Improving Retention Rates and Profitability in Ecommerce

Ecommerce Retention Rate is often overlooked, but it’s an important metric. Since customer acquisition is the most expensive thing an online business has to do, profits depend on how you can profit from each customer after you acquire them.

So you need to do everything in your power to convince your clients to keep coming back after their first purchase. 

If your Retention Rate is low you’re putting extra pressure on acquisition channels to bring ever more customers through the door. Putting pressure on acquisition usually ends up driving up customer acquisition costs and profitability down.

Ecommerce Retention Rate case studies

In ecommerce, your goal should be to maximize Average Order Value (how much each client spends in one purchase) and promote repeat purchases (or Ecommerce Retention Rate).

We’ve separated a few famous case studies of companies that have successfully applied retention strategies that give them significant competitive advantages:

Personalized emails – Amazon

Typical email newsletters from ecommerce sites have a very low click-through rate and, as a consequence, a very low impact in customer retention.

However, according to a study done by Überflip, online retailers using automated and personalized emails have been enjoying a very positive impact in their sales and retention:

Retention Rate - Personalized Email Newsletters

Amazon is one of the best cases of Ecommerce Retention Rates and have been following this strategy for a long time. As Brad Stone, a author of “The Everything Store: Jeff Bezos and the Age of Amazon” argues in his book, Jeff Bezos (Amazon’s CEO) is:

“(…) prepared to cut prices to the bone and add all those freebies to cultivate customer loyalty and drive sales growth. Then he reinvests it all in more low prices and further expansion, driving additional customer loyalty.”

Most of the emails you’ll get from Amazon are part of a selection of products based on your activity on their site, aimed at keeping you coming back. This is an example of an email I received from Amazon in 2013, while I was looking to buy a digital SLR camera:

Ecommerce Retention Rate - Amazon Newsletter

Personalized Emails

Amazon has a massive inventory and a product recommendation engine. This allows them to create automated email that cross and upsell to their customers. The recommendations are based on their previous searches and purchases.

By doing that, Amazon maximizes their Customer Lifetime Value and, on top of that, sells their store in addition to the products in it. This is an important distinction.

When Amazon “sells their store,” it means that they’re giving a great reason for people to return to Amazon. In doing so, they are building a brand that will get users coming back for all of their other needs (and not only when they run out of whatever they first bought).

This approach short-circuits the acquisition process. Instead of having to re-acquire their customers every time they need a new product, Amazon becomes the go-to brand in their minds for whenever they need to buy something, effortlessly.

Lead by Amazon, many small and medium online retailers have also been following the same path, with extremely good results. Here are some key data, taken from BrainSINS clients, on the impact of automated newsletters in their KPIs:

  • Automatically recommended products had 73% more clicks than hand-selected products.
  • Product recommendations in newsletters generated 46% more revenue than handpicked products.
  • The time to create a newsletter dropped by 30 to 90%.

The results are clear: less effort and improved sales and user engagement. So consider nurturing the leads generated by your acquisition efforts with a personalized email strategy.

Read more about the different ways Email Marketing can help improve Ecommerce Retention Rate. »

Customer service – Zappos

As Zappos has demonstrated, customer experience is not just about making customers happy. A great customer experience creates and sustains customer loyalty, which in turn contributes to a higher Customer Lifetime Value.

At Zappos, 70% of sales are generated from repeat customers, leading to an extremely high Ecommerce Retention Rate. When so many customers keep coming back to shop with you, their lifetime value is so high that the cost to acquire them barely matters.

The secret behind such an astonishingly high Ecommerce Retention Rate is their amazing customer service. Zappos has achieved this by focusing the company’s entire culture on delighting the customers at every interaction. This culture can be seen in their list of company values, where the very first one is focused on exactly that:

  1. Deliver wow through service.
  2. Embrace and drive change.
  3. Create fun and a little weirdness.
  4. Be adventurous, creative, and open-minded.
  5. Pursue growth and learning.
  6. Build open and honest relationships with communication.
  7. Build a positive team and family spirit.
  8. Do more with less.
  9. Be passionate and determined.
  10. Be humble.

It has been reported that a customer service representative from Zappos physically went to a rival shoe store to get a specific pair of shoes for a woman staying at a hotel in Las Vegas when Zappos ran out of stock. They even have launched a “School of Wow,” where they teach other businesses how to follow their customer service culture.

Consider wowing your customer at their first purchase. Do it by exponentially improving customer service and UX. Try adding more personality to your social/email communication with them. If you’re successful, your customers will be so loyal that you may even be able to charge more for your products, which in turn will have an even bigger impact on LTV.

Recommendation engine – Netflix

In the case of consumer subscription products, price is a big concern. So companies such as Spotify, Dollar Shave Club and Netflix need to charge low monthly prices to be able to acquire users. For this strategy to be profitable, Ecommerce Retention Rate must be incredibly high.

Netflix’s monthly subscription is on average $8.14 per user. They have an estimated Customer Acquisition Cost of around $18 and a profit margin of around 33% ($2.64 per user per month). This means that if they have an Ecommerce Retention Rate anywhere lower than 7 months, they are losing money. Not to mention the fact that to sustain their business, they need to acquire tens of millions active users.

So the only way to keep a viable business is to make sure their Ecommerce Retention Rate is extremely high.

Netflix has done that by acquiring and producing amazing content. But because “amazing content” varies greatly from person to person, Netflix had to build a massive content library (estimated at 13,000 titles).

They then made sure that each piece of content reaches the right audience by building a sophisticated recommendation engine that keeps people watching more and more.

The end result is an average retention rate of 25 months per user, which in turn generates an average Customer Lifetime Value of approximately $66. That number, compared to the average $18 Customer Acquisition Cost, is what makes Netflix such a profitable business.

Subscription model

Consider adding a subscription option for your customers (read more about it in this article). But, whether you’re a subscription business or not, consider recommending the right product for your user to consume after their first purchase. Read more about the benefits of implementing a Personalization and Recommendation engine in this article.

Creating a habit –  Facebook

Many people fail to realize that Facebook’s secret for its unprecedented growth isn’t virality, but retention rate. According to Alex Schultz, Facebook’s first VP of Growth, Zuckerberg determined from the beginning that the main metric Facebook should be optimizing for is DAU (Daily Active Users).

Zuckerberg knew that, as an ad-based business, Facebook needed to generate a huge amount of impressions from targeted users to be successful. According to Nir Eyal, author of the book Hooked, Facebook did that by becoming what is now being called a “habit forming product”.

That means Facebook is engineered to become a daily habit in the lives of their users. Exactly like brushing your teeth or putting your clothes on, Facebook is an integral part of the your routine without you even realizing it.

Nir Eyal developed a framework that explains how Facebook does that. It’s called the Hook framework, and it involves 4 steps:

Ecomemrce Retention Rate - The Hook Canvas

Engineering habits

The idea is to create an association between your product and “internal triggers” in users’ minds. When that happens, your users will not need any external prompting to come to your site. Without having to rely on paid marketing, habit-forming products get users to use them by attaching their brand to the users’ daily routines and emotions.

In the case of Facebook, when users subconsciously think, “I’m bored,” Facebook’s site or app comes immediately to mind and the action of checking their news feed is done almost automatically.

As a result, Facebook has more than 900 million daily active users (65%), who spend an average of 700 minutes per month on the social platform. Each day 35 million people update their status. This not only gives Facebook’s clients, the advertisers, an amazing pool of consumers to reach out to, but gives them rich demographics and behavioral information to target them in the best way possible.

If you have an ad based business or not, consider using Nir Eyal’s framework to turn your product into a daily habit in the lives of your target market. As an engineer of habits, you’ll be able to generate retention rates that will generate a great Customer Lifetime Value. 

This strategy can also work for Ecommerce businesses too. For me, Amazon immediately comes to mind when I’m in the mood to buy a new book. Accessing Booking.com is my habit when I’m stressed and need a vacation.

How to Measure Ecommerce Retention Rate

Calculating retention is a little complicated. First you need to decide how often do you want your customers to come back to your store. You can change month for week, month, 3 months, 6 months or a year, if that suits your business better.

For example, if you run a travel website, yearly retention is probably more appropriate. For everyday items monthly retention is probably a better fit.

But, thinking of a monthly time period, you need to know the following data to calculate your retention rate:

  • Number of customers at end of the month = NC
  • Number of new customers acquired in that month = NN
  • Number of customers at the beginning of the month = NB

 

The formula is: Retention Rate = ((NC-NN)/NB) X 100.

It looks complicated but it’s quite simple. For example, if last month you sold to 100 people, and 80 out of those 100 customers were new, your NC number is 20. The retention rate of your store would be 100-80/100 =  0.2. This means you have a 20% Ecommerce Retention Rate.

Is 20% a good Retention Rate? That depends on your type of business, products and target market. At Compass, we calculate your Ecommerce Retention Rate automatically and benchmark it against businesses like yours. We then give a report showing if your numbers are bad or good. If bad, we even give you advice on how to fix it.

You can sign up to get your Ecommerce Retention Rate Report clicking on the button below. It’s free and it takes 2 minutes.