Measuring Retention

Establishing a Baseline

The first step to improving a process is to understand what success looks like. Identification of the key metrics that track progress towards your goals is critical to measuring your success. Customer retention will vary widely depending on several criteria specific to the business environment and customer demographics. That is why it is important to first establish a group of baseline metrics that includes the makeup of your customer base, typical behavior and usage patterns. Of course, the ability to create baselines is only as good as the data that are available. New functionality may be required to collect more data about your current and prospective customers in order to better understand them.

Several criteria you may want to track include:

Of course, not all retention metrics will be specific to your business. It is important to have general industry-wide metrics such as payment method failure rates, the percentage of failed transactions, and chargeback rates. Payment method failure statistics can be further divided by payment method, card type (for credit card failures), location, currency, and reason codes. Rates and reason codes will vary between processors, and it is helpful to know if the reason codes you are experiencing are common for your processor or if you are receiving more of a certain code than average. It is also useful to look at payment failures by geography and currency to detect regional trends, which can help shape your global strategy. If you are seeing an abnormal failure rate, there may be external factors in your site or processes that are triggering certain payment method failure response codes . Understanding the reason codes and why you are receiving them will be the first step in identifying and addressing these external factors. Overall, examining industry statistics by payment methods and comparing your most successful and most profitable methods against them is a good way to align your business with your peers across the industry.

Business Specific Metrics

As we mentioned initially, the most important metric for a digital business with a recurring revenue commerce model is Average Customer Lifetime Value (ACLV) – a product of customer duration and the average recurring charge. Your specific ACLV will be extremely dependent on your business environment. ACLV reflects not only the price being charged, but also the overall customer demographics, customer behavior and the relative value of your product to your customer. Of the two ACLV components, average recurring charge is the simplest to determine. The average recurring charge can be determined fairly easily by dividing the total transaction revenue during the period by the number of customers and the number of billing periods covered. For example, the average recurring charge for a business with monthly billing periods would be the gross revenue for a given year, divided by the product of the billing periods (12) and the number of unique purchases.

Customer duration however, requires a bit more analysis. The most straightforward method of determining duration is to take a group of customers who started in the same billing period and calculate how many remained at different historical points. To give an example, look at all customers who started in January on a monthly billing cycle and then calculate the number of those customers who still remain at the end of each subsequent month. Once you find a customer drop-off between 80%-90%, depending on other business variables discussed below, the difference between the starting point and the drop-off point will be your customer lifetime. Performing this analysis for several customer groups (cohorts), based on start dates, acquisition method and other factors, will generate an average customer lifetime. These calculations should be done for each product of billing plan that is offered. Usually, different products will have unique customer demographics and therefore a different ACLV.

The other necessary business specific metrics are around cancellations, opt-outs and refunds. The rate at which customers leave is something that will greatly affect your business, industry and customers, and these metrics are obviously of key importance to any understanding of customer retention. Luckily, these metrics are much easier to determine and track.