Repeat customers are one of the best measures for success with any growing business. After all, if your customers are happy enough with your products and/or service to return time and time again, this is a fair indication that you’re doing something right. Plus, research has shown that even just a 5% increase in customer retention can result in a 25%-95% boost in revenue.
At the same time, tracking customer retention isn’t always easy. You need to gather a lot of data and do some serious number crunching to get a better feel for what customer retention looks like within your business. Fortunately, with a quick reference guide to the most important retention metrics and formulas, you can better calculate and track this important data. From there, you can make more confident and informed decisions for your business.
1. Customer Acquisition Cost (CAC)
CAC = (cost of sales + cost of marketing) ÷ new customers acquired)
Calculating CAC will tell you exactly how much you’re spending for each new customer you acquire during a specific timeframe. This metric matters because when customer acquisition costs are high, this could be an indication that your marketing strategy could use some refinement. Meanwhile, lower CACs mean that you’re effectively bringing in new customers and that your profitability is likely quite high.
Even for businesses focusing on customer retention, CAC is a good metric to start with because it can provide valuable marketing insights.
2. Customer Lifetime Value (CLTV)
CLTV = (average purchase value x average number of purchases) x average customer lifespan
The purpose of calculating CLTV is to determine how much revenue a single customer has brought into your company. This metric is important because it can tell you whether you’re bringing in low-value customers or high-value customers—and whether you’re retaining your most valuable customers or losing them.
Generally, you should aim for CLTV to remain consistent or to slightly increase over time. If CLTV is shrinking, it may be time to refine your customer retention strategy.
3. Customer Churn Rate
Customer Churn Rate = (number of customers at start of year – number of customers at end of year) ÷ number of customers at start of year
Simply put, this metric will help you determine the rate at which customers stop buying from your company. Obviously, some churn is to be expected. Customers’ needs change—and a client that used and loved your service may simply not have a use for it any longer. However, high annual churn rates (such as those greater than 5-7%) may be the sign of an underlying problem where customers are leaving because they’re unhappy with a product or service.
Keep in mind that, although the formula shows how to calculate annual churn rate, you can adjust it as needed to calculate churn semi-annually, quarterly, or for any time period you desire.
4. Net Promoter Score® (NPS)
NPS = % of promoters – % of detractors
Introduced to the marketing world in 2003 by Fred Reichheld of Bain & Company, NPS can be a great measure of overall customer satisfaction and loyalty. Specifically, this metric is calculated by subtracting the number of customers who are not likely to recommend your business to another person from the number of customers who are likely to recommend your business.
These parts of the equation can be filled in by simply sending out a survey to existing customers, asking them to rank their likelihood of recommending your company on a scale of 1-10. 9 and 10 scores can be considered “promoters,” but responses 6 and below are considered “detractors.”
NPS matters because a mediocre or low score could indicate the need to improve your product or service, whereas a high score can give you some reassurance that you’re doing things right.
5. Repeat Purchase Ratio (RPR)
RPR = number of returning customers ÷ number of total customers
RPR allows you to determine the exact percentage of customers who have purchased from your company again, which can also indicate strong customer loyalty. Knowing your company’s RPR is important because it can be used as a tool to refine your marketing strategy. Specifically, you can use RPR to figure out which demographics or buyer segments are more likely to buy from you again and which ones you seem to be losing. From there, you can more accurately adjust your marketing strategy to target different types of consumers.
6. Product Return Rate (PRR)
PRR = number of units sold and later returned ÷ total number of units sold
This metric is most useful if your company primarily sells physical products. Specifically, PRR can tell you the rate at which your products are returned by customers. This matters because high rates of return are likely to indicate an underlying problem with your product that could result in lost customers. A high return rate on a particular product can tell your development team that they need to refine or otherwise improve upon the product to boost customer satisfaction and encourage repeat business.
7. Time Between Purchases
Time Between Purchases = sum of individual purchase rates ÷ number of repeat customers
This metric can tell you how much time, on average, it takes for a repeat customer to make a purchase from your business again. On its own, this metric doesn’t actually mean a whole lot—but when analyzed in conjunction with other important retention metrics (such as NPS and RPR), you can get a better feel for how useful your products/services are to your target audience.
8. Loyal Customer Rate
Loyal Customer Rate = number of repeat customers ÷ total customers
This formula is extremely useful for quickly determining the rate at which customers are likely to make a repeat purchase during any given period of time. You can use this formula to calculate your loyal customer rate for an entire year, a quarter, or even a month. From there, you can get a better feel for whether your loyal customer base is growing, shrinking, or staying stagnant. This information can then inform your marketing strategy moving forward.
The Final Word on Retention Metrics and Formulas
Building a solid customer retention strategy begins with figuring out where your business stands when it comes to repeat customers. With a better handle on how to calculate retention metrics and how to interpret them, you and your marketing team can develop a plan for success.
Still feeling a bit overwhelmed? A professional marketing team can take the time, stress, and hassle out of tracking and analyzing these key metrics for retention. Reach out to the Hawke Media team today to learn more about our marketing strategy and other services. We’d be happy to schedule a free consultation, where we can further discuss your marketing goals and explore what we can do for your business.