Retention is important for any merchant — but this key performance indicator is especially critical to the success of subscription ecommerce brands.
The percentage of users your subscription business loses each month compounds over time. Even with a monthly retention rate of 90%, you’d have to replace your entire customer base each year. The energy and resources that go into such an effort would be too much for most ecommerce companies to sustain.
It’s far smarter to use your resources to drive retention by nurturing customer relationships. Focus on providing an excellent subscriber experience to keep customers around, and you’ll strengthen your foundational monthly recurring revenue (MRR) while affording you the resources to invest further in your products, website and customer service efforts.
In short, a high retention rate feeds into itself to keep your company strong, while a low one has the opposite effect, cutting your profits and requiring you to split your focus. Make sure your ecommerce subscription company is set up for success by optimizing your subscriber retention rate. Here’s how to track and improve this metric.
There are two types of retention to calculate: subscription retention and revenue retention.
If you offer more than one subscription product or pricing plan, it’s important to calculate both. Losing only high-paying customers might make your retention rate look low while seriously hurting your MRR. On the flip side, losing a lot of low-paying customers may make your retention rate look catastrophic. Following that number might lead you to pour heavy resources into retention despite the threat to your MRR being low.
Once you have your base retention rate numbers, it’s a good idea to run the numbers for specific cohorts. The data you get from these calculations will give you valuable insight into which parts of your business model are performing the best and which need more attention.
Read on to learn how these calculations can help you understand your business better.
![Subscription retention rate = [(number of customers at the end of the month - number of new customers acquired that month) / number of customers at the beginning of the month] x 100](https://cdn.prod.website-files.com/5e574d51c5f6ac35ea8a6faf/63cab281cd21108c4ab53efe_Subscription%20retention%20rate%20formula.jpg)
Calculating your retention rate is easy: First, find the total number of active and existing customers at the end of each month (or whatever billing period you offer). This number should exclude the customers that canceled their subscription in this same period.
The most precise calculation, which we shared above, is careful to not count new customers. Doing so will make your retention rate seem much higher than it is, which is dangerous for you as a business owner — if you don’t know there’s a problem, how can you fix it?
You can double-check your work by subtracting your customer churn rate from 100%. The number you get should match your retention rate (as churn rate and retention rate are opposites). Not sure how to calculate your churn rate? Find instructions in our roundup of essential ecommerce metrics.
![Revenue retention rate = [(MRR at the end of the month - new MRR added that month) / MRR at the beginning of the month] x 100](https://cdn.prod.website-files.com/5e574d51c5f6ac35ea8a6faf/63cab2b450754b85c86b9277_Revenue%20retention%20rate%20formula.jpg)
Your revenue retention rate looks at the number of dollars you’ve retained rather than the number of customers. The calculation is almost identical to that you’d use for your subscription retention rate — the only difference is substituting MRR for the number of people.
Merchants with a low pricing spread among their subscription products are likely to see a number that’s similar to their subscriber retention rate. This group should use their revenue retention rate to provide insight into which subscribers are more likely to churn. If your revenue retention rate is higher than your subscription retention rate, you’re retaining mostly higher-paying customers. If it’s lower, you’re keeping mostly low-value customers on your list of active subscribers.
Merchants who offer subscriptions at a range of prices should use their revenue retention rather than their subscription retention to gauge the health of their business. All sellers need to know how their MRR is changing, but this group is likely to have a large gap between their subscription and revenue retention numbers. A high subscription retention rate won’t matter if your revenue retention rate is 10% lower — something that could easily be the case if you, for instance, lose a few high-paying accounts each month.
After learning your overall retention rate, it’s time to dig into the data to determine who’s happiest with your subscription and who’s most likely to churn. We recommend regularly calculating the retention rate of two cohorts.
1. Customers sorted by sign-up date: Calculating retention rates for a group of customers who signed up in the same month, over that cohort’s subscription lifetime, tracks retention at different stages in the customer lifecycle.
Buyers aren’t equally likely to cancel their subscription each month. Some companies see a surge of cancellations in the first couple of months, when new subscribers realize the product isn’t for them, and then a higher retention rate moving forward because loyal customers stay locked in. Others may see retention rates decrease after six months as excess product starts to pile up in subscribers’ homes.
Get to know these trends so you can determine what’s behind the periods of low retention and how you can fix it.
2. Customers sorted by subscription plan: Customers who have signed up for different products are likely to have differing levels of loyalty. You may find that some pricing plans only keep customers around for two or three months, barely earning back the money you spent to win those subscribers over in the first place. On the flip side, you may find a product that’s a low earner overall but has an excellent retention rate.
Use what you find to guide your marketing budget. You want to focus on subscriptions with high retention rates, so you can spend less money overall on customer acquisition and more on customer support.
Your retention rate will determine whether your business can stay viable in the months and years to come. The higher you can push your retention rate, the better your company’s future looks.
No product has an unlimited number of consumers. Churn means losing a consumer, most likely forever, and for a subscription service, premature churn can add up to months or even years of lost revenue. Keeping customers around, on the other hand, gives you more ways to save money and even increase your profits by these means:
Your best bet for improving your company’s bottom line is to keep customers around for as long as possible once you’ve won them over.
Customer retention is easy to optimize given the immense amounts of data available through most ecommerce platforms today. Start by testing the retention strategies below. Once you’ve determined what leads to the most significant improvements in retention, find new features and offerings within the same vein to try out.
Customer satisfaction is the key to retention. That seems obvious — but many merchants struggle to define what customers want, much less deliver it to them regularly. Include the following in your subscription experience to keep buyers happy, and they’ll be more likely to stick around.
The easiest way to reliably meet all your subscribers’ needs is to let them tell you what they want. Consumers expect to have control over every aspect of their subscription experience: over 80% of consumers want merchants to allow them to use their payment method of choice. These subscribers also want to be able to change options like product selection and shipment frequency. Give them access to these options and more with a customer portal that allows them to customize their monthly deliveries to their liking.
Many of today’s ecommerce subscribers signed up for their deliveries when the pandemic and supply chain issues made shopping in stores a hassle. They expect a better experience from their subscription provider — and companies that can’t deliver may rapidly lose the goodwill of their buyers. We found many consumers are canceling subscriptions due to:
These issues may be out of your control, but it’s bad form to ignore them. Make active mitigation plans to keep your customers happy. That may mean offering coupons to cushion the blow of increased prices or sourcing alternatives to popular products in case your supply gets cut off.
Shoppers love loyalty programs, mainly their associated discounts or other rewards. 33% of subscribers cited these features as their favorite benefit of a subscription program. Consider what your company can give — whether it’s points with each monthly purchase that can be redeemed for free products, flash discounts or access to exclusive add-on products that complement the theme of your subscription. Rewards make customers feel appreciated and cared for, which is a great way to convince them to stick around.
Merchants who care about keeping customers around should start by investing in software that helps them provide a good customer experience. Your ecommerce platform should make it easy to:
Once you have your system in place, your job is to listen to your customers and constantly think of new ways to meet their wants and needs.
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