Analysis Indicates That Increasing Order Frequency is the Fastest Way to Retail Growth

June 19, 2018

Retailers have shifted from a product-centric to a channel-centric mindset in recent years, and are in the midst of a transition to a customer-centric approach, argues Custora in a recent report [download page]. So which customer-centric KPIs have the greatest impact on top-line growth? The study provides some insights.

To arrive at its conclusions, Custora examined 5 KPIs from more than 100 of its retail customers, representing more than 500 million end customers and $150 billion in annual transaction volume.

The 5 KPIs examined were customer acquisition, average order value, order frequency, retention rate and reactivation rate.

While each KPI was associated with top-line growth, Custora wanted to understand their unique individual contributions, and so performed a multivariate analysis to uncover the most efficient growth drivers.

The analysis revealed that order frequency is the most effective growth driver. This KPI relates to the average number of orders per transacting customer over the course of a year. For every 1% increase in order frequency, Custora found a resulting 2.8% increase in revenue.

That makes order frequency by far the most efficient growth driver. But it isn’t the only one. The analysis also demonstrates that a 1% increase in average order value results in a 1.3% increase in revenue.

It’s worth noting that loyalty (which could be defined in part as order frequency) and average order value can be related. In research into e-commerce buying behavior, Monetate last year reported that on a revenue-per-session basis, customers with a history of multiple purchases spend more than 5 times as much as new shoppers ($10.67 vs. $1.73).

Custora notes that order frequency and average order value – the two most effective growth drivers – are both retention metrics. But that isn’t the full picture: the two other retention metrics, retention and reactivation rate, were found to have no effect on revenue growth.

As the analysts write: “This tells us that getting a lapsed customer to come back and make
a single purchase isn’t enough. In order to drive growth, marketers need customers to meaningfully re-engage to become repeat purchasers.”

How about the customer acquisition KPI? Custora found that for every 1% increase in customer acquisition, retailers could expect a 1% increase in revenue.

Retailers examined for the report could stand to improve in their retention metrics. While they delivered an impressive 17.2% revenue gain in 2017 over 2016 and an 11.7% increase in customer acquisition, they weren’t as successful in the other KPIs.

Although they did have slight growth (+1.6%) in average order value, the retailers analyzed experienced a small decline in the most effective metric, order frequency (-0.59%). Their retention rate (-2.2%) also declined, with reactivation rates down significantly (-11.5%).

Custora’s recommendations for growing order frequency and basket size can be found in the report, which can be downloaded here.

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