Dispelling the myths of customer retention in retail

E-retailers bet big this holiday season and it paid off.  Consumers spent $35.3 billion during the holiday season, up 15% from the same period last year.

Looking across our own clients, we observed that 65% of these holiday purchases were made by new customers.  With such an influx of new shoppers, it’s no wonder retailers are now thinking hard about customer retention. Turning new buyers into loyal customers is the best way to maximize the return on their big holiday investment.

As marketing teams begin retention efforts for these holiday shoppers, we thought it timely to dispel some common myths about retention in retail.

Myth #1:  Retention improvements don’t make a big impact on the bottom line.

We’re constantly measuring the impact of retention improvements on customer profitability.  On average, we find that a 1% improvement in customer retention leads to a 5% increase in profits per customer.

A 1% retention improvement leads to a 5% improvement in profit per customer

Why is this impact so large?  The goal of retention is not to simply turn a one-time buyer into a two-time buyer. The goal is to understand when to reach out, how to reach out, and what to say to each individual to keep customers returning over and over again.  Improvements in retention have a multiplier effect, i.e. small improvements lead to big gains in profit.

Myth #2: Retention in retail is too fuzzy to measure

This is simply untrue.  Retention in retail is different from retention in a subscription business, because retail customers don’t let businesses know when they “quit.”  However, every retailer knows they lose customers, and it’s possible to measure this drop off.

One way to visualize retention is to graph how a group of new customers becomes less and less active over time – in this case, we define “active” as making an order in the store.  In the beginning, the whole group is active.  As time passes, fewer and fewer customers make orders each month.

 

Comparing how new customers fade away

Note that this drop-off curve does not distinguish between customers who are idle and those who have actually quit forever.  There are more sophisticated techniques that capture this difference, but this graph is a good starting point.

Myth #3: It’s impossible to measure the impact of specific retention strategies

To measure the impact of retention strategies, we can look beyond conversion rates and optimize for customer lifetime value (CLV).

Traditional online marketing metrics, such as click rates, open rates and conversion rates, aren’t sufficient in the world of retention marketing.  If you offer your customers a 90% discount, all those traditional metrics will surely be high, but this surely won’t optimize long-term customer profits.

CLV is the answer. CLV, when calculated correctly, captures the long-term profits we can expect from a specific customer.  The science of CLV calculation has progressed quite a bit over the past 5 years to the point where it is now an accurate and valuable metric.  If the retention actions you take are hurting long-run profits, CLV calculations will quickly let you know.

Myth #4: It’s impossible to substantially change customer retention

We’ve seen many companies increase and decrease their focus on customer retention, and we’ve watched the impact it has on customer profitability.  It’s common to see retention swings of one or two absolute percentage points.  In an extreme case, we  saw a company lift its retention by 4 absolute percentage points, increasing profits per customer by almost 20%.

 

If you’re putting together a retention plan to hold on to your customers, let us know – we’d love to help.

Note: When we speak of increases and decreases in customer retention, we’re referring to raising and lowering the drop-off curve by absolute percentage points.  When we speak about increase in customer profitability, we are referring to the relative impact on the lifetime value of the average customer.

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