6 Metrics to Measure Customer Loyalty for Ecommerce
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Aug 25, 2020
Ecommerce sellers are trying to win as many loyal customers as possible. Lovers of your shop. Brand loyalists. Repeat purchasers. Whatever you think of ‘em as, they cost less to retain and they spend more than a one-and-done shopper.
Plus, a loyal customer for you means one less customer for your competitor. But despite all this battle for customer loyalty, actually measuring loyalty can be tricky. After all, loyalty, by definition, is a feeling of support—so how do we actually measure what our customers feel about us (and see how we can improve)?
Sadly, ecommerce hasn’t evolved enough to get a feel for good vibes or bad, so we have to try and understand the allegiance customers feel toward your store through studying numbers we can count on.
There’s no one golden loyalty metric that will tell you everything you need to know. Instead, we’re laying out six metrics to measure when it comes to your store and understanding customer loyalty.
Understanding Loyalty: Ecommerce Metrics to Track
By piecing together some (or all, in a dream world) of the metrics below, you can get a feel for how devoted a shopper is to your store. With a thorough understanding of what a loyal customer looks like, you can start to hone your marketing strategies that strike all the right chords with your customers.
1. Repeat Customer Rate
Repeat customer rate, though a simple metric, can provide powerful insight into customer loyalty. It represents the number of repeat customers divided by your total customer count, and provides a snapshot perspective of customer sentiment.
For retailers in industries that experience a high purchase frequency (e.g. food, subscriptions, clothing, etc.), one particularly useful aspect of repeat rate is the ability to account for third, fourth, or fifth purchases over time. Repeat purchases, as will be shown, do not always reflect customer loyalty; however, loyalty can grow as customers continue to return.Pro Tip
One of the easiest ways to improve repeat rate in an ecommerce setting is by implementing a few simple strategies that entice people back to your store. For example, you could offer incentives for first-time customers, like free or discounted shipping on their next purchase. You could also invite them to join your email list to receive exclusive offers and promotions.
2. Customer Retention Rate
While repeat rate measures any time a customer makes multiple purchases, it may not tell the full story of customer intent. A customer could place an online order for a product, remember she forgot to add something to her cart, and place a second order immediately after the first. Does this mean you have a loyal customer on your hands? Possibly, but not definitively.
Retention rate is a year-over-year metric that solves this problem by placing a specific window of time between customer purchases, the length of which can vary depending on the industry. Calculating customer retention rate is fairly straightforward:
- Identify the big window: This is the general scope of time you’re measuring. Depending on what you sell, this can vary in length. For example, everyday goods like groceries and household supplies may require a more narrow window, since these are purchased more frequently than say luxury goods (like clothing, cars, etc.) that are purchased less frequently.
- Identify the small window: The small window, as you probably guessed, represents a shorter period of time than the big window. For example, if your big window covers any purchase made within the last 12 months, then it follows that your small window would cover a tighter span of time, e.g., the last 3 or 4 months.
- Identify the number of customers who made purchases during both windows.
- Divide that number by the number of all customers who only made purchases during the big window.
For example, if 1,200 customers make a purchase during the previous 12 months, and 400 of those customers made an additional purchase during the previous six months, the customer retention rate for that period would be approximately 33%.Pro Tip
One effective way to improve retention rate is by delivering a personalized experience to your online customers. Personalized recommendations cut through the noise and help customers more easily find what’s relevant to them. Think of it like a local sandwich shop owner remembering the exact orders of his favorite customers: customers get exactly what they want, they get it fast, and they leave feeling appreciated and acknowledged.
3. Ecommerce Churn Rate
If retention rate represents the customers who stick around over time, churn rate is the opposite. In ecommerce, churn rate is the amount of people who don’t return to your site. This can be an especially useful metric to look at if your customer LTV (covered below), is lower than expected. Calculating ecommerce churn rate follows similar steps to retention rate:
- Identify your big window of customer visits to your website.
- Separate the number of unique customers from the number of customers who visited the site multiple times.
- Divide the number of unique visitors against total visits, and express as a percentage.
Let’s say your ecommerce site has received 900 total visits in the past six months. Of those 900 visits, 621 were unique, non-repeat visitors. Dividing the unique visitors over total visits gives you a churn rate of 69%. Obviously, the lower the churn rate, the better because it implies that a greater percentage of your online visitors are doing so for a second, third, or fourth time.Pro Tip
Design can play a major role in the difference between a repeat customer, and a one-hit wonder. While customers loyal to your brand may care less about the design and usability of your website (they trust in the quality of your product that much), first-timers are much more skeptical. Remember elements like site speed, simple navigation, and clean purchase path, all contribute to customer trust and eventual customer loyalty.
4. Customer Lifetime Value
Customer lifetime value (LTV) represents the difference between the total revenue that customer generates for your business minus the costs associated with acquiring that customer.
While the actual calculations involved in customer LTV can be much more complex than that, LTV ultimately boils down to one question: is what your most loyal customers spending on you worth more than what you’re spending to keep those customers loyal?
As you can imagine, customer LTV informs a lot of business decisions, from marketing efforts and spend to product development, to customer-facing interactions throughout the purchasing process.
It can lead businesses to double down on providing an excellent start-to-finish experience for their most loyal customers, or dedicate fewer resources on building up customer segments that have historically proven less profitable.
To take calculating LTV to the next level, you’ll need a few additional figures:
- Average purchase value: or, the total revenue over a specified period divided by the number of purchases made during the same. For example, if revenue for the past year is $15,000 with 300 purchases, the average purchase value is $50.
- Average purchase frequency rate: divide the number of purchases (300) by the number of unique customers, say 180. Frequency rate would be 1.67%.
- Customer value: multiply the frequency rate (1.67) by the average purchase value (50). For this example, customer value is $83.50.
- Average customer lifespan: the average amount of time between your customers’ first and last purchases, measured in years. Let’s set customer lifespan at 5 years.
Finally, we calculate the lifetime value by multiplying the average customer lifespan (5 years) by the customer value ($83.50), or $417.50. In other words, if you’re spending more than $417.50 to acquire and keep a customer, you’re spending too much, and are actually losing money.Pro Tip
Customer LTV is made of several moving pieces. If you find yourself feeling overwhelmed by it all, answer this question: How can I create a better experience for my existing customers? You’d be amazed at what kind of creative solutions come to mind when you frame it this way. Think personalization, friendly emails, and (you guessed it) a better post-purchase experience.
5. Net Promoter Score
One of the best hallmarks of a loyal customer is how willing he or she is to recommend your product or service to someone else. This is exactly what the net promoter score (NPS) attempts to measure. Per Survey Monkey, the operative question that makes the NPS tick is, “on a scale of 0 to 10, how likely is it that you would recommend our organization to a friend or colleague?”
The next step is to categorize all responses into three groups:
- Detractors (0–6)
- Passives (7–8)
- Promoters (9–10)
Say you send above survey question to each of your customers and you receive 200 responses that break down as follows:
- Detractors: 40 (20%)
- Passives: 70 (35%)
- Promoters: 90 (45%)
Next, subtract the percentage of detractors (20) from the percentage of promoters (45); this will give you an NPS of 20. You might be wondering whether a score of 20 is a good thing or a bad thing, but it’s neither: NPS is relative to your company’s previous scores. So if your most recent NPS was a 20, but your NPS from the previous year is -2 (yes, you can have a negative NPS), then 20 is amazing!Pro Tip
In every promoter you have a potential brand ambassador. Empower this group by making it easier for them to promote your brand. Initiatives like referral programs and social media challenges can all incentivize this powerful minority to spread the love.
6. Loyalty Program Metrics
Loyalty programs can be an effective way to reward your best customers for their business; but every loyalty program is only as strong as the number of people actually using it. Otherwise, it’s a money pit. If your loyalty or rewards program isn’t panning out the way you hoped, look at the following metrics to identify the problem:
- Participation rate: represents the number of customers enrolled in a customer loyalty program against the total number of customers.
- Redemption rate: the number of redeemed rewards divided by the total number of issued rewards. This measures the ultimate success of the rewards program.
- Active engagement rate: specifically, the total customers actively participating in the loyalty program against all customers.
Customer feedback is supremely important to the success of any loyalty program. How can you expect to foster loyalty in your customers if your loyalty program isn’t giving them what they want? Maybe you can’t give customers everything they want on their loyalty program wishlist; but without a compelling reason to join, they’ll likely remain in the “Passives” category above.
Tune into Your Customers’ Loyalty
Pledge allegiance to your brand? Nah, you don’t need folks to stand up and recite their love for you every day. All you have to do, as a seller of fine goods online, is take notice. Your customers are telling you exactly how loyal they are and what drives them back to the checkout again and again—you just have to know where to pay attention.
The great thing about customer loyalty, though, is we have so many ways to dissect and analyze it. As you test out each of these loyalty metrics, don’t forget the very human element, the emotional and non-rational reasons that motivate people in one direction or another. Keep an open mind. Be willing to update assumptions about customer behavior as new data comes in, and see customer loyalty grow stronger every day.