March 17, 2009

Mega-Metrics: Annual Repurchase Rate

In my opinion, the most important mega-metric is the Repurchase Rate.

Repurchase Rate is the single most important indicator of customer loyalty. We calculate repurchase rate by dividing our database into two time periods. We identify all customers who purchased during, say, 2007. Then, we calculate the percentage of 2007 customers who purchased again during 2008.

In Multichannel Forensics, we divide the annual repurchase rate into three categories.
  • Retention Mode: Annual Repurchase Rate > 60%.
  • Hybrid Mode: Annual Repurchase Rate between 40% and 60%.
  • Acquisition Mode: Annual Repurchase Rate less than 40%.
When I worked at Nordstrom, we were largely in Retention Mode ... our store customers loved us. We were able to retain more than 70% of our store customers, year-over-year.

When I worked at Eddie Bauer, we were largely in Hybrid Mode ... we retained between 40% and 60% of our customers, year-over-year. Hybrid Mode is the most enjoyable business model to work in, because you have so many levers to improve business success. At Nordstrom, you weren't going to improve the retention rate from 76% to 91%, it simply wasn't mathematically possible. But in Hybrid Mode, you can make a difference!

When I worked at Eddie Bauer, we had a Home division. That division was in Acquisition Mode, with an annual repurchase rate under 40%. The only way this business was going to grow was by acquiring new customers at a faster and more profitable rate than last year, period. You simply cannot get a customer who just purchased a couch to buy another couch! During my time at Eddie Bauer, we were only able to get the Home division close to break-even once --- and during that year, we did that by renting the entire Pottery Barn list, over and over and over. We mailed more Pottery Barn names than we mailed Eddie Bauer names ... at least that's the way I remember it!

Acquisition Mode is the least understood by direct marketers, and it is a scenario that is about to become a really big deal to online marketers.

You see, so many of the folks working in the online channel manage an "Acquisition Mode" business. As mentioned earlier, these channels/businesses succeed when new customers are increased at a profitable rate, year-over-year. Thanks to Google and offline cannibalization, this was easy to do, year-after-year. A generation of online marketers grew their business without the hand-to-hand combat other channel leaders had to deal with. In 2009, the easy flow of new customers, courtesy of Google or offline channels, is ending.

This is where things get really interesting, folks. If your online channel is in Acquisition Mode, and an easy flow of new customers from other channels or Google is drying up, you have challenges in front of you. So be sure to measure your annual retention rate right now --- it is so easy to do!! Understand the dynamics of your business, and begin to plan for the consequences of your business model.

9 comments:

  1. Interesting post that raises a lot of questions for me.

    1. Does your retention rate for Nordstrom combine online and offline sales?

    2. The chart you posted shows a falling retention rate. Is this normal?

    3. What can an online business in acquisition mode do to materially increase retention rates?

    4. Why do you claim that the flow of new customers from Google is drying up?

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  2. 1 = Both.

    2 = The rate falls for some companies, rises for others. It is common for businesses to experience declines as the customer file grows. It is easy for Zappos to retain the first 100,000 customers ... it is much harder when the customer file is at 2,000,000 customers, as each marginal customer is likely to be less and less loyal.

    3 = The key word is "materially". For instance, an online business might have a 37% annual retention rate, and might decide to go from one e-mail campaign per week to two e-mail campaigns per week. A tactic like this will likely increase the annual retention rate from 37% to maybe 39%. Or maybe the brand offers free shipping, increasing the rate from 39% to 44%. After that, it's all about merchandise, customers have to crave the merchandise and/or service, and it is very hard to move the metric thereafter.

    4 = Let me restate ... the rampant increases are drying up. Google went from 0 searches a month in 1998 to 2 billion a month in 2005 to 32 billion in 2009 ... well, that growth is drying up, and when it drys up, then the hard work starts.

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  3. Thanks for the thoughtful responses. Hillstrom's Multichannel Forensics is frequently cracked open at work, and this blog is a handy companion.

    (By the way, my gut tells me the same thing about #4. I wonder at what point online advertisers hit a saturation point and their display and banner ad campaigns lose their effectiveness.)

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  4. Kevin,

    This is not a comment about this post specifically, but I just wanted to say thank you, this mega-metrics series of blog entries is really rather good.

    Kind regards

    John.

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  5. Hi John, it seemed like a good time to organize lots of metrics I talk about from time to time, so enjoy the next week!

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  6. Kevin,

    I always learn a lot reading your blog, and agree with John, this mega-metrics serie is wonderful!!!

    I hope you don't mind I used this post to talk about annual repurchase rate in my blog!

    Thanks for everything!

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  7. All of the content on this blog is free for everybody to use!

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  8. Kevin,
    I have some questions for you. Does it apply to products that are new in the market? We have a new product www.ecostaticinc.com which we are selling online and soon will be selling on retail stores. However, the repurchase rate is very slow. People love the product and we keep adding new customers but the current ones have not bought as expected.

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  9. Yes, it certainly applies to you, too. I have many clients who sell new products to customers - if repurchase rates are around 20% after three months, they'll land somewhere around 40% after a year.

    It's fine if customers do not repurchase merchandise - go find new customers - lots of businesses thrive using this strategy.

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