Increase Customer Retention by Focusing on These Metrics
If you’ve been in retail for any amount of time, you’ve heard it said over and over that the costs to find new customers are higher than keeping the ones you already have. Specifically, it costs between five and 25 times more to acquire a new customer, while increasing customer retention rates by 5 percent can increase profits by 25 to 95 percent.
That’s why customer retention—increasing the number of repeat customers and the profitability of those existing customers—is so important. But in order to maximize these relationships and efforts, you need to know the customer retention metrics to focus on. Whether it’s churn rate or purchase frequency, that data can clue you in on how and why customers are loyal and spend money with you and not the competition.
To that end, customer retention can greatly increase by introducing one simple service—buy now, pay later (BNPL).
Why Offer Buy Now, Pay Later (BNPL)?
At one time, shoppers would walk into a store and put items on layaway—meaning they put down a deposit, made payments over time, and collected those items later once they were paid off.
BNPL is similar, except for the fact that the shopper doesn’t have to wait to take the purchases home.
That key differentiator is what is making this service so popular. In fact, a recent report by The Ascent found that over a third of U.S. consumers have used a BNPL service.
When customers know they can divide their total cost into bite-sized payments, they feel comfortable adding items to their carts—meaning they’re spending more money.
Case in point: BBQGuys.com, which offers financing solutions through Bread, has seen a 32% higher AOV from customers who’ve opted to finance their purchases.
Customer Retention Metrics to Track and Improve
Now that we know how important offering buy now, pay later can be, it’s time to look at the most important customer retention metrics, and how BNPL can improve them.
Customer Retention Rate (CRR)
As one of the most important metrics to track, customer retention rate (CRR) reflects the percentage of customers who loyally do business with you over a specific amount of time. To start, you must first establish a specific time frame, such as each month. You can then calculate it with the following formula:
(# Customers at End of Period – # Customers Acquired During Period) / # Customers at Start of Period) X 100 = Customer Retention Rate.
This is important because it not only tells you how many new customers you have, but how well you’re satisfying those customers.
By providing BNPL as a service, you’re offering repayment over a longer period of time, which helps your brand stay top of mind even after the shopper completed the purchase. Not to mention, a better payment experience means they are more likely to purchase again.
Customer Churn Rate (CCR)
Customer churn rate (CCR) is the percentage of customers that have stopped making purchases over a certain period of time. This is important to track because the lower the CCR, the higher the retention rate.
To calculate CCR, you must first establish a specific time frame, such as each month. You can then calculate CCR with the following formula:
(# of Customers at Start of Period – # of Customers at End of Period) / # of Customers at Start of Period)
This gives you the percentage of shoppers choosing not to return every month.
While it’s hard to know exactly why they might not return, one way to improve your CCR is to offer excellent customer service, as one in three customers will leave a brand after just one bad experience.
As far as BNPL goes, the service helps you lower CCR by making your products financially accessible. When shoppers can afford your merchandise, they’re less likely to jump ship.
Customer Acquisition Cost (CAC)
Do you know how much it costs to win over a new customer? That’s where customer acquisition costs (CAC) come in, which includes marketing expenses such as how much your online search ads cost, as well as overhead costs like how much you’re paying employees to acquire new customers. You can calculate CAC with the following formula:
Total Marketing and Acquisition Costs Over Set Period / # of Customers Converted Over Set Period.
BNPL improves your CAC because it’s shown to boost conversions and average order value (AOV). When you increase the number of people that turn into paying customers, you’re getting more bang out of your marketing and advertising bucks—which translates to better CAC.
Purchase Frequency (PF), Repeat Purchase Probability (RPP), and Time Between Purchases (TBP)
As the names imply, purchase frequency (PF), repeat purchase probability (RPP), and time between purchases (TBP) all focus on how often a customer makes a purchase from your company — and how likely they are to return. This is key, as it has been found that repeat customers are responsible for 41 percent of a store’s revenue. You can calculate these statistics over 365 days with the following formulas:
Purchase Frequency: # of Orders Over 365 Days / # of Unique Customers Over 365 Days
Repeat Purchase Probability: # of Customers Who Bought More Than Once Over 365 Days/ Total Number of Customers Over 365 Days
Time Between Purchases: 365 Days / Purchase Frequency
And when it comes to buy now pay later, BNPL also increases purchase frequency. Once customers know that they’re approved for financing, they’re more likely to return to the same place for the same positive checkout and payment experience.
With platforms like Bread, you can market to shoppers with personalized emails and even time your messages and campaigns when they’ve successfully paid off a purchase.
Average Order Value (AOV) and Profitability Per Order (PPO)
These customer retention metrics are important for one very obvious reason — they measure how much a customer is spending and how much you’re making on those purchases. You can calculate AOV using the following formula:
Total Revenue / Total Number of Orders
Profitability per order (PPO) calculates how much profit you’re making on each purchase, as opposed to how much money the average customer is spending per order with AOV. You need to know your average profit margin, and from there you can calculate it with the following formula:
(Average Profit Margin x Total Revenue) / Total Number of Orders
BNPL gives shoppers the confidence to purchase additional products or higher ticket items and they are also less likely to return those items, which improves your AOV and PPO.
Consider the case of Eargo, the company that’s revolutionizing the hearing aid industry. Eargo adopted Bread’s 0% APR financing solution, and the move led to a 25% increase in applicants. What’s interesting is the fact that customers who’ve opted for financing were less likely to return their purchases.
“Bread’s 0% offering just makes sense for our customer base, driving a significant portion of qualified shoppers to checkout. Not only has this increased our conversions, we’ve also seen that these customers are even less likely to make a return, further improving our margins,” said John Gareau, VP of Digital and Ecommerce at Eargo.
Customer Lifetime Value (CLV)
Customer lifetime value (CLV) is the total revenue a customer is expected to spend with a business during their lifetime. It is a key business metric because it helps you forecast and benchmark future revenues and guide your company’s growth.
Your top 20 percent of ecommerce customers are likely to be those who drive your sales and revenues. Identifying these profitable shoppers will help you decide where to focus your efforts and budget to acquire new customers.
With BNPL, you’re giving people payment flexibility through financing, which can improve the overall customer experience—encouraging repeat purchases and CLV.
Loyal Customer Rate (LCR)
Loyal customer rate (LCR) is just what it sounds like—calculating which customers are loyal to your brand. This is at the heart of any marketing program, and loyal customers not only make frequent purchases but also attract and convert new shoppers into lifelong shoppers. You can calculate your LCR for the year with the following formula:
# of Customers Who Made Four or More Purchases in 365 Days / # of Unique Customers Over 365 Days
One of the most overlooked aspects of customer loyalty lies in the ease and convenience of the shopping experience. Making it easy for customers to browse, shop, and pay for their purchases (using services like BNPL) drives customer satisfaction and loyalty.
The Bottom Line
It’s safe to say that retaining the customers you have, all while acquiring additional shoppers as you go, is the key to retail success. By studying the data and making the necessary adjustments to the resulting metrics, you have a clear picture of where your company is and where it needs to go. And by offering services like BNPL and flexible financing options, you’re opening the door to purchases that might not have been made in the first place. All of this adds up to greater loyalty, less churn, and increased profits.