Improving customer retention for cannabis retail & brands
July 9, 2021
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Introduction: What is customer retention and why does it matter?
What is your store or brand's customer retention rate? Is it higher or lower than the market's average? This report will show you how to uncover these answers, as well as how to make improvements to customer retention.
Customer retention rate (CRR) is a measure of the proportion of customers that a company retains over a given time period. Customer churn or customer attrition are similar, but are opposite measures of how many customers are lost over time.
Any business in the cannabis industry should be concerned about their customer retention rate for one huge reason: it costs significantly more to acquire a new customer than to retain an existing one. Whether through marketing campaigns, providing samples, staffing vendor days or industry events, it takes money to get your product in front of new customers for the first time. The same goes for cannabis retailers, especially in urban environments with many nearby shops for customers to choose from. When the competition is fierce, it takes more effort and cost to stand out and attract new customers.
On the other hand, satisfied and loyal customers will not only keep coming back to your store or products, but they can also become the most valuable members of your marketing team. Even in the oldest recreational markets, the cannabis industry is still new. There are customers making their first ever purchase decisions every day, and the suggestion of a certain product, brand or dispensary from a trusted friend or family member is as good as it gets in terms of free marketing.
Data for this report is sourced from Headset connected cannabis retailers in California and Pennsylvania who collect anonymized customer data.
How to calculate customer retention rate
To determine customer retention rate, you will first need to choose a time frame for your calculation. Common time frames to evaluate customer retention include: annually, bi-annually, quarterly, monthly, and weekly. Longer time frames will often make the most sense for most cannabis businesses.
Here is the equation to calculate a simple rate of customer retention:
Customer Retention Rate = [E-N)/B] * 100
The three variables for the equation are:
E = the number of customers at the end of the time period
N = the number of new customers gained within the time period
B = the number of customers at the beginning of the time period
It is important to subtract the number of new customers (N) from the number of total customers at the end of the chosen time period (E), because they would otherwise artificially inflate our retention rate. For example, if we started with 100 customers (B), lost 10, but gained 20 (N) new customers, and simply looked at the total number of customers at the beginning and end of the time period, we would calculate a retention rate of 110%!
How to measure customer retention rate
Unfortunately, the equation for CRR won't help you steer your business without any data. There are multiple dashboards provided in Headset Retailer Premium to evaluate customer retention metrics, including customer retention rate.
The Retention Rate tile on the Cohort Analysis Dashboard in Retailer Premium's Marketing Module offers a fantastic view of monthly customer retention rates over time. By moving across a single row, we're able to view the customers who made their first ever purchase in our store within a given month. In this case, the top row is customers who first purchased in July 2020. Each cell displays the proportion of customers within that cohort who made another purchase in a certain month in the more recent past, relative to the original purchase date. For example, we can see that of the 1,661 total customers who first came to our shop in July 2020, 10.4% (or 172) were retained in June 2021.
Perhaps a more important trend to evaluate is how our customer retention rate is changing over time. An easy way to do that is to move down a column, rather than across a row. For example by moving down the "1 Months Since First Purchase" column, we can see that our CRR for customers returning within the first month after their first purchase has declined from 26.6% in July 2020 to 22.3% in May 2021. While that is only a small dip it is still alarming, as we'd like to see our CRR increasing over time, not decreasing.
The Repeat Purchase Rates dashboard also provides several great analyses to evaluate your retention metrics. In the Customer Trends tile (pictured above), we can view the percentage of customers on any given day that were returning customers. By tracking this metric over time, we can understand if our business is getting better or worse at holding on to valuable repeat purchasers.
While both of these examples are from Headset Retailer, product producers are in luck. The team at Headset is hard at work on a new Insights module for brands to analyze their own customer retention rate, as well as those of their competitors. Subscribe to our newsletter for information on product updates and releases.
How to improve customer retention
Determining how to improve your business' customer retention metrics can be overwhelming. However, it's best to break down your strategy into manageable components. Think of what makes you personally return to a favorite retailer or repurchase from a brand you love. It's probably some combination of the following principles:
A satisfied customer should be your absolute minimum goal, as it simply means the customer had a successful experience interacting with your business. For retailers, this means that your customer was able to find the right product, enjoyed good customer service from your staff, and went on their way.
In a competitive landscape, simply satisfying your customers is not enough to guarantee retention. You and your team should be working to make every customer's experience with your business a joy. This is an area to get creative, but the classics still always apply: focusing on fantastic customer service and a beautiful retail environment are great first steps.
No matter how lovely a shopping experience or product is, all your hard work will go down the drain if the price isn't right. Use market data to make sure your products are priced competitively. But don't forget that value is perceived by the customer, and many will be willing to pay more for the right experience.
Provide incentives for your customers to return. For retailers, the most common example is the use of loyalty programs. Encourage your staff to sign up as many customers as possible, so that you can entice them back to your store with discounts and marketing campaigns. For brands, the potential landscape of ideas is wide open. One particularly successful example of this principle in action is the trend away from the more universal 510 threaded cartridges, and towards proprietary formats in the Vapor Pen category.
What is a 'good' retention rate for a retailer?
It is useful to be able to measure retention metrics such as CRR and Repeat Purchase Rate for your own data. But even with that analysis available, most business stakeholders will quickly wonder: how does my business compare to my competition and to the rest of the cannabis industry? In other, more mature, industries there may be standards to strive towards, but those values are difficult to come by in the cannabis industry. Above is our first ever market level data on customer retention rates. This graph compares biannual (H2 2020 to H1 2021) customer retention rates of individual cannabis retailers in California's recreational market and Pennsylvania's medical market.
On this box and whisker plot we can see that, in general, the customer retention rate of Pennsylvania medical dispensaries is significantly higher than that of California recreational retailers. While the distribution of CRRs in California is much wider, the median value of 35% is just over half of the median CRR in Pennsylvania (65%).
Perhaps this difference between markets is caused by medicinal cannabis patients being more likely to build trust and rapport with their favorite dispensary, or because some medical dispensaries require patient intake forms and returning to the same dispensary saves time. Regardless, these two markets provide clear examples of both recreational and medical customer retention rates that retail operators can strive for.
What is a 'good' retention rate for a brand?
Now we shift our view from cannabis retailers to cannabis product brands. This graph shows the median biannual customer retention rate of the top California brands within each product category. It is important to note that in this case for each brand, CRR is calculated among customers who purchased the given category at least once within each time period. The retention rate of the category itself (eg. what percentage of Pre-Roll customers purchase Pre-Rolls again) is a different analysis, which we will save for another day.
This chart shows that, in terms of customer retention, not all categories are on a level playing field. In general, non-inhalable categories (highlighted in purple), have much higher retention rates than the inhalable categories. Edibles stand out as the notable exception with the lowest median retention rate of all categories. This may be because Edibles tend to be a fairly occasional purchase and competition in the category is fierce.
The median CRRs for Concentrate and Vapor Pen brands are notably higher than those of Flower and Pre-Roll brands, indicating that vape and dab fans tend to be more brand loyal than the average Flower or Pre-Roll customer.
Brands: Successful exceptions
After calculating your Customer Retention Rate, it's important to compare your total to market averages so that, if necessary, you can work on a plan to improve customer retention for your store or brand. The Headset team is working hard to make this type of analysis, including a view of the competitive landscape and customer brand switching analyses, available to our Insights customers soon. Curious to see how your store or product compares to the competition? Sign up for a demo to learn how Headset tools can help you optimize your customer retention strategy.
Different markets have different average customer retention rates. It's important to know where your business stands amongst the competition.
Improving customer retention is important, since it is more cost-effective to retain customers than to acquire new customers. There are multiple ways to do this, to creating a pleasant store environment, to giving personal attention to each customer.
Analyzing customer retention for brands is a little different from retail customer retention, since different categories of products have different customer retention rates.
Although some brands operate within categories with relatively low customer retention rates, there are some notable brands who have significantly higher retention than other brands within the category. This demonstrates that monitoring and improving customer retention can pay off.