Why do companies struggle with customer retention and getting more repeat purchases when it increases the profitability of each existing customer?
Sometimes, when I consult with startups or companies that are trying to turn around, I notice a common problem:
They focus too much on customer acquisition at all costs but fail to retain important customers that they already have, and they do not have an efficient funnel to bring customers back for repeat purchases.
While new-customer acquisition is the engine to bring in new business and revenue to a company, customer retention and repeat customers are what drive long-term success.
Once you’ve identified and targeted your best customers, identified touchpoints to increase customer engagement, optimized conversion rates to drive more revenue and profit, and increased your Average Order Value (AOV), your next step is to focus on retaining more of your existing customers.
In this guide, you will learn much more about customer retention:
- What’s more important: customer acquisition or customer retention?
- The importance & benefits of customer retention
- How to calculate & measure the customer retention rate
- What is a good retention rate?
- How to create a customer retention strategy to increase repeat customers
Let’s get started!
What’s more important: customer acquisition or customer retention?
According to Adobe, nearly 80% of marketing budgets are being spent to acquire new customers while retention activities —such as email and social media — make up only 18%.
If you consider the fact that 92% of visitors or traffic are generally new customers while returning and repeat purchases make up 8%, this seems proportionate.
However, if you look at the revenue distribution, the 92% of new customer traffic is responsible for only 59% of generated revenue; in contrast, the 8% of returning customers’ purchases are responsible for an astonishing 41% of generated revenue.
Now, that sounds like a disproportionate distribution of a marketing budget!
This is not to say that you need to shift most of your budget and time from customer acquisition to customer retention.
But this is definitely something that every company and marketer needs to think about.
What is my current customer retention, relative to my revenue or profit distribution, and how can I improve customer retention and repeat purchases?
The goal of this guide is to help you re-evaluate your current customer-retention strategy and determine the best ways to maximize your retention, given your specific situation.
The importance & benefits of customer retention
Customer retention is important for 3 primary reasons:
- Returning customers and repeat purchases cost less than new customer acquisition.
- Higher customer retention increases profitability.
- Loyal customers are likely to become brand ambassadors and advocates, leading to more referrals — also known as word-of-mouth.
1. Returning customers and repeat purchases cost less than new customer acquisition
You may have heard that it costs 5 times more to acquire a new customer than to retain one.
To be honest, that data is from 2010, so let’s not focus on that figure too much.
Nevertheless, the cost of acquiring a new customer is typically much higher than retaining an existing customer.
That being said, some industries certainly benefit and profit more from acquiring new customers.
For example, a gym may charge a $100 activation fee requiring a 1-yr contract. After their first year, members go month-to-month at $20 per month.
In this case, this gym wants to get more new customers to get the activation fee with a year contract locked in since month-to-month clients tend to drop off.
This is the exception, however; for the vast majority of businesses, new customer acquisition is considerably more costly than customer retention, for many reasons:
- Existing customers already know the brand. There is less “selling” to do. It can be up to 14 times more likely to sell to an existing customer than to a new customer.
- Existing customers are easier to reach because you already have their contact information.
- You own the customer data on existing customers, allowing you to better target products and deals that are relevant to them, leading to a higher conversion rate.
- Retention campaigns, such as retargeting and emails, tend to be less expensive compared to aggressive acquisition campaigns, such as Pay-Per-Click or paid ads.
2. Higher customer retention increases profitability
According to the Garner Group and Leading on the Edge of Chaos by Emmett and Mark Murphy, a 5% increase in customer retention can increase profits by 25-125%, depending on the industry, and 80% of your future profits will come from only 20% of your existing customers.
Repeat customers are also likely to spend 33% more than a new customer.
This demonstrates that retaining your customers and aiming for repeat purchases leads to increased profitability.
3. Loyal customers are likely to become brand ambassadors and advocates
A person can’t become a brand’s ambassador or advocate unless they love the brand and its products.
A loyal customer that loves a brand and its products/services can have a big social influence by sharing their experience, which in turn leads to referrals.
Referrals are great because it’s a new customer acquisition strategy with a very low cost.
That sounds like something I would invest in to get more of!
How to calculate & measure your customer retention rate
Retention Rate = ((CE-CN)/CS)) X 100
CE = number of customers at end of period
CN = number of new customers acquired during period
CS = number of customers at start of period
This customer retention rate formula can measure any period of time, whether it’s for a week, month, or year.
Keep in mind that any period too short or long may not accurately reflect the current state of your customer retention, so be mindful of what you’re measuring for and the best time period for your business.
Let’s use this formula in an example:
You start with 1000 customers at the beginning of the month, lose 50 customers during that month but gain 150 new customers.
At the end of that month, you have
1000 – 50 + 150 = 1100 customers
So your retention rate is as follows.
Retention Rate = ((CE-CN)/CS)) x 100
= ((1100 – 150) / 1000) x 100 = 95% retention rate for that month
Related metrics to track and monitor
While you monitor and track the retention rate, there are a few complementary metrics to use:
Repeat customer rate
# of customers that purchased more than once / # of unique customers
This will show how many existing customers are coming back for a repeat purchase during a specific period of time, relative to your total number of unique customers.
For example, if you have 100 unique customers during the month, and 10 customers purchased more than once, then:
10 / 100 = 0.1 or 10%
The higher this number, the more repeat customers you’re getting.
# of orders placed / # of unique customers
This metric shows how often an average customer is coming back to purchase during a specific time period.
For example, if there were a total of 100 orders placed during the month, and there were only 10 unique customers, then:
100 / 10 = 10
Or, a customer came back to make a purchase an average of 10 times.
Average Order Value (AOV)
total revenue earned / # of orders placed
This very important metric shows how much a customer is spending per order, on average.
The higher this value, the better you’re doing in up-selling and cross-selling. A higher AOV generally means a higher profit for your business.
By monitoring this set of metrics together, you can more easily identify which areas you need to strategically improve.
A low repeat-customer rate may indicate that you need a program to push repeat purchases by offering an incentive to come back or improving personalization.
While it can simply be the nature of the business (like furniture or cars), a low purchase frequency may indicate that you’re not timing your retargeting campaigns well.
And a low average order value may indicate that you need to focus more on up- and cross-selling or personalization.
There is plenty to analyze and take away from these metrics alone to improve your customer retention strategy.
What is a good retention rate?
No business or marketing metric has a universal standard.
When determining whether your current retention rate is good or bad, and what rate to target, it’s important to understand a few things so you can come up with your own ideal rate that fits your business model and situation.
According to Shopify’s customer retention matrix, below, some businesses need to focus more on customer acquisition than customer retention.
For businesses with a higher purchase frequency, customer retention becomes more important.
Does this mean acquisition-focused businesses should ignore customer retention?
Based on your revenue and profit distribution, between new and retained customers, there should be a good balance between acquisition and retention strategy.
How to create a customer retention strategy to increase repeat customers
You might think that a great product, a fair price, and great customer service are all you need to acquire and retain customers.
Although these are the biggest factors that motivate buyers to remain loyal, there are many internal and external factors that can greatly influence your customers to leave for a competitor.
Some of the common retailer and eCommerce challenges in retaining customers are long purchase cycles for products, lower-price competition, losing subsequent sales to marketplaces like Amazon, lack of customer contact info for retargeting, and an insufficient budget allocated for retargeting.
For the most part, there are simply so many options available and so many competitors trying to grab your customer’s attention and their business.
As discussed earlier, determining the customer retention strategy that fits your business situation requires an analysis of your own data to decide how much to focus on retention and what campaigns to run.
When you’re ready to initiate customer retention programs, here are some proven ways to increase repeat customers.
Loyalty programs for returning and VIP customers
This isn’t just any loyalty program and certainly not a site-wide discount code.
The key to a great successful loyalty program that gets results is to properly segment your customers and offer them specific loyalty incentives that matter to them.
Your loyal VIP customers, determined by their Customer Lifetime Value, should receive more incentives than your typical 2nd– or 3rd-time repeat customers.
Studies have shown that 68% of customers leave if they feel the attitude of “indifference”.
Everyone wants to feel special and offering every customer the same loyalty incentive doesn’t engender this feeling.
Reward your customers appropriately and think about the action you want as a result.
Is a discount what motivates your VIP customers the most? If not, why are you giving away higher discounts to bring them back if they were coming back anyway, but for a different reason?
Referral programs to grow your customer base
As mentioned earlier, a referral is great for business because it’s low in cost but high in profit.
Don’t expect free referrals if you’re actively trying to grow the referral base, however, your incentive should also not exceed the profit you expect from the new referred customer.
How much is each customer worth to you? How much do you typically pay for a new customer?
Based on that, you can determine an appropriate reward for your current customers when they refer new customers to your business.
For example, Purple mattress offers $20 off of any order of $200 or more to a friend you refer, and then give you a $25 Amazon gift card when they make a qualifying purchase.
On top of that, you are entered to win a $1000 Purple gift card for every friend you refer.
By offering a quick “copy link” button and an easy way to email the link to a friend, Purple is doing a lot of the heavy lifting required to refer someone.
A few incentives to note here:
- They are rewarding you with a $25 Amazon gift card. No purchase from Purple is necessary to redeem it, making it more appealing for someone that already has a mattress.
- They are incentivizing the new referral to make a purchase by offering a $20 discount. Since the qualifying purchase is $200, they have a reason to spend that much, which in turn can be used to increase the company’s Average Order Value (AOV).
- The more friends you refer, the higher chance you get of winning a $1000 Purple gift card. You may want to mass-email your friend list.
- By making referrals easy to share, customers don’t have to jump through hoops. They even automatically allow you to send a friend a reminder in 3 days by checking a box!
Remind them to come back with retargeting campaigns
Why wait for them to need your product/service and hope they will come back to you instead of going to a competitor?
Remind them proactively about your brand and products and how much they enjoyed their experience with you.
An effective retargeting campaign not only reminds them of your brand but also reminds them that they need your product/service before they even realize it!
Retargeting campaigns can include email marketing, display marketing, targeted social media marketing, SMS (text message) marketing, and other marketing mediums that allow you to reach your customers directly, such as direct mail.
Survey your loyal customers and lost repeat customers
When we analyze our customer data, we tend to focus on quantifiable numbers and metrics.
However, it’s equally important to learn what customers are thinking.
What motivates loyal customers to keep coming back to you? Is it world-class customer service? Your price? Your product quality? The shopping experience?
Also, what causes your repeat and loyal customers to leave?
Did they simply find a better deal? Did the quality of your product/service change? What was their expectation? And what would bring them back?
Such qualitative survey results can help you understand better how to keep your loyal customers from leaving and how to convert more one-time buyers into repeat buyers.
Make a repeat purchase easy
Do all of the heavy lifting so all that your customers have to do is authorize the purchase!
Allow them to create their own account to see their past purchases to make reordering easier.
Allow them to opt-in to an auto-ship program with an auto-pay for high-frequency purchases, such as office supplies or supplements.
Personalize your retargeting campaigns, so your customers can view products/services that they would be interested in.
There are many ways to make a repeat purchase easier; convenience and relevance are the key.
Review the entire buying cycle for a returning customer and remove all and any obstacles that make the experience cumbersome or inconvenient.
Go above and beyond — take care of your customers
This should be part of every company’s policy, but unfortunately, it doesn’t always make it to the top of the list.
When you take care of your customers and go above and beyond, they will be impressed and appreciate the service.
A great example is Chewy.com, an online pet supplies and pharmacy retailer.
Just as much as their competitive pricing, they are known for their stellar customer service, which is available by phone, chat, or email, 24/7.
Not 100% satisfied with a purchase?
They offer a simple and worry-free return policy that allows for returns within 365 days of purchase.
I’ve had personal experience with their customer service with products that didn’t work out for my pets, and I could not believe how helpful their customer service reps were.
As a result, I have been a loyal customer of Chewy for years, and guess what?
I talk about it a lot to my friends and family who have pets.
Customer retention is just as important as new customer acquisition.
Finding the right balance between retention and acquisition — depending on your revenue, profit distribution, and marketing goals — is something very important for any company to consider.
Given the many benefits that repeat and loyal customers bring to your business, you need an effective retention marketing that increases your profit and sets your business up for success in the long run.
If you need help determining your ideal and best customers so you can focus on retaining them, check out these guides below:
- Secrets to Ideal Customer Profile & How to Analyze Customer Data
- What is Customer Lifetime Value, and Why is it Important?
So, how do you plan to retain your customers?