Below is a guest post from Alex McEachern of Sweet Tooth Rewards, a loyalty and points program for ecommerce businesses.
Acquisition or retention, that is the question. We constantly ask ourselves whether it’s nobler to always seek out new shoppers with outward facing ads, or to take arms against an old way of thinking with retention. Shakespeare aside, striking the right balance between acquisition and retention for your business is important.
Many business owners treat acquisition and retention as something that needs to be chosen, one over the other. This is not the case. Today’s top retail stores are discovering a balance of the two that makes them much more profitable than competitors.
The traditional (or old school) way to think about ecommerce is to attract as many eyes to your store and focus on boosting your conversion rate. This has made paid digital advertising channels like Adwords and promoted social posts very popular. However, as these channels become more popular, they also become more expensive.
Platforms like Shopify and Bigcommerce have made starting an online store easy. This means the supply of top AdWords positions is low, and the number of potential bidders is high. Simple economics would tell you that the prices will rise. This is true as you can see in graph above.
So what do you do? You can’t just stop attracting people to your site – you’ll will have no sales. The problem though becomes how do you combat the rising costs of digital advertising that are eating into your margins? The solution is to supplement your acquisition channels with retention marketing.
Ecommerce is Like Playing a Sport
I like to view an ecommerce business (or specifically, an eStore’s marketing strategy) as a sports team. Can a team win by playing really good defense? Yes. Can a team win by totally outmatching the opponent in scoring? Yes. But, can a team win by playing no offense or defense at all? No!
Think of acquisition as your offense – you go out and find potential sales. On the other hand, retention is your defense – you defend existing customers from shopping elsewhere. You can win by playing one better than the other, but you will need both to play the game at all.
As mentioned before, acquisition is more expensive than ever. If you do not get that customer to return again, you are wasting your initial acquisition investment. Follow up that offensive punch with some solid defense.
Retention is the New Frontier
Here’s how to put rising acquisition costs into perspective – evaluate the dollars each customer represents over the time they spend with you, rather than what the initial sale is worth. Retention marketing focuses on keeping a customer shopping with you for their entire life. This is known as lifetime value (LTV or CLV), which can be a little intimidating when you first look at it.
Don’t worry about getting too crazy with your CLV calculations, start simple with this easy CLV formula.
Average Order Value x Purchase Frequency x 1-3 years = Customer Lifetime Value
When you look at how much value a customer adds to your business and your bottom line, investing in acquisition seems much more palatable. It also helps that repeat customers are more profitable, share your store more, and even convert at a higher rate.
Now you may be asking yourself, retention marketing seems amazing, but how do I start? You need to invest in retention marketing tools just like you invest in paid acquisition. The amount you put into each is really dependent on the stage of your store. An increase in your retention rate has amazing benefit that you wouldn’t accomplish with paid acquisition and conversion optimization alone.
The graph above shows two stores under two different scenarios. Each store is selling 100 items at $10 each. The grey store retains 5% of its customers month-over-month, while the pink retains 10%. Notice how drastically a 5% change can help your store.
The Harvard Business Review, stated that a 5% increase in customer retention can increase profits 95%! That is quite the return.
Retention Marketing Tactics
Here are a few customer retention tactics that can help you kick start your retention marketing game.
Create a list of people who have made a purchase from you in the past. These people are much more likely to buy again than a fresh new face to your site. Use this list to market to them when they are most likely to buy.
Do you sell sleds? Message this list the first time new snow falls after the fall. Do you sell Makeup? Message this group during wedding or prom season. Do you sell… you get my point!
I think loyalty programs are the best retention marketing tactic at your disposal. Loyalty programs provide an amazing opportunity to earn more repeat business. You give customers points when they make a purchase or register for an account. This gives them a balance of points that acts as a switching cost to selecting a competitor next time.
I have seen amazing results giving points for account registration on my men’s grooming site. Giving real value at the start of the relationship is key!
Once you see that each customer has a ton of future value, you will begin to open up more meaningful conversations with them. This can become a lot to manage across management and customer support agents.
A customer relation management system (CRM) consolidates all conversations and sales history into one convenient place. This type of software makes it much easier to tailor conversations and offerings to your now loyal customer base.
Combine Acquisition and Retention
Everyone already has some form of acquisition channel going, but if you want your store to become the best it can be you need to sprinkle in some retention marketing. The tools above are a great start, but there are many more retention tools.
No matter how you decide to proceed with retention marketing, it is important that you develop a retention marketing strategy. This will outline how, why, and where you will devote resources to retention, similar to what you do with paid acquisition channels.