Jim answers questions from fellow Drillers
Hi again folks, Jim Novo here.
Today’s question is from a fellow Driller who understands customer retention really well but just can’t decide on the best metrics to measure retention in the supplements business. Should he use Customer Retention Rate? Customer Churn Rate? Hurdle Rate? Ahh, to make the right choice here the gory details will need to be visited – so let’s get to the Drillin’ !
Q: Hi Jim,
I am here choosing all the metrics I will use in the coming days to evaluate the health of my business and learn a little bit more about it. I will begin analyzing some basic metrics and then (just after being completely comfortable with the “basic metrics”) I will do some more sophisticated analyses like LTV and RF Grids. (Jim’s Note: RF Grids are advanced customer LifeCycle tracking tools described in my book).
Now I am trying to decide which is the best metric to measure my site’s ability to retain customers. There are three metrics that come to my mind. Customer Retention Rate, Customer Churn Rate and Hurdle Rate.
Customer Retention Rate would be the easiest to measure but the least precise. I could be doing a great job retaining customers but if I am attracting a lot of new customers this metric could give the wrong impression that we are doing more poorly than the last time we measured.
Customer Churn Rate is very easy to calculate when you have a “subscription model business.” If the customer cancels the contract it means a defection. But in my case there is no contract. We sell products. If the customer does not purchase in 30 days it doesn’t mean necessarily that he defected.
The Hurdle Rate based on Recency (45 days for purchase seems to be a good number for the products we sell- natural supplements, based in Brazil) seems to be the best metric I can choose to measure our ability to retain customers over time.
What metric do you think I should be using to measure our ability to retain customers?
A: I think you are one of the smartest IT guys on the subject of database marketing, that does not do database marketing for a living, I have ever met (?) ! Where did you learn this stuff? Did you read a book or something? ;)
Your analysis is absolutely correct on every point, and the approach is on target. If you start simple and work towards more complexity, you will learn more about your customers. And assuming most of your products are roughly a 30 day supply, 45 days is an excellent cut-off for a Hurdle Rate analysis. Simply track the percentage of customers who have made a purchase in the past 45 days over time, perhaps monthly to start. If the percentage is rising, you are getting better at retaining customers. If it is falling, you should be looking for reasons why this is so.
Once you establish this metric, the second “cut” I would take is by product. What percentage of customers have made a purchase in the past 45 days – by product category or product line? This will be very revealing to you, and will suggest which products you should put the most marketing effort into and which products perhaps you stock but don’t “market.” For example, all other considerations equal, the product you should feature on the home page is probably the one which has the highest 45 day repeat purchase percentage.
By including this tracking by product, when your overall percentage of 45 day buyers drops or rises, you can start to discover why. For example, if you sell a lot of products in one month that have a low 45 day repeat percentage, in the following month, you can expect your overall 45 day repurchase rate to drop, which means sales will drop.
With a system like this, you are now into forecasting sales, and can do the appropriate promotions to make sure you hit sales targets. For example, you promote products with high 45 day repeat in the following month to counteract a lot of sales in products with low 45 day repeat prior month.
You may find that when setting up to track the overall Hurdle Rate, it’s easy or convenient to do this same tracking by product category or line, depending on how your systems are organized. If so, it might be worth the extra effort, because it can be frustrating to see the 45 day percent buyers drop, but to not have any idea why.
Q: Setting Hurdle Rates for each product and product category is an excellent idea. If we notice that the “muscle mass” category has a higher Hurdle Rate than the “fat loss” category we would advertise the muscle mass category more that “fat loss”?
A: Absolutely. Now you have both the response rate to ads and the longer term Hurdle metric to help you decide where you are really making the most money. Make sure you keep track of the source of the customer on first purchase, because the next level down is looking at Hurdle Rate by product category by ad source. You will find different ads generate different Hurdle rates for the same products.
Q: Before this idea my partners and I were always “arguing” which products should be advertised on the index page and the main category pages. Now we will have a scientific approach to choose the products!
A: Yes, no question. When you start to operate the business using these kinds of measurements you can spend more time on running the business to make the most money and less time arguing about “feelings” people have about products or design changes.
Q: This metric is so important that I will ask my programmers to create an automatic Hurdle Rate for each product and category so I will not have to analyze the database every time I need this information (I will need this information very frequently). For most of the other information I will analyze them using a spreadsheet (like it’s explained in your book). I will copy the SQL tables and paste them into the spreadsheet. I did some tests and it worked just fine.
A: Yes, these are longer term ideas that don’t need to be visited as often. And when you execute promotions based on them, you will see your other, more short-term Hurdle metrics move, allowing you to measure the success of the promotion by category, for example. You would see the 45 day Hurdle percentages jump, say from 30% to 40%, but there would be a wide variation among categories. This in itself tells you which categories are most profitable to promote to.
Q: Thanks a lot for your great advice…
A: No problem – you’re a customer!
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