Your store’s “returning customer rate” doesn’t matter at all. Instead, what matters is customer lifetime value.

These statements sound contradictory so let me explain.

When I’m diligencing businesses to acquire for Agora, founders often talk about their “returning customer rate.” I believe they do this because Shopify has, inexplicably, placed this metric at the very top of every store’s Analytics tab.

Shopify defines the returning customer rate as “the percentage of customers that have placed more than one order from your store, out of customers that placed an order within the selected date range.” Basically this means it’s the percentage of returning customer orders out of all orders at any particular time.

OK…cool–this is totally irrelevant. Founders will tell me their rate is 20%, or 40%, or 80%. And I have no idea how to interpret it. What matters is not what percentage of customers are repeat customers in any given time, it’s what percent of customers return as a percentage of first time customers in any given cohort.

This sounds confusing but the intuition is pretty simple to grasp.

Let’s say you had a business that is basically dying. Its best days are behind it. It acquired a lot of customers, say, two years ago and those customers are continuing to come back at some rate but the business is having trouble acquiring new customers efficiently now.

In that case, the returning customer rate is going to look great! A very high percentage of orders being placed today are from returning customers. That means lifetime value is good, right? No. The returning customer rate as Shopify defines it is high only because the business hasn’t acquired many new customers so the only orders left are from returning ones. This metric doesn’t tell you anything about how valuable the customers that were acquired actually are.

If you’re trying to understand actual reorder rate metrics that matter, what’s really important is what percentage of the customers that first ordered two years ago have come back and how many orders have they placed in the subsequent two years. That will allow you to determine actual customer lifetime value.

That’s what matters. Not some strange Shopify legacy metric from 2009.