Every tall building started with a solid framework, and every tall tree started with the roots. Retention marketing is the same. You can create something amazing, but you need to lay down a strong framework.
“If you don’t know where you are now, you will never know how far you have gone.”
The framework you need is an understanding of your current metrics. Measuring your current ecommerce stats will show you where you are, so you can measure the effectiveness of your retention marketing strategy.
You should have a benchmark of all the standard ecommerce metrics like conversion rate, average order value, abandoned cart rate, etc… But besides those metrics, you should also benchmark KRMs (key retention metrics) before starting your retention marketing plan. For consistency, you should use data from a one year period for the following calculations.
Repeat Customer Rate (RCR)
Your store’s repeat customer rate is the percentage of your customer base that is coming back to purchase again. Remember, it is more expensive to acquire a new customer (seven times more expensive!) than retain an existing one.
To measure your current RCR, take the number of repeat customers and divide it by the total number of unique customers. Be sure you are dividing by unique customers and NOT orders.
Customers With More Than One Purchase / Unique Customers = Repeat Customer Rate
As you focus more on retention marketing, you will notice that your revenue from repeat customers will start to climb.
When you make getting return business a focus, your customers will start to shop with you more often. This metric is known as your store’s purchase frequency. It is the average number of times a customer will shop with you in a given time period.
Total Orders / Unique Customers = Purchase Frequency
Total number of orders divided by the number of unique customers you have, will give you purchase frequency. Even a slight increase in purchase frequency can lead to a huge increase in revenue.
Now that you have calculated these KRM benchmarks, make sure you note them somewhere. If you use an analytics or CRM tool, you can store it there. Whatever you decide to do you will want to look back on these numbers to see how your strategy is performing.
How Much Retention Marketing Do You Need?
Now that we have laid a solid framework to build our retention strategy on, we need to decide how much of a focus to put on retention. You would not expect acquisition to just happen, so you should not expect retention to just happen.
You invest marketing dollars into a content strategy, email marketing, social media, search engine optimization, and retargeting (to name a few places) for your acquisition strategy. If you want your retention marketing efforts to be a success you need to do the same.
Let's look at the breakdown of a typical ecommerce store’s traffic:
As you can see 92% have not purchased before, or have made a single purchase. This traffic would be attributed to acquisition efforts. The remaining 8% are customers who have purchased from you 2 or more times. This traffic can be attributed to your retention efforts.
When you look at the traffic numbers you may ask why you should allocate more than 8% of your marketing budget to retention, when it only represents a small portion of your traffic. On the surface it may seem counterintuitive, but you need to dig deeper.
Let's look at the average revenue breakdown from each of those segments:
That small percentage of your traffic is actually generating a substantial portion of your revenue. The average ecommerce store sees over 40% of their revenue come from that small but mighty 8%. This is because a repeat customer is more profitable than a first time buyer.
If this is the case, why do the majority of stores allocate almost all their budget to customer acquisition? The average store allocates 81% of marketing dollars to acquisition, which represents 59% of revenue, and 19% of marketing dollars to retention, which represents 41% of revenue. This budget allocation doesn't seem to make sense!
What Should Your Store Do?
Every store is different, but some stores will benefit more from retention marketing than others. The effectiveness of retention marketing is determined by two main factors. The first is the life-stage of your store, and the second is the nature of the products you sell.
Your Store’s Life-Stage
If you have a brand new ecommerce site, you will have very small customer base. Obviously it does not make much sense to be spending marketing on retaining customer you don't have yet! As you grow, you'll want to shift more marketing dollars to to retention marketing.
Once your store has an established customer base, it becomes more beneficial to focus on retention over acquisition. Growing revenue via acquisition can eventually slow, but retention can help you continue to grow.
What You Sell
A returning customer is worth more to your business, so every store should be striving to boost retention. If you have a product that has high likelihood of repeat purchases, you will benefit immensely from retention marketing. Examples of these types of products would be cosmetics, coffee, supplements, and even clothing.
If you do sell high ticket items, retention strategies can still work for you. Imagine if you could sell three fridges to a customer over their lifetime rather than just one. That would be a huge boost! Alternatively, you can cross-sell complementary products to your customers.
When Can You Expect to See Results?
Retention marketing doesn't provide overnight results or instant gratification. But, if you stick to it you will start to see some phenomenal results. How long do you need to wait? That depends. Six months to a year is a common timeframe. Retention marketing is like rolling a snowball, once your get it started it becomes easy.
Originally published Apr 12, 2016 7:00:00 AM, updated February 01 2017