Retail Merchandising can often be similar to the Food and Beverage Industry in many aspects, but it is definitely unique in terms of how we most items in the store. Before we get started, lets take a look at three concepts that everyone should understand.
Retention Rate
Churn Rate
Lifetime Customer Value
Retention Rates
Retention rate is the percentage of customers who continue to use your service or product over a predetermined period. It’s an important metric, especially for subscription-based businesses, as it shows the extent of your company’s revenue regardless of whether you gain any new clients.
Typically, it costs more money to get a new customer than it is to keep a current customer.
Just think about how much it costs to email a previous customer than to create an ad to reach a new customer.
From what I have seen in the past, the typical customer will stay with a company 1-3 years. A lot of this has to do with the change in preferences, changes to income, and changes in age.
Churn Rate (see Churn Rates by Industry and Breakdown)
Customer churn, or customer turnover, refers to the number of customers you're losing in a predetermined time period. Churn rate is a scary metric. It's also an incredibly important one.
If you don't know how many customers are leaving the business, then you won't know how it's impacting your revenue — and you won't be able to create improvement plans to reduce turnover rate.
While it is impossible to give an overall churn rate for businesses, a theoretically average churn rate is around 5%, while less than 3% is considered good
Churn rates vary by industry
Not all churn is bad churn. There are simply some customers we are better off without. Customers that attempt to hold businesses hostages for their reviews, customers who constantly make complaints that are unwarranted or are excessive, and those who are looking to game the system to take advantage of businesses.
Another great read on churn rate. Skip to the bottom to see the churn rate of companies like Netflix, Disney, AppleTV, etc (Churn Rate of Companies)
Thoughts on Churn Rate and Subscriptions (Read)
Higher Average Revenue Per User (ARPU) correlates to less churn. People who pay more are more likely to stick around than those who pay less. Think about businesses that sell high end products versus low budget items; people go back to high ends for the quality, name, or hype, but will go to any location or find a substitute from a low budget item.
Longer contracts reduce churn. Simply put, people are creatures of habit and stick to what they know. Additionally, with the flood of subscriptions that people have, it is easy to forget and be automatically signed up for another year.
Older companies experience less churn. Companies that are 10+ years old see a churn rate of 2-4% versus younger companies that range from 4-24%. Older companies seem to understand customer needs and how to position their products more consistently.
Lifetime Value of Customers
Customer lifetime value (CLV or CLTV) is a metric that indicates the total revenue a business can reasonably expect from a single customer account throughout the business relationship.
The metric considers a customer's revenue value and compares that number to the company's predicted customer lifespan.
Similar to raising the average check price of a customer dining at your restaurant by getting them to order appetizers, drinks, sides, or desserts, figuring out how to keep a customer for a longer period of time decreases the cost per acquisition of a new client.
Analytics of customer spending habits allows you to see what they are buying and how frequently they are purchasing items from you.
With various analytic tools and databases, companies can target customers based on their habits and interests (similar to ad campaigns targeting you on social media).