How A Small Increase In Customer Retention Can Have A Huge Impact On Your Revenue
February 3, 2018
Author: Avora Team
SEO, PPC, Adwords, advertising campaigns, trials and special offers – the list of marketing efforts focused on attracting new customers seems endless. The average ecommerce business spends 90% of its marketing budget on customer acquisition according to Joseph Jaffe, a marketing thought leader.
But the truth is that existing customers are often more profitable than new ones. In fact, according to the Harvard Business School, increasing customer retention rates by just 5% can boost revenue by between 25% and 95%.
So how do you balance the investment in new customers and how do you determine which are your most profitable customers and why?
At first glance, Customer Acquisition Cost (CAC) seems deceptively simple to calculate. Take the amount of budget spent on outbound marketing campaigns, sales and demand generation and divide this by the number of new customers.
However, this fails to take into account the real success rates of different channels. How many of those new customers, for example, were exposed to paid advertising, how many had seen a promotional video, or how many simply ran a Google search? Access to that pre-engagement information can be invaluable in determining how the customer came to your site.
Thanks to analytics from pay-per-click (PPC) and email click-thru rates (CTR) some of that data is relatively easy to collect and you can then see which channels have the lowest CAC, yielding the most customers for the least spend.
More sophisticated analytics can track your customers more widely and determine the pre-landing touchpoint. Was it from an email campaign? An affiliate? From Search Engine Marketing? Was it direct or triggered by an event? If it was an email campaign, was it the first or last email that triggered their engagement? What was their last landing page before coming to the website? Did they come from a marketing source such as Google or an affiliate? Was it a referral? What device were they using at the time? Is conversion better on mobile or the desktop, did the device impact the buying the decision?
But even these aren’t the only touchpoints. Buyers are now increasingly influenced by peer reviews, social media and forums. Personal research is now the basis of most ecommerce purchases and it pays to know where your customers are getting their information from so that you can factor in that channel. The problem is that many marketers are still looking at limited referral mechanisms instead of this bigger picture. If you don’t know what spurred your customer to engage in the first instance, then you can’t capitalise on a key referral channel. It’s this first click, last click attribution that can make all the difference in retaining customers.
Extensible customer tracking that identifies wider referral sites and assigns the customer a unique identifier from day one are therefore key to working out the value of new versus retained customers. Yet few companies are able to access these insights. What is increasingly important is not just the raw data of engagement but the drivers of that engagement. What nudged that customer to come to you?
Motivations will differ. Demographics are obviously a key factor, but there are other variables that may have an impact; fluctuations in the weather or even political changes may be influencing buying behaviour and how confident the consumer feels in making a purchase. Knowing these triggers can help organisations anticipate future spikes in demand and keep customers happy. And happy customers are retained customers.
Investment in retaining these good customers may be slightly higher, but profits will be higher over time and there’s an added benefit: loyalty schemes allow retailers to track their customers and gather data when they go ‘off radar’ and move from the Internet to instore. They can then join up that data to gain visibility into how users shop. Are they picking up purchases using Click-and-Collect and if so are they making additional purchases while they are there? Does their purchasing indicate that they are doing the bulk of their shopping with a competitor and if so how can you entice them to you instead?
Taking into account the value of that customer over time or the Customer Lifetime Value (CLV) gives a more accurate picture of how valuable each customer is to the organisation. This can be calculated using tried and tested formulae. First, assess the Average Customer Lifetime by determining how long customers spend with the company. Then work out the Customer Retention Rate (CRR) which is the number of times the customer carries out purchases over a given time compared to an equal preceding time. The profit margin per customer can then be deduced and, after taking out any other costs, you arrive at the CLV. This can then be used to calculate the maximum cost the company should devote to customer acquisition.
CAC enables the business to instantly see which channels have the best yield and what’s working. But it’s also important to take a long-term view and look at CCR and CLV if you want to improve retention. Both will give you a much better indication of how much you should be investing in acquisition to prevent you focusing too much on acquisition at the expense of retention. It’s here where Avora can add value by applying predictive analytics to look at how those figures might change over time, helping to provide a more balanced view beyond the numbers of how the business can retain as well as build out its customer base.
Of course, it’s also vital to look at the problem of customer attrition or churn and what happens when loyal customers begin to tail-off. But that’s a subject for another blog post Customer Churn – How to limit your losses.