Gone are the days when you could simply set up an online store, run a few ads, and start watching the money roll in. Today’s ecommerce landscape is a battlefield and the majority of stores are slugging it out to be average. However, there are stores that have figured out how to rise from mediocrity and into the ecommerce elite. These stores know how to use retention marketing!
Today’s Average Store
Stores are different across industries, markets, and countries, so we're going to work with averages from different studies to help create our baseline.
Average Ecommerce Store's Order Value: $78.00
Recently, there has been a huge focus on growing an ecommerce store’s revenue. While this looks good on paper, you need to dig deeper than just revenue numbers. You need to look at the profit you are keeping from each sale. You may be saying “This is pretty obvious!” yet big companies fall into this trap of chasing revenue without regards to profit all the time.
Average Ecommerce Store's Profit Margin: 35%
According to a study from MarketingSherpa, the average American ecommerce site has an average profit margin of 35%. In this benchmark situation, that means that the average store is profiting $27.30 per order. Not bad.
Average Profit Per Order: $27.30
However, there is one pesky cost that will always eat away at your profits. That is your customer acquisition cost. It is not cheap to attract someone to your online store (which you surely know!). One study has the median acquisition cost at $12.00. This seems a little low, but let's use it for argument’s sake.
Average Cost to Acquire a Customer: $12.00
This is the thorn in the side of every ecommerce merchant, trying to keep profit margins up and acquisition costs down. And, the cost to acquire a customer is also on the rise. As acquisition costs rise, traditional thinking in ecommerce starts to become less sustainable.
Profit to the Merchant: $15.30
In the current landscape (our baseline) this ecommerce store would make $15.30 on every order. This number is after accounting for the price paid for acquisition. Again, this is a hypothetical situation, but this merchant has made $15.30 on a $78.00 order. That is 20% of the sale price, and you haven’t even shipped it yet!
Depending on your shipping costs, this scenario can get you caught in a rat race.
Growing Your Store
The above scenario is a bit like treading water. You're likely doing OK and making a couple of dollars per order, but if your costs vary significantly, you could be losing money. Even so, no one wants to spend 90 cents to make a dollar.
Many stores make the mistake of continuing like this while they grow a following and customer base. The problem: many stores continue in this mindset forever and never truly scale. If you want to achieve real growth, you need your investment in acquisition to go further. If you want to be elite you need retention marketing.
Becoming Elite Through Retention
Attracting each new customer to your store is increasingly not easy, nor cheap. You want to get the most out of each acquisition investment you make. Retention marketing is a way to get more value out of each acquisition. It is how to make it in the ecommerce world.
In the average store scenario above our merchant is making $15.30 before shipping. Let’s say it is closer to $5.00 when it finally makes it to the customer's door. This may seem lackluster at best. Where this becomes a viable strategy, is when you treat each new customer/order as the beginning of a longer relationship. This relationship is known as customer lifetime value.
Repeat Customers Spend 3X More Per Order
Customers that return for a repeat purchase are way more valuable to your store. A study by Adobe found that repeat purchases spend three times more than first time buyers. WOW! Let’s use our original example and turn that purchase into a repeat one. A $78.00 purchase would become a $234.00 one. This already is looking good, but it gets better.
Average Order Value From a Repeat Customer: $234.00
Remember that $12.00 acquisition cost? Well, you won't need to pay that again for this purchase. With the right retention tools (email, support, loyalty programs, etc.) you will have a retention cost, rather than an acquisition one. The good news is that retaining a customer costs seven times less than acquiring one. That means our $12.00 is now $1.70.
Cost to Retain an Existing Customer: $1.70
With this increase in order value, and decrease in retention cost, you now have a much more profitable order. This second purchase creates $80.20 in profit.
Profit to Merchant: $80.20
If you want to seriously grow your store, you need to focus on getting customers to come back. Going after new customers is important, but you need to follow that up with an effort to retain them. If you are always hunting for new customers you will not be able to grow sustainably. It is that simple.
Retained Customers Get Even Better
If the above was not good enough, it get better. Here are a few other facts about repeat purchasers that you should know.
They Share Your Store More
Your repeat customers can easily become some of your best marketers. The more a customer shops at your store, the more people they refer to you. Basically the more invested in your store/brand they become, the more they want to tell their friends.
Bain & Company conducted a study that found as number of purchases increase, so does the amount of people referred. The story here is that looking after your existing customers can actually net you some new ones. A referral is also the most trusted form of advertising according to Nielsen.
They Spend More at Key Times
Repeat customer spend more in general, but they also spend more during the busiest times of the year. A study by Adobe found that repeat customers spend more during the holidays than first time purchasers.
While all shoppers spend more during the holidays (17% more), a store’s repeat customer base spends even more. If a shopper has made a purchase before the holiday season and comes back during it, they spend 25% more than normal.
The takeaway here is that you need to get your retention strategy together sooner rather than later, and well before the holidays approach.
Originally published Mar 8, 2016 4:40:30 PM, updated July 28 2017