Retention is the ability of the company to retain its customers for a specific period of time.
Why should one worry about retention?
It is just plain simple, it is always more expensive to acquire a new customer than to sell products to existing customers. And you also know that this has a direct impact on the revenues and profits of your e-commerce business.
Just to understand the profundness of the impact, we have done the following simulation. In the simulation, we are trying to understand the increase in retention on revenues and profits.
Impact on Revenues & Profits of retention – understanding using simulation
In the simulation, we are trying to understand the increase/decrease in profits with various retention rates (from 10% to 40%). The X-axis represents the retention rates of your business,Y1 (Y-Axis - Left) is sales and Y2(Y-Axis-Right) represents the profits in USD.
We can observe, with
an increase in retention from 10 percent(0.10 on X-axis) to 20 Percent (0.20 on X-Axis), there is a 5.3% jump in revenues but there is a huge jump of 13.44% in profits (when all the other parameters are kept constant- Ceteris Paribus)
This shows there is a direct & huge impact on your profits with the small increase in retention.
Impact on Brand Equity
Along with a direct impact on the top line and bottom line, it has a huge impact on brand equity. When a consumer purchases multiple times, he/she is highly engaged with the brand. Not only does that makes it difficult for a new brand to replace your brand and it also ensures predictable revenues for you from your customers.
Now, it’s time to get into action. We should be able to measure and understand the exact state of retention in your e-commerce business.
How to calculate Retention?
Retention Rate = ((E-N)/S) x 100 E = Number of customers at end of the period. N = Number of customers acquired during the period. S = Number of customers at the start of the period.
Step 1: Identify the time period you want to find the retention. For example, the quarter of Jan 1st to March 31st.
Step 2: Identify the number of customers at the end of the considered period (E). For example, Let’s consider there were 400 customers who had made at least 1 purchase with us from 1st Jan to 31st March
Step 3: Identify the number of customers at the start of the considered period (S). For example, Let’s consider there were 300 customers who were there on Jan 1st.
Step 4: Identify the number of customers acquired in that considered period (N). For example, Let’s consider there were 300 customers who had made at least 1 purchase with us from 1st Jan to 31st March and are new customers.
Now use the above-given formula, you will get the retention rate for your e-commerce business for that given period.
Retention Rate for the period Jan 1st to March 31st = ((400 - 300 )/ 300 ) * 100 = 33.33%
Now you can compare the retention rate of this period with the last similar period ( example Oct 1st to Dec 31st) or Last Year same time ( 1st Jan to 31st March ), and if there is a fall you should look into the same to take corrective measures.
Retention rate is one of the key indicators of your e-commerce business, that tells the future of your e-commerce business. If there is a continuous fall in your retention rates, it is time to regroup, think and plan your next steps, so that your e-commerce shop stays in business.
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