If you’ve spent any time in e-commerce, you’ve likely heard quite a bit about Customer Acquisition Costs (CAC). CAC is rapidly increasing, and brands need to pay attention to how much they’re spending on new customers in order to stay profitable.
But customer acquisition has an equally important counterpart: customer retention. If brands aren’t tracking their customer retention costs on a regular basis, they won’t have a holistic view of just how much they’re spending, what their average customer lifetime value is, and where there’s room for improvement.
In this post, we’re going to take a deep dive into customer retention to understand how to optimize costs for a better ROI.
In e-commerce, customer retention is a brand’s ability to retain existing customers. Essentially, customer retention is the practice of shrinking customer churn by building a community of loyal customers who are likely to purchase from your brand more than once.
Customer retention can be measured with a specific metric called customer retention rate (CRR) which measures the number of repeat customers a brand has over a certain period of time. Simply put, the customer retention rate measures customer loyalty.
Customer retention rate = (total # of customers at the end of a specific period – # of customers acquired during the period/# of customers at the beginning of the period) X 100.
While the CRR calculation may sound tricky, it’s really just tracking customer fluctuations over a set period of time to understand the rate of customers thatwere lost versus won.
For example, if a brand starts the new year with 1500 customers, acquires 100 more over the course of January, but loses 50 over the same period, their customer retention calculation would be:
CRR = (1550 – 100/1500) X 100
In this case, the brand’s CRR would be a stellar 96% as they acquired more customers than they lost over the month. To get the average customer retention rate, the brand would simply need to keep track of its CRR month-over-month for a specific period of time.
It’s a widely known fact that acquiring customers is plain old expensive. In fact, it costs 5 times as much to attract a new customer than it does to keep an existing one.
Not only that: existing customers are 60-70% more likely to buy from your brand compared to new customers, who are only 5-20% likely to make a purchase.
So, let’s say a brand acquired 50 new customers in the past two months, and 10 of them purchased a second time. It’s not unlikely that those 10 customers spent much more than the 40 one-timers over the same period.
With retention as a growth strategy, e-commerce brands everywhere are beginning to shift their focus from purely acquisition to a more balanced effort of acquisition and customer retention strategies.
Picture this: you compliment your friend’s new shoes and they immediately tell you all about where they purchased them and the smooth experience they had. This type of marketing is called word-of-mouth, and it’s one of the most effective ways for e-commerce brands to acquire new customers.
But, it doesn’t happen without a hefty amount of customer loyalty. Customers who are going to advocate for your brand to their friends and family are likely customers who have purchased a few times, each with a consistently good experience.
For brands, the higher their e-commerce customer retention rate, the more likely they are to have a large number of brand advocates on-side.
Repeat customers spend more (67% more, to be exact) than new customers. Why? Because their path has already been paved. They’ve gone through the checkout process already and they may even have an account set up with payment and shipping information saved.
This means there are less ‘unknowns’ for repeat customers. If they’ve already purchased a product, they’ll have a sense of how long delivery is, what the packaging looks like, and what the quality of the product is.
For e-commerce brands, this means that the longer they can keep their customers happy and confident in purchasing from their brand, the more value they’re likely to get out of them over their lifetime.
It seems like consumer behavior is changing daily – but one thing that has held true is a desire for an authentic community. No matter the vertical, consumers would much rather see positive reviews within a strong community rather than sales-y language and punchy advertisements.
Take apparel brand Edikted for example. A large part of their consumer base is Gen Z, so they chose to meet their customers where they were – on TikTok. Did you know that over 60% of the Gen Z cohort are active TikTok users?
With this in mind, Edikted crafted a TikTok community that encourages customers to share their ‘mini hauls’ with the #Edikted tag. The tag now has upwards of 500 million views, an incredibly organic approach to more views and engagement.
Another measure of customer retention rate in e-commerce, customer retention cost tracks how expensive it is for a brand to keep a customer loyal. This includes all costs associated with keeping a customer making purchases, such as:
The customer retention cost formula is pretty straightforward.
CRC = amount spent on keeping customers active/number of customers that are active
However, it becomes challenging when brands have to actually track and measure the amount they’re spending on customer retention initiatives.
Because there are so many things that aid in customer retention rate, it’s difficult to accurately assess everything that helps a brand to ‘keep’ a customer. To get a more accurate picture of retention spend, brands may find it easier to add the element of time into the equation. For example, only looking at periods of one month vs. the entire year.
Customer retention costs are sneaky. With so much focus on providing a stellar customer experience and building a community, brands may not realize just how much they’re spending on retaining their customers.
From customer service tools to personalized marketing initiatives, the dollars quickly add up. And, if your average order value isn’t as high as you hoped, some of those customer retention efforts may result in you making a loss.
It’s easy enough to look at a customer’s lifetime with a brand and say, ‘this customer spent $1,500 over the course of a year.’
It’s much more difficult to look at that same customer’s lifetime and factor in what was spent to encourage them to keep coming back. Those $1,500 could look a lot more like $800 once brands consider all they’re doing to retain that customer.
Having a more accurate depiction of what a customer is spending, alongside what your brand is spending. can help in maintaining healthier profits.
A brand’s return on investment (ROI) is one of the most important factors in maintaining profitability. Throw in customer lifetime value and customer retention costs into the equation, and a brand will have a much more accurate depiction of how profitable a specific investment was.
For example, say a brand found that their most loyal customer came in through a social media advertisement. Over the customer’s lifetime (one year), they purchased $4,000 worth of revenue, and the social ad cost only $400. The return on investment would be a whopping 900% with $3,600 in revenue gained.
But, take this same example and factor in the cost of the various loyalty initiatives over the year, and the ROI would look a bit different. While the social ad only cost $400, the marketing initiatives after the initial purchase cost $1,000 bumping the investment cost to $1,400. The new ROI would be around 186% with $2,600 in revenue gained. Still respectable, but quite different from the initial figure.
Optimizing, rather than reducing customer retention costs, will keep your customer service levels intact while improving repeat purchases. Not sure where to start? Check out our 5 tips to better optimize retention costs, in turn improving customer retention.
We’ve all heard the saying, ‘out with the old and in with the new.’ This rings true in optimizing customer retention costs and reducing churn rates. Brands that are continuously improving their customer technology and tools are more likely to maintain a stronger, healthier relationship with their community.
When brands take inventory of their current customer tools and measure how effective they are, they may find an opportunity to boost customer experience within their existing customer base. How? By investing in a more advanced customer success platform or a top-tier CRM to ensure customer expectations are consistently met.
If you aren’t sure where to start, it’s always a good idea to start with those who know you best: your best customers! Ask them what they want to see more of, what they like, what they dislike, what keeps them coming back for more.
This feedback can provide invaluable consumer insights that pave the path for decision-makers. It may shed light on areas of improvement or strategies that worked vs. strategies that didn’t. The results? A more strategic, personalized approach to retaining customers and less of the ‘let’s throw this at the wall and see what sticks’ attitude.
Streamlined operations are one of the best ways to reduce costs in e-commerce fulfillment. If a simple customer request is taking hours (or days!) of backend tasks and endless emails with customer service representatives or operations managers it’s likely costing a brand in the long run. Ensuring that efficient processes are in place to cut time and energy will ultimately help brands reduce their customer retention costs without sacrificing the level of customer service.
The incredible thing about the digital world is how much autonomy is given to the customer. E-commerce customers can typically start their own journey and curate their own experiences with a brand – so long as the brand has a seamless onboarding process in place. This means easy checkout flows, site navigation, optimization for mobile devices, subscription management, account customization, and more.
If brands find that their customer engagement and retention rates are not up to par, they may want to take a look at their onboarding process for opportunities to maintain trust and encourage purchasing. After all, a complicated checkout or account setup will likely result in a customer abandoning cart.
In e-commerce, customer retention rate and customer retention costs will tell the full story – but only if they are both measured. Simply focusing on a stellar retention rate, without taking into account how costly it is to keep existing customers, will throw off the scale and result in lost revenue. While customer satisfaction is the ultimate goal in e-commerce, brands who are savvy with where their dollars are spent are more likely to remain in the green.
It’s clear that building a community of loyal customers is invaluable in e-commerce. A focus on customer retention is imperative for a brand’s success. But to paint the full picture of where dollars are being spent, brands need to understand just how much it’s costing them to keep their customers.
The difficult task is finding the balance between optimizing customer retention costs while increasing customer retention rates. If a brand begins to cut essential tools or employees that improve customer retention, they may save money at first, but lose repeat customers in the long run.
The verdict? Like many things in e-commerce, a comprehensive approach proves to be the most valuable one. A focus on customer retention costs is important, but a balanced focus on multiple metrics for a more detailed understanding of overall performance is essential.
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