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.

Measuring Loyal Customer Behavior Using Multichannel Forensics

How do you define whether your customer base is 'loyal' or not? If a customer purchased eight times at Wal-Mart last year, is the customer loyal? If a customer purchased eight times at H20Plus last year, is the customer loyal?

In reality, every business, even those with a poor management team, have very loyal customers. It becomes important to understand how customers behave over time.

The majority of businesses can measure customer loyalty over the course of a year. Management categorizes all customers who purchased during, say, 2005, and measures how many customers purchased again during 2006. This metric is called the 'repurchase rate', and is a very important metric for management to understand.

There are three modes that any corporation, product, brand or channel fall in to. They are:

• Retention Mode: When sixty percent or more of last year's customers purchase again this year, your business is in Retention Mode. These businesses have loyal, repeat purchasers. Management can focus on increasing the purchase frequency of customers, as well as encouraging customers to purchase more items per order.

• Hybrid Mode: When between forty percent and sixty percent of last year's customers purchase again this year, your business is in Hybrid Mode. These businesses are among the most enjoyable for executives to manage. They have a multitude of levers to pull to increase sales. It is possible for management to increase retention rates into Retention Mode. It is possible for management to increase purchase frequency, or to encourage customers to purchase more items per order.

• Acquisition Mode: When less than forty percent of last year's customers purchase again this year, your business is in Acquisition Mode. This mode is surprisingly deceptive to executives, because it flies in the face of customer feedback. Management reads letters from loyal customers who love your product. Yet, the average customer is unlikely to purchase again next year. Management running businesses in Acquisition Mode have no choice but to continually find large sources of new customers to fuel future growth. Surprisingly, many web-based businesses that don't have the sku breadth of Amazon.com fall into Acquisition Mode. These businesses may struggle when the flow of customers transitioning from catalog businesses slow down over the next five years.
  

Your homework assignment is this: Talk to your resident programmer, and ask her to identify all customers who purchased in 2005. Of those customers, measure the percentage who purchased during 2006. Once you have that metric, identify which of the three modes your customer base falls into. We'll talk more about this tomorrow.