Finding the formula for successful customer retention strategies

Richard Piper, our Business Development Director discusses two fundamental but contrasting strategies: the retention of loyal customers versus the acquisition of new ones.

We all know that repeat purchasers spend more and generate larger transactions, yet retailers spend far less time on retaining existing customers. If retailers are to find buoyancy and generate constant revenue in the modern retail market, retention should be placed above acquisition.

But the hyper-competitive retail landscape throws up many challenges to consumer faithfulness. Among these are the overcapacity of retailers, the disruption of traditional retail channels and the online/offline dependency cycle. These are all problems that should be reviewed and remedied. What are the metrics that retailers should measure and what are the loyalty mechanisms they should introduce to foster this loyalty considering the value of customer retention in comparison to acquisition?

Counting Costs

The cost of digital advertising keeps climbing higher, growing at a rate of 12% per year. At the same time, customer acquisition costs retailers five times more than retaining existing ones. This means that if retailers focus solely on acquiring new customers to grow their consumer base, they will not break even. In fact, with such high acquisition costs, customers must make, on average, four purchases before they become profitable.

With the heavy focus on acquisition, Webloyalty’s findings come as no surprise. According to the Unfaithful Consumer 2 report, between 2016 and 2018, the number of homeware customers that chose to shop around rather than stay with their favoured retailer rose by 15.3 percent, and a 16.3 percent for electronic goods.

So what are the drivers behind this disloyal behaviour?

Misaligned Budgets

Retailers must change their mindset and focus on customers as assets rather than transactions.

The sea change that e-commerce has driven has pushed retailers to focus on the single figures – traffic and clicks – rather than what matters most; the customer’s lifetime value.

Such intense focus on acquisition has led to huge budget imbalances in the industry. An example is Blue Apron, which reportedly spends more than $400 for every new customer, despite making only $236 a customer, causing major problems for the company.

Making Measurements

Though Customer Lifetime Value may be difficult to measure, it is vitally important for the health of retail. It gives clarity to the need for retaining loyal customers over the pursuit of finding new ones.

Retailers in the market must first identify their most loyal consumers and understand why they return to the store. What are the deals and discounts customers are using most frequently? Where do they spend the most and why might this be? And how does customer service fair in the mix?

Companies must also investigate their churn rates to see the events that cause customers to stop using to their service and look more closely at product issues to identify the points where customers stop engaging with the brand.

Retailers like ASOS have been outstanding in understanding their Customer Lifetime Value. Using AI, ASOS looked at 132 customer data points, including the country a customer was from and when they last made an order, to fully get to grips with what makes a customer a high-value customer. This knowledge was then used to improve their marketing to all customers. By understanding this behaviour, ASOS is able to switch more loyal but low-spending customers to high-value.

Similarly, retailers must identify the traits that push customers to be one-time buyers.

The cost of this disloyalty is high. For example, global losses by food and grocery chains through poor customer retention amount to £89.4 billion each year. Among the reasons many customers seek out competitors is high delivery costs (26.3 percent), big price rises (50.6 percent), and the lack of online ordering facilities (35.7 percent).

Once metrics such as these are measured, retailers are empowered to make necessary improvements. When a retailer knows their best attributes they can be leveraged to turn a single purchase into multiple ones.

Solve your acquisition problem and encourage loyalty from your existing customers

How then, can retailers reward existing customers in the face of squeezed margins and rising retention costs?

Historically, one of the best methods for customer retention is to establish a loyalty programme. However, the dynamic is changing whereby consumers are foregoing points and prizes in exchange for value.

An example of this would be the rising sector of subscription Loyalty programmes, Amazon Prime is merely the tip of a growing spear of retailers awakening to the power of ‘paid loyalty’. Perhaps the most compelling reason is that consumers clearly want it; Sixty-two percent of consumers said they would consider joining a fee-based rewards programme. This begs the question,

are customers loyal to the loyalty programme and not the retailer?

At Webloyalty, our reward programmes drive repeat purchases by offering members the ability to earn ongoing cashback on their shopping without eating into retailer’s margins, thus encouraging loyalty behaviours, higher purchase frequency and better customer engagement.

Cracking loyalty is a key driver of long-term profitability.  Loyal customers spend more, refer more people, become brand advocates and are more willing to expand their purchasing into new categories. Put simply, repeat customers are far more valuable than first-time shoppers. The evidence is clear, so consider refining and measuring your customer retention strategy this year.