Shopping Economy

Traditional retail success metrics — year-over-year growth and profitability, and position against competition — are becoming obsolete in today’s digitally enabled economy.

While retail continues to evolve and adapt to changing consumer preferences and new technologies, it is increasingly critical to develop newer, more relevant metrics to accurately value and measure retailers.

Developing a comprehensive perspective

In this time of increasing disruption, retailers should develop a detailed understanding of how their business compares with its own previous performance and against new competition — including upstart retailers with increasingly differentiated profit models.

Stakeholders should encourage the industry to develop, implement and apply new, more detailed, performance-oriented metrics that give a holistic and channel-agnostic view of operations. Companies should dig deeper into their numbers to determine how and where they generate revenue, who their customers are, and how to drive additional income from acquisition and retention.

By adopting comprehensive metrics, companies can more effectively determine their strengths and weaknesses, and take the steps needed to build on success and shore up any competitive disadvantage. By taking a critical look at the foundations of the business, executives can develop plans for growth that actually move the needle.

Convergence in retail is very real. Traditional and new entrants alike are embracing innovative revenue and profit streams, and as a result the consumer has unparalleled choice — stretching far past the traditional definition of retail. A new set of metrics should let the whole industry assess value creation and value capture more effectively.

Creating a series of holistic, balanced metrics includes a necessary and beneficial tension. Each metric is important but not sufficient by itself. They work together. Through a connected system of metrics, eme can more accurately reflect how a retailer is performing and reveal the unique aspects of its profit model — and as retailers invest in new approaches to creating consumer value, these metrics help them understand how they are capturing and sustaining it for stakeholders.

Customer Lifetime Value (CLTV)

CLTV is one of the most important metrics for measuring the net profit attributed to the entire future relationship with a customer. By measuring it against the cost of customer acquisition, companies can see how long it takes to recoup the investment required to earn a new customer.

CLTV tells companies how much revenue they can expect one customer to generate over the course of the business relationship. The longer a customer continues to purchase, the greater their lifetime value becomes. This is something customer support and success teams directly influence — reps and success managers play key roles in solving problems and offering recommendations that make customers stay loyal, or churn.

The model, step by step

Using data from a Kissmetrics report, Starbucks works as a worked example. The report measures the weekly purchasing habits of five customers, then averages their values together.

1 · Average purchase value. Divide total revenue in a period (usually one year) by the number of purchases in that same period.

APV = Total Revenue ÷ Number of Orders

The average Starbucks customer spends about $5.90 each visit. Once you have it for one customer, repeat for the other four, add each average together, and divide by the number of customers surveyed.

2 · Average purchase frequency rate. Divide the number of purchases by the number of unique customers who made them.

APFR = Number of Purchases ÷ Number of Customers

The average observed across the five customers was 4.2 visits per week.

3 · Average customer value. Multiply average purchase value by average purchase frequency rate.

CV = Average Purchase Value × Average Purchase Frequency Rate

Repeat for all five customers and average their values: $24.30.

4 · Average customer lifespan. Average the number of years a customer continues purchasing from you.

ACL = Sum of Customer Lifespans ÷ Number of Customers

Kissmetrics lists this as 20 years. If you do not have 20 years to wait and verify, one way to estimate lifespan is to divide 1 by your churn rate percentage.

5 · Customer lifetime value. Multiply customer value by average customer lifespan.

CLTV = Customer Value × Average Customer Lifespan

Because the Starbucks figures were measured weekly, customer value is first multiplied by 52 to reflect an annual average, then by the lifespan:

52 × $24.30 × 20 = $25,272

Customer Acquisition Cost (CAC)

CAC determines the resources needed for a company to attract new customers and continue growing. If you want your business to expand its customer base and still make a profit, you need to understand what it stands for and how to calculate it.

The total sales and marketing cost includes all programme and marketing spend, salaries, commissions, bonuses, and overhead associated with attracting new leads and converting them into customers.

CAC = (Cost of Sales + Cost of Marketing) ÷ New Customers Acquired

Reducing this value means the business is spending money more efficiently and should see higher returns in total profit. Successful companies aim to constantly reduce it — not just to recoup revenue, but because it is a sign of the health of their sales, marketing and customer service programmes.

Think about it: if your inbound marketing programme is operating successfully, you do not have to dedicate as many resources to ad spend to generate poor-fit leads, because your content is bringing in high-quality organic leads around the clock. If your sales team is constantly prospecting and nurturing a healthy pipeline, you do not need to rush to hire additional reps to hit quota each quarter.

LTV to CAC ratio

Businesses use the LTV:CAC ratio to guide spending across marketing, sales and customer service. It is a brief snapshot of how much customers are worth compared to how much the business is spending to attain them.

• Target: 3:1. The value of your customers should be three times the cost of acquiring them, and it should take roughly one year to recoup that cost.
• Closer to 1:1 means you are spending as much on attaining customers as they spend on your products.
• Higher than 3:1 — say 5:1 — means you are not spending enough on sales and marketing, and are missing opportunities to attract new leads.

Customer acquisition cost by industry

Customer churn rate

Customer churn is one of the most important metrics for a growing business to evaluate. It is not the happiest measure, but it gives a company the hard truth about its retention.

Churn is the percentage of customers who stopped using your product or service during a certain time frame. It matters because acquiring new customers costs more than retaining existing ones — an increase in retention of just 5% can create at least a 25% increase in profit, because returning customers spend 67% more. Retention therefore lowers operating costs too.

To calculate it:

1. Determine a time period.
2. Determine the number of customers acquired in that period.
3. Determine the number of customers lost or churned in that period.
4. Divide lost customers by acquired customers.
5. Multiply by 100%.

CC = (Lost Customers ÷ Acquired Customers) × 100%

Net Promoter Score (NPS)

NPS is a customer satisfaction benchmark that measures how likely your customers are to recommend your business to a friend.

Businesses use it to capture feedback and assess overall satisfaction. Its numeric scoring makes it easy for management to calculate an average and see how content customers are; the standardised scale clarifies positive and negative reviews, and the comment section justifies the respondent’s score.

More importantly, NPS lets you find your most loyal customers and use them as the model of who to build your product for.

To calculate it, survey your customers with the standard question:

On a scale of 0 to 10, how likely are you to recommend us to a friend?

Responses sort into three groups:

NPS = Promoters % − Detractors %