Kevin Hillstrom of Mine That Data, says it’s essential for online retailers to know what kind of relationship they have with their buyers, because this drives everything from marketing strategy to shopping cart size.

To understand this, he calculates the annual repurchase rate:

What Percentage of People Who Bought Something from You Last Month Will Do So This Month?

Acquisition Mode

If less than 40% of last month’s or last year’s buyers will buy this month/year, then the focus of the business is on new customer acquisition. Loyalty programs aren’t good long-term investments for this kind of business.

Kevin says that 70% of e-commerce businesses fall into this category when they’re mature. Vendors of scuba or rock-climbing equipment might be a great example of this: many of their customers buy gear once, and don’t get so hooked on the hobby that they need to upgrade. That’s not a bad thing—it just dictates marketing strategy. An online vendor of eyewear might put more of its marketing efforts into convincing past buyers to refer others, and less into convincing those buyers to purchase multiple pairs of glasses, for example.

Hybrid Mode

If 40–60% of last month’s or last year’s buyers will buy this month/year, then the company will grow with a mix of new customers and returning customers. It needs to focus on acquisition as well as on increasing purchase frequency—the average customer will buy 2 to 2.5 times a month/year. Zappos is a hybrid model e-commerce company.

Loyalty Mode

If 60% or more of last month’s or last year’s buyers will buy something this month/year, the company needs to focus on loyalty, encouraging loyal clients to buy more frequently. Loyalty programs work well only if the retailer has this kind of engagement, and only 10% of e-commerce businesses end up in this mode when mature. Amazon is a good example of a company in this mode.

Additionally, even before a year has elapsed, an e-commerce company can look at 90-day repurchase rates and get a sense of which model it’s in.

·      A 90-day repurchase rate of 1% to 15% means you’re in acquisition mode.

·      A 90-day repurchase rate of 15% to 30% means you’re in hybrid mode.

·      A 90-day repurchase rate of over 30% means you’re in loyalty mode.

CONCLUSION

“It doesn’t matter whatsoever what mode a business is in. But it means everything for the CEO to know what mode he or she is in,” Kevin says. “I see too many leaders trying to increase loyalty. If you’re in acquisition mode, you probably can’t—and shouldn’t try to—increase loyalty. The average customer only needs a couple of pairs of jeans a month/year, for instance.

You can’t force the customer to buy more! Knowing your customer and mode is important.”

Kevin says he frequently sees business leaders with seasonal e-commerce properties trying to convince customers to buy gifts off-season. “It doesn’t work,” he says. “They’re in acquisition mode. They’re better off creating awareness during the year so that they get new customers in November and December.”

REFERENCE

The Lean Series: Lean Analytics —Use Data to Build a Better startup Faster by Alistair Crolll & Benjamin Yoskovitz