For many businesses, pressure from shareholders and the C-suite to drive quick results has led to short term strategies focused on increasing revenue. It all sounds fine until we look at the wider business dynamics at play; we’re operating in increasingly crowded markets, where the costs to acquire new customers is rising. It’s not sustainable to focus solely on driving revenue, and businesses will fail because of it unless they change their mindset.
To put this into context; the cost of acquiring a new customer is between 5-25 times more expensive than retaining existing ones. While the probability of selling to a new customer is 5 to 20% versus 50 to 70% if they are an existing customer. If you want long term profitability and growth you have to optimise the value you generate from existing customers before chasing new revenue streams.
For businesses that hope to raise funds, float or sell, the argument has always been that revenue multiples were what got you your mega valuation. But even that’s changing. VCs have developed new customer retention based valuation models called ‘customer-based corporate valuations’ (CBCV). The shift has happened because retention rates are better indicators of real business value versus one-off sales. And yes, this method is being used on retailer businesses too, not just subscriptions businesses.
Because of these market dynamics, we’re entering a new era which we refer to as The Retention Economy. Retailers who continue to focus on top-line revenue growth rather than customer-unit economics will lose out in a big way. Here’s what you can do about it.
How to win in The Retention Economy
There are three main steps you can take to help you succeed in retaining and driving value from your existing customers. And there’s a good opportunity to get ahead of your competitors, as currently, only 15% of companies are focusing more on retention than acquisition.
Step 1: Measure CX Metrics
Turning a business from revenue-focused strategies to longer-term profit-driving ones requires a shift in thinking.
The metrics and goals you set internally drive the strategies your C-suite team creates. So, you need to measure customer lifetime value (CLTV) in order to set targets and goals around retention. This in turn will change their focus and the strategies they use.
Not only this, but understanding CLTV can help reduce your rising acquisition costs because you can more efficiently target the customers who are worth the most to your business.
But, CLTV can be hard to measure, particularly if you have long sales cycles. Also, if you aren’t able to discern unique customers e.g. you have guest checkouts or omnichannel experiences that aren’t tracked. Not to mention it can be hard to observe when exactly a customer has in fact ‘churned’ (or latent attrition).
Shortcoming aside, it’s better to get some form of measurement, to begin working with. The simplest version of the CLTV calculation is;
Customer lifetime value = average purchase value x average number of purchases per year x average customer lifespan in years.
If you don’t have a single customer view you can work out the above by;
Average purchase value – annual revenue divided by the total number of purchases.
Average number of purchases – total number of sales per year divided by the total number of individual customers who bought from you that year.
Customer lifespan – Average number of year’s customers’ continue to purchase from you.
Some equations tell you to subtract the cost of sales and marketing. However, I’d advise against doing that unless you can apply it to at least a segmented CLTV, because your customers likely come from a range of acquisition channels which vary in cost, and the customers themselves may have varying lifetime values. Therefore if you plan to use aggregated data to calculate the above I recommend keeping your average customer acquisition costs (CAC) separate.
To get greater value from this calculation, the best thing you can do is to apply it to customer segments – backed by discernable data highlighting different groups. In an ideal world, you’ll be working towards a single view of the customer, using a data warehousing solution to collect all of the data you have about individual customers across all channels. Allowing you to create information about different personas or customer groups. This will help you in step two below.
Alongside CLTV you’ll also want to measure lead metrics they help you put CLTV into context. These include customer satisfaction measurements such as CSAT/PSAT, NPS and Customer Effort Scores CES or SUPR-Q.
Step 2: Understand your customers’ motivations
Google ‘customer retention strategies’ and you’ll get over 95 million search results.
Anyone can make generalised recommendations; improve your customer experience, think about loyalty programs, improve your post-purchase flow etc. etc.
But to make these ideas actually work you need to understand what makes your customers tick, what motivates them to purchase and understand what apprehensions they may have.
By this point you hopefully have the quantitative side of the picture; you can map out different user journeys and have demographics data about different customer segments. But to get a deeper more nuanced understanding you’ll need to conduct qualitative research, and regularly. I don’t think anyone needs to hear it, but customers and their expectations, lives, and needs are changing faster than ever. The research you conducted last year is likely already out of date.
Consider using a range of research methods to collect data from such as moderated user research, social listening, and customer service chat log analysis.
Step 3: Experiment to improve retention and CLTV
Step one and two will give you quantitative and qualitative data to understand what’s happening and why. But hang fire before you start implementing new systems, programs, or customer journey changes.
To quote one of my favourite proverbs from the 1830s ‘there’s more than one way to skin a cat.’ From your research above you might have 10’s of ideas of what you could do to improve your customer metrics, and each one of those ideas could be executed in 1000’s of different ways. Some of the ways you could execute them may not make a difference at all to your KPIs, others may have a negative impact. If you go ahead with an idea without testing and measuring it, you’re simply guessing. And the odds of getting winning ideas executed in an optimal way is low.
Instead, organise a structured process for testing out new concepts and some of your top ideas on how to execute them (pro tip- use psychological principles to help you enhance the execution of ideas). The easiest way to do this is by using an A/B testing tool to run experiments on the digital experience part of your journey– although the principles of experimentation can be applied offline too. A/B testing on your website is only a worthwhile experimentation method if you have traffic in the 100,000’s allowing you to get statistically significant results.
It’s worth noting that many people associate A/B testing (wrongly) with button colour changes, and small UX tweaks. Both of which are not great test ideas to test as they are unlikely to drive behavioural changes or are too insignificant to register. But don’t be fooled, these tools allow you to test out new propositions, pricing strategies, cross-sells and upsells, checkouts, and loyalty program ideas. If you have the data and set-up you can also use personalisation tools to take this a step further.
If you can’t run statistically sound experiments online, make changes to your experience in a methodical way, to a subset of users, and use a launch monitoring service or your internal team to measure the results before and after to help assess if the idea is worthwhile. Conducting cohort analysis of your customers to help you attribute the impact any implemented changes had on your long term growth metrics such as customer lifetime value and retention.
By testing your ideas before you implement them you can avoid wasting money and time on ideas that don’t end up helping improve the business.
While the path to succeed in The Retention Economy isn’t as easy as spinning up some new PPC ads, it’s worth it if you want to grow a sustainable, profitable business that will be here in the long term. Take advantage of building loyalty and a community of valuable customers around your business now. It’s down to you to start the change in mindset needed to make it happen
Katie Kelly, marketing director, Speero