifetimes
The overall retention rate throughout a customer's lifecycle is not constant. Retention rates of groups of consumers frequently vary in the middle and early stages of a customer's lifespan in the store. During these periods, you can divide customer behavior into long, mid, and short-term churn.
Not computing an alternate retention rate for customers on entirely different plans
Customers in lower plans often show dynamic retention rates, just as groups of subscribers that signed up at different times would have retention rates that vary throughout their plans as a client. Users on the most expensive plans, especially those in the enterprise tier, are likelier to have greater user retention rates.
Not analyzing user behavior
By using advanced analytics data obtained via tools like ConvertedIn -to learn how your existing customers engage with a company (brand), you can create a model of the type of customer who will most likely continue with you over the long run -by carefully examining the available information.
Nonetheless, you can also recognize the behaviors that are warning signs that a customer will leave your business. By stepping in before it occurs, you can keep such consumers, thereby increasing your retention rate.
Why Is Retention Rate Important for E-commerce?
Retention rate is vital for many reasons than just earnings. When assessing consumer satisfaction with a new product, businesses frequently consider the percentage of retention to gain insights into the product's acceptability. From this metric, e-commerce vendors can utilize these parameters to:
A high retention rate reduces the amount retailers need to spend on acquiring new customers since their current buyers frequently make purchases from them.
Focus on advancement
If most of your attempts are primarily on continuously gathering prospective customers, it will be very challenging for you to build and expand your enterprise because you won't be able to devote considerable time and effort to expanding your business if you continually need a high number of new users to maintain the liquidity inflow.
Gain new customers
Online purchasers will want a piece of the action when they discover a brand with a loyal following. Higher engagement rates demonstrate to potential customers how much you value their business and relationship with you.
Boosts returns on investments
The cost of converting existing customers is lower than acquiring new ones, and they are more likely to increase their spending with you. It raises the return on investment (ROI) of your advertising and other promotional expenses.
Boosts customer lifetime value
Higher retention rates suggest more repeat business, which improves the total revenue you get from an individual customer throughout their relationship with your business.
Encourage word-of-mouth advertising
Customers who regularly use your brand are more inclined to tell their relatives and friends about it. It's among the most powerful and successful promotional strategies utilized by retailers globally.
Gauges attrition rate
In the retail business, while some companies track retention rates, others track the attrition rate to have a comprehensive overview of underlying growth. If a firm retains 90% of its buyers after 30 days, its attrition rate is 10%. Therefore, businesses must strive to maintain low attrition and high retention rates.
Increase customer loyalty
Repeat customers are probably satisfied with your services because they wouldn't do so otherwise. Giving customers a cause to return frequently is key to raising customer loyalty and retention rates.
Informs personalized services
Retention rates also center on having a relevant understanding of your clients or customers that will enable you to offer them awesome personalized or tailored services. The more you know your loyal users, the easier it becomes to interact with, market to, and ultimately sell to them.
What are the Factors affecting Retention Rates?
- Customer reviews
Unlike past generations, who relied on official advertising efforts and advertisements to learn about products and establish trust, today's consumers turn to live customer reviews to make their purchase decisions. For a fact, user-curated reviews are more preferred by modern consumers when deciding whether to trust a product (brand) or not.
- User personalization
Modern shoppers also want their shopping experiences to be tailored specifically to them. Consumers usually want the companies they adore to regard them with tailor-made products. It could mean making personalized product recommendations or assigning them to a sales assistant who recalls their preferences and name.
Frequently Asked Questions: Retention Rates
What Is a good customer retention rate for e-commerce?
The median eight-week retention rate for most sectors is under 20%. A retention percentage of more than 25% after eight weeks is excellent for services in the financial sector or media. Over 35% retention is regarded as excellent (good) in the e-commerce and SaaS businesses.
What is meant by an increase of 5% retention rate?
With a 5% growth in retention rate, a business can boost income by 25% to 95%.
How often should I measure Retention Rate?
Each business has a different stance on this. Businesses that depend heavily on customer retention measure it more frequently than those that don't. For instance, if you own a barber's shop, you may have many regulars who drop by practically every weekend before the next working day. Thus, you might want to evaluate the retention rate every week I'm this instance.
What is a good retention rate for an app?
It's noteworthy to acknowledge that retention had decreased by 15% for iOS and 14% for Android. Another 4-5 percent stop using all applications two weeks later. Around 6% is where the 30-day retention rate remains stable. In general, a good retention rate is simply any percentage that is higher than this.
A few of the best strategies for increasing sales and enhancing your company are keeping your existing users. Thus, ensuring a great user experience and maintaining open lines of communication with all clientele are the keys to increasing the retention rate for e-commerce or retail business. Use the advice above to direct your efforts to retain customers, and observe your business grow.