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Repurchase Rate is the eCommerce KPI that Gets Looked Over the Most

One of the few basic marketing metrics that eCommerce startups should pay special attention to is the repurchase rate(s) on the acquisition cohorts. I find that most eCommerce entrepreneurs don't report this KPI very often.  The brilliant article Why Misunderstanding Startup Metrics Can Cost You Your Business by Mark Suster, in which he explains the importance of a few basic marketing metrics (CAC, LTV, and Payback period), made me want to write about it.

What makes retention so important?

First, let's talk about why it's important to keep employees, especially in the early stages of a company's growth.

1) It's the best single metric to measure product/market fit

In his talk at Sam Altman's How to Start a Startup class at Stanford University, Alex Schultz, VP of Growth at Facebook, says:   
“Retention comes from having a great idea and a great product to back up that idea, and great product market fit. The way we look at, whether a product has great retention or not, is whether or not the users who install it, actually stay on it long-term, when you normalise on a cohort basis. […]Before you begin any growth tactics, you first need to get a consistent amount of users consistently using your product. If you don’t have that, you don’t have product/market fit and you should first focus on making a product people want. [..]The number one problem I’ve seen for startups I’ve advised has been that they don’t actually have product/market fit when they think they do.” 
  Or, to quote Union Square Ventures' Fred Wilson in his article "Growth vs. Retention,"   
You might think you have product market fit and so you scale up your hiring, your marketing, your sales, and your capital raising and spending. But if you can’t retain a healthy percentage of your users past ninety days, you don’t have product market fit yet and all the investment you make in your business is just money down the drain.  

2) It lets you figure out how to make money and how much money you'll need

Assuming that some of your users came from paid channels, knowing your retention rates will help you figure out how long it will take to get your money back. The payback period is how long it takes for your Customer Acquisition Cost to be paid back (CAC).  I'm talking about the paid CAC, not the blended CAC, here. The first one only looks at customers acquired through paid channels, while the second one also looks at users who found the site on their own. Most of the time, the paid CAC is a better metric to look at because it can tell you if you can scale up your user acquisition efforts profitably or, more generally, at what cost.    Payback period = CAC / ((annual revenue per customer) * (Gross margin in %))    with:  
  • CAC = (full marketing spend) / (# of new customers acquired through paid channels) 
  • Annual revenue per customer = average cumulative revenue brought by customers acquired through paid channels, in the first 12 months after their first order 
  • Gross margin in % = profit contribution per customer. For eCommerce, it’s the profit after COGS and fulfillment costs and before marketing costs. In Rocket Internet jargon, it’s equivalent to the PC 2 (%) 
  If your CAC is $100, your annual sales are $500, and your gross margin is 40%, then your Payback Period is 100/(500 x 40%) = 0.5 years = 6 months.  If your basket size and gross margin don't change a lot, which is a safe assumption for most online retailers, retention is the most important way to increase your annual revenue per customer. You won't be able to improve your repurchase rate if you don't know what it looks like.  In the end, the longer your payback period, the more money you will need to get new customers and the riskier your path to making money will be as a whole.

Determining the repurchase rate

In the simplest terms:  The repurchase rate is the percentage of people in a group who have placed another order within a certain amount of time, usually 30/60/90/180/360 days after their first order.  The number of customers who place their first order in a given month is a cohort (as cohorts are typically calculated on a monthly basis).  For example, if 20 of the 100 customers who made their first purchase in March bought again later in March or in April, as long as it was within 30 days of their first purchase, the 30 days repurchase rate for the March cohort would be 20% (20/100).  The repurchase rate will be higher the longer the time period that is taken into account.  360 days RR > 180 days RR > 90 days RR > 60 days RR > 30 days RR.  Which RR intervals are "right" depends on what kind of vertical you are in. These are the most common, especially for online shopping for clothes. Keep in mind that the longer the interval, the longer you will have to wait until you have some data to play with.  You can figure out the repurchase rate in two different ways, depending on whether you only count the first time a customer reorders or all of them. We can say that RR1 is the first and RR2 is the second.  For example, if out of the 20 customers already considered, 10 placed two orders and 5 placed three orders within 30 days of their first order, the 30 days repurchase rate would be: 
  • 20% for RR1 ((20*1)/100) 
  • 40% for RR2 ((10*2+5*3+5*1) / 100) 
Both metrics are important, but RR1 is a faster and easier way to figure out how sticky your service is, while RR2 is used to figure out the LTV of your customers. I'll talk about the first one in the next few paragraphs and in the step-by-step guide to figuring it out.

How about the number of new orders vs. the number of repeat orders?

A metric that I hear about a lot more from eCommerce is the percentage of orders that come from new customers vs. orders from customers who have already bought from them in a given month.  
“Last month, 60% of our total orders were coming from repeat customers. Our customers love us!” 
 The problem with this metric is that it doesn't tell you anything about the quality or LTV of your customers, how sticky your product is, or your product/market fit, which is exactly what you should be focusing on, especially in the early stages of your eCommerce journey.  Picture two businesses that are growing at very different rates:  
  • Company A growing its customer base at 30% m-to-m 
  • Company B growing at 5% m-to-m 
Given the difference in the number of new customers each company gets, Company A could have a much lower percentage of repeat customers after six months, even though its repurchase rate is much higher than that of Company B.   [caption id="attachment_9503" align="aligncenter" width="432"]Repurchase Rate Repurchase rate vs. % of repeat purchases[/caption]  

Why do you keep hearing about it?

I think it's because of three main things: 
  • it’s easier to calculate 
  • it’s easier to comprehend
  • It covers up any serious problems with the business's a product/market fit. 
To expand on the third point, it is much easier to get a good percentage of repeat orders after the first 12 months, say 40–50%, especially if the business isn't growing that quickly (as seen from the example above).  RJ Metrics has put out an interesting study with some benchmarks for eCommerce businesses on the percentage of repeat orders.  https://business.adobe.com/resources/main.html  On the other hand, figuring out your repurchase rates can be a pretty (bad) eye-opener, especially if you are doing it for the first time.   
“How come only 20% of our customers ever make a second purchase? We are getting more and more orders coming from repeat customers, it’s not possible! 
  So I understand why founders often talk about the former.  I don't understand why so many early-stage venture capitalists, at least here in South East Asia, don't ask about repurchase rates and don't ask the hard questions about marketing metrics in general.

How to figure out your repurchase rates for the first time in a simple, step-by-step way?

Here's an easy way to figure them out without using expensive analytics software (which you will need past a certain size of your marketing team or once your marketing budget will be big enough to justify it). Excel will be more than enough for now.

Step 1 — Download your historical transactions

You'll need to do the following for each order: 
  • the unique ID identifier of the customer who placed the order 
  • the transaction date 
That is all you need to get started.

Step 2 — Give each transaction a cohort date and a repurchase date

  • Sort your orders by the customer ID and the date of the transaction.
For every transaction, give: 
  • the incremental # of purchases coming from the same customer ID (if any) 
  • the cohort date
  • the repurchase date (in the below example for RR of 30/60/90/180/360 days)
 

Step 3- Compile your cohort table

You can now make your table by pivoting the previous XLS sheet and using the cohort months as row labels and the cohort size plus your repurchase date as column labels.  This is how your final table of cohorts should look:

What is a "good" metric for repurchase?

“It really depends on the vertical you’re in. What you need to do is have the tools to think, ‘who out there is comparable’ and how you can look at it and say, ‘am I anywhere close to what real success looks like in this vertical? [..]For social media, you’ll need to retain at least 80% of users. eCommerce companies are much different. If you can get 20–30% of your customers coming back every month and making a purchase from you, then you should do pretty well.”  Alex Schultz, VP of Growth at Facebook — “How to Start a Startup” 
Even among eCommerce companies, repurchase rates vary a lot depending on the vertical you're in. If your business is in a vertical with a lot of repeat purchases, like an online grocery service, you should compare your metrics to those of similar businesses. Same thing if you offer a subscription model in a certain industry.  For fashion eCommerce, Stitch Fix, an online personal stylist platform that claims an 80% retention rate for its 90-day RR, has an excellent retention metric. Giving customers the option to sign up for a shipment every month helped them get to this number, but it's still an impressive metric that shows how well their product fits the market (which certainly helped them to get Benchmark to lead their Series B).  My old company, TATE & TONIC, offered a service for men in Singapore that was very similar to this one, but we didn't get anywhere near these amazing numbers. Zalora and other "traditional" fashion eCommerce sites where I've worked are also a long way from reaching these metrics.  Even though the numbers themselves are very important, it's even more important to keep an eye on how your repurchase rate is getting better or worse over time. A steady improvement over time, especially as the number of people in a cohort grows, is a great sign that you are heading in the right direction.  

Conclusion

You need to know your repurchase rate to figure out how well your product fits the market and how well your user acquisition strategies work.  If you've been using the number of repeat orders as a quick way to measure how sticky your product is, you should now focus on your repurchase rate and try to improve it.  Improving it will not only help you grow faster, but it will also make a huge difference in how much money you make in the end.  Retain and Conquer!
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  8. Write more, thats all I have to say. Literally, it seems as
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