Why Customer Retention is a Key Differentiator for High-Performing Ecommerce Business
It’s one of the most dangerous threats to your ecommerce business…
Even worse, the threat is invisible; lurking just beneath the surface, stealing your customers, and only revealing itself to you after it’s too late.
It’s disloyalty. And don’t assume you’re immune.
The Question You Must Answer
Exactly what type of loyalty is valuable to my business?
It’s an important question and one that must be approached with humility, informed by data, and answered honestly if you’re to become a high-performing ecommerce business.
The truth is that customer loyalty is on the decline.
The marriage betweens brands and their customers is on the rocks:
- 44% of mobile coupon users change brands often for the sake of variety
- 31% of those surveyed here say they’d switch brands for a cheaper alternative
- 90% of millennials surveyed here would switch brands based on the cause with which a brand is associated
In fact, the very consumers you’ve enrolled in your loyalty program are less likely to behave loyally than they might have in years past. While enrollment in loyalty programs has increased, participation in those programs is declining:
The commoditization of seemingly everything…
Combined with the democratization of information means ecommerce merchants are increasingly competing less often on price and more often on customer experience. In fact 89-percent of marketers expect customer experience to be their primary differentiator.
But that’s not enough to thrive in an environment characterized by declining customer loyalty…
The Hidden Cost of Disloyalty
Improving the customer experience isn’t an end in itself…
In fact, it’s only a portion of what separates top ecommerce businesses from the rest of the pack. No discussion about improving the customer experience is complete without mention of the total customer experience or TCE.
In part, the TCE includes attributes that retain customers and and earn lasting customer loyalty (LCL) which, according to research, is being pressured by commoditization, globalization and market saturation in developed countries.
The value of retention that leads to LCL becomes clearer when seen through the lens of the cost to acquire new customers and the inherent bias companies have toward acquisition versus retention:
- It can be 7X more expensive to acquire a customer than retain one
- 44% of companies have a greater focus on acquisition vs. 18% that have a greater focus on retention
It’s counterintuitive, especially when you consider the the difference in probability between selling to existing customers versus new customers:
Inflated customer acquisition costs that can often plague “pre-revenue” or unprofitable tech companies seeking hyper-growth are often shrugged off as nothing more than a slight nuisance that can be rectified with a simple pull of a lever. But a successful business model, one that plans for the long term, must be balanced in ways that result in CLV being higher than CAC:
Customer retention can significantly and consistently drive down a merchant’s overall customer acquisition costs while simultaneously lifting customer lifetime value. In fact, even a minor improvement in retention can yield a dramatic increase in sales.
All of this is of course not to say that customer acquisition shouldn’t be a priority for top performing ecommerce companies. However, these companies better balance acquisition with retention to power customer loyalty and drive sales over the long term.
Evaluating your retention and loyalty numbers – the percentage of orders coming from repeat customers, repeat purchase rates, etc. – and comparing them to the best performing ecommerce merchants, can offer you a glimpse into the future and whether you’re on track to experience the success you set out to achieve when you launched.
Disloyalty may be an invisible threat…
But the patterns identified in high performing ecommerce businesses are easy to see and reveal how you might prioritize your customer experience and marketing objectives.
Here then are three key insights that illustrate how customer retention and loyalty drive growth for the world’s highest performing ecommerce businesses:
Insight #1: Repeat Customers Accelerate Growth at Top Performing Ecommerce Companies
In a recent evaluation of 358 ecommerce retailers, RJ Metrics, which offers an analytics platform to ecommerce businesses, analyzed the behavior of more than 53-million online customers making more than $41 billion in transactions. One of the key takeaways, according to the analysis, is that immediately after launching and even three years later top performing ecommerce companies not only excel at customer acquisition but also retention:
According to the analysis:
“Already in month one, top ecommerce companies generate 20% of their revenue from return customers. And by the close of year three, they’ve experienced periods when they generate nearly 60% of their revenue from return customers..”
While top performing companies also excel at acquiring new customers they often differentiate themselves by better retaining those new customers and prompting repeat purchases much more rapidly than lower performing companies.
Insight #2: Top Performing Ecommerce Companies Reduce the Time It Takes to Earn Customer Loyalty
Top performers, those in the first quartile (Q1), convert new customers into repeat customers much faster than lower performers. In fact, new customers of top performing ecommerce merchants, according to the research, generally make a second purchase 12-days faster than lower performing merchants:
Reducing the time between purchases one and two is crucial when you consider this; just 32-percent of new customers place a second order within a year of the first purchase. However, top performers that do prompt a second purchase within year one significantly increase their chances of earning additional purchases:
Insight #3: Top Performing Ecommerce Companies Acquire & Retain More Valuable Customers
In addition to acquiring a greater number of loyal customers, top performing companies are also characterized by loyal customers who spend more money and who are more valuable than those of lesser performing companies:
According to the analysis:
“While CLV is more of an output than an input, the lesson here is still quite important: you cannot win on transaction volume alone — revenue quality matters. In the first year with a business, customers at top companies spend nearly $100, while CLV for the bottom three quartiles lands somewhere between $45 and $50.”
Customers are easier to spot than intuition might lead you to believe, which is important for marketers to understand in order to better predict which of their customers are most likely to make additional purchases. In fact, repeat customers who ultimately become high value customers over time are more likely to spend more money on their first purchase versus customers of lesser value:
According to the analysis:
“Repeat purchasers spend more on their first purchase than the average, and one-time purchasers are the only group that spends less than the average. Customers that make four or more purchases have first order values at least 15% higher than average. Companies can use analysis like this on their own customer base to predict the campaigns that will bring in the highest marketing ROI.”
Bucking the Loyalty Decline
In an environment in which customer loyalty is on the decline, a focus on customer retention is a key differentiator for ecommerce businesses. Remember, the best performing ecommerce companies not only fill the funnel with new customers but also focus intensely on retaining customers and earning long term loyalty that differentiates them from competitors:
- Growth at top performing companies is accelerated by repeat customers
- Top performers reduce the time necessary to earn customer loyalty
- Customers of top performing companies are more valuable
In a world where customers are increasingly willing to switch brands, ecommerce businesses that want to outperform their peers must narrowly focus on earning loyalty and inspiring new customers to rapidly become high value repeat customers.