Repeat Purchase Rate
The Repeat Purchase Rate (also known as the 'Repeat Customer Rate') is a metric that reveals the percentage of a company's customers who return to make another purchase over a given period. Think of it as a business's “stickiness” score. If you find yourself going back to the same coffee shop day after day, you're contributing to their high repeat purchase rate. For a value investor, this simple number tells a powerful story about customer loyalty, product quality, and brand strength. A consistently high rate suggests customers aren't just buying out of convenience or because of a one-time discount; they are coming back because they genuinely value what the company offers. This transforms one-time buyers into a reliable stream of future revenue, which is the bedrock of a stable and predictable business—exactly the kind of company that catches the eye of investors like Warren Buffett.
Why It Matters to Value Investors
A high repeat purchase rate isn't just a vanity metric; it's a window into the health and durability of a business. It separates the fads from the franchises.
A Sign of a Strong Moat
A company that consistently convinces customers to return has a powerful durable competitive advantage, or moat. This advantage could come from several sources:
- Brand Power: Customers trust the brand and associate it with quality (e.g., Apple, Coca-Cola).
- Habit Formation: The product becomes part of a customer's routine (e.g., your morning Starbucks coffee).
- High Switching Costs: It's too much of a hassle or too expensive for customers to move to a competitor (e.g., changing your company's entire software system).
A high repeat purchase rate is tangible proof that the company's moat is not just theoretical—it's actively keeping competitors at bay and customers locked in.
Predicting Future Revenue
Businesses with loyal, returning customers are far more predictable. Their revenue doesn't depend solely on the expensive and uncertain game of winning new clients. It costs a company far more in marketing and sales efforts to attract a new customer (customer acquisition cost) than it does to retain an existing one. A high repeat purchase rate lowers this burden, leading to higher profitability and more stable cash flows. For an investor, this predictability reduces risk and makes it easier to forecast a company's long-term performance and calculate its intrinsic value.
How Is It Calculated?
The beauty of the repeat purchase rate lies in its simplicity. You don't need an advanced degree to figure it out. The formula is: Repeat Purchase Rate = (Number of Customers Who Made a Repeat Purchase in a Period) / (Total Number of Customers in that Period) x 100
An Example in Action
Let's imagine an online store, Socktastic, wants to calculate its repeat purchase rate for the last quarter.
- During the quarter, a total of 1,000 unique customers bought socks.
- Looking at their purchase history, Socktastic finds that 350 of those 1,000 customers had also purchased from them at least once before.
Using the formula: (350 Repeat Customers / 1,000 Total Customers) x 100 = 35% So, Socktastic's repeat purchase rate for the quarter is 35%. This means over a third of their sales came from their existing customer base.
Putting It Into Context
Like any single metric, the repeat purchase rate needs context. A raw number means little without understanding the landscape.
What's a "Good" Rate?
There's no magic number. A “good” rate is highly dependent on the industry and business model.
- Consumables: A grocery store or a coffee pod company like Nespresso would expect a very high rate, as their products are used and replaced frequently. A rate of 60%+ might be normal.
- Durables: A company selling mattresses or cars will naturally have a very low rate when measured quarterly or annually. People don't buy a new car every year. For these businesses, you might look at longer timeframes or other loyalty metrics.
- Subscriptions: A business like Netflix or a Software-as-a-Service (SaaS) company lives and dies by repeat purchases (i.e., subscription renewals). Here, investors often look at the inverse metric, the churn rate, which measures how many customers leave.
The Bigger Picture
To get a full picture, always analyze the repeat purchase rate alongside other key metrics.
- Customer Lifetime Value (CLV): Are these repeat customers profitable over the long term?
- Profit Margins: Is the company sacrificing profits with deep discounts just to get customers to return?
- Growth in Total Customers: A high repeat rate is fantastic, but the company also needs to be attracting new customers to grow.
Ultimately, a strong repeat purchase rate is a sign of a healthy, customer-centric business. It’s a clue that you might have found a wonderful company worth holding for the long haul.