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Ecommerce Optimization Series #1: The untapped profit in customer retention

  1. How many customers buying from you today did you acquire last year? 
  2. What value do loyal customers represent to your business? 
  3. What experiments are you running to improve customer retention? 

If the answers to these questions aren’t filling you with confidence, read on. 

It’s been a long time coming, but Customer Experience Optimization (CXO) is gaining recognition because it considers the whole user journey and lifecycle, not just the website or first purchase, which is more commonly the remit of CRO.

This is the first instalment of our new nine part Eommerce Optimization Series, covering the most significant challenges and opportunities teams like yours face.

The opportunity: small uplifts in customer retention lead to big payoffs 

Harvard Business Review claims that acquiring a new customer is five to 25 times more expensive than retaining existing customers, and a 5% increase in retention can increase company revenue by 25-95%. Regardless, loyalty-related tests or initiatives are often the last in line for budget and resources. 

There shouldn’t be a power struggle between retention and acquisition; both play a role in growth to varying extents. But retention gets little airtime within marketing or optimization teams. This single-minded focus on converting new users means you’re leaving money on the table. 

Interest in loyalty and retention tends to arise out of necessity; when there’s an economic downturn or marketing budgets get cut. But when we look at what’s happening in the marketplace today, there’s never been a better time to focus on improving retention. 

Why customer retention needs your focus 

  • Competition is fierce: Ecommerce stores are vying for consumer attention among millions of options. Once you’ve convinced a new user to visit your store, the probability of selling to them is around 5-20%. In contrast, the likelihood of selling to an existing customer is about 60-70%, so capitalizing on the value from existing customers is a no-brainer. 
  • Rising customer acquisition costs (CAC): Competition in the marketplace alongside Google’s third-party cookie ban will impact ad effectiveness. Margins are already slim for many verticals, so businesses must grow profit by increasing customer lifetime value. Improving retention can also feed into organic acquisition methods helping reduce CAC, e.g., encouraging word of mouth.

  • Geopolitical repercussions of war and COVID-19: These global events impact product availability and delivery costs. The hardest hit are “Direct to Customer” (DTC) brands responsible for the entire supply chain. Combine these factors with the previous points, and it’s clear that ecommerce businesses are being squeezed from all sides. 

The Challenge

The economics of retention combined with the state of the market make retention a golden opportunity. So what’s holding teams back from improving? Here are the top three reasons I see and what you can do to overcome them.  

1. Data difficulties

Important retention metrics such as customer lifetime value (CLTV) can be challenging for ecommerce businesses to calculate. E.g., in subscription businesses, you have an explicit action that identifies “churn,” but with ecommerce, it can be hard to know when a customer has stopped buying from you. 

The perception is that you need a fancy customer data platform. While good data infrastructure and tools will help you gather insights and model/automate actions based on user behavior, you don’t need this to get started. Start simple with three data points: 

  • A form of customer ID
  • Transaction dates
  • The value of a transaction

The above data points allow you a calculate CLTV. Add a fourth data point and investigate potential correlations between user behavior and higher retention. From this, you can develop hypotheses to test. 

2. Optimization teams focus on A/B website testing 

Optimization teams rely heavily on validating hypotheses through website A/B tests. But A/B tests are designed to observe user behavior in a single session or a short time period. 

Instead, teams must consider alternative experiment designs, tools, or datasets to measure loyalty over long periods and test the entire customer journey across channels and mediums. 

3. Pushback from the C-suite

Metrics around retention and loyalty don’t fit into the weekly, monthly, and quarterly reporting cadence. These timescales might be too short to measure changes in retention rates, but as the adage goes, “What gets measured gets managed.” Therefore it’s best to surface loyalty metrics (that might remain static for an extended period) alongside acquisition data.

How does this all apply to your business? 

If you'd like to learn more about optimizing for retention and how we can help customise these processes to apply to your specific retention challenges, contact me via annika@speero.com I would be happy to share our Retention Modelling methods.

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