Everyone wants to get in on the subscription gold rush.
No longer limited to Book-Of-The-Month Clubs, everything is being—to coin a word—“subscriptionized”.
Whether it’s weekly gourmet pre-packaged meals, replacement razor blades, or unlimited music, everyone from Blue Apron to Google is trying to get people to sign up for some sort of subscription.
The reason? That golden goose of recurring revenue.
Instead of having to fight to get a large volume of customers to make a single purchase, companies can rely on customers to purchase again and again.
“The success of the model is clear. You need only look at Dollar Shave Club on the consumer side to see the impact on the industry (or look at newer DNVBs like Quip following similar paths). Or, on the B2B side, look at the stock prices of Adobe (up 770 percent since 2012), Microsoft (up 320 percent) or Autodesk (up 360 percent), which have shifted to offer internet cloud-based software for a monthly or annual fee.”
You may be wondering: What does any of this have to do with ecommerce? After all, you’re not running a subscription business. Right? Sort of. The reality is that every business needs repeat customers in order to drive growth.
As a VP of Ecommerce, you’re constantly aiming to boost revenue and reduce costs. Focusing on customer retention (aka repeat customers) is a highly effective way of doing that. But this is easier said than done. Getting people to purchase from you on a regular basis usually requires a seamless, even pleasant shopping experience.
For better or worse, Amazon has set the standard for online shopping. Only the most dedicated of shoppers will put up with a mediocre shopping experience in order to purchase more than once (if at all). Hence the need for Conversion Rate Optimization (CRO).
One of CRO’s primary goals is to increase conversions by making the overall shopping experience as simple, pleasant, and seamless as possible. If you can give shoppers this kind of experience, it’s much more likely that they’ll purchase from you more than once, increasing your customer retention and overall Customer Lifetime Value (LTV).
In this article, we’re going to show you:
- The significant benefits of increasing customer retention
- What most brands get dead wrong about retention
- How to win the hearts of customers so that they come back again and again
- The key role CRO plays in increasing retention
The Significant Benefits of Customer Retention
To say that there are significant benefits to customer retention is a significant understatement. The reality is that it’s very difficult to scale your business if your retention rate is low. You’re constantly on the hunt for new customers, which requires a large amount of time and resources that would otherwise be dedicated to growing your business.
If you want to scale, you need to increase retention. Specifically, higher customer retention means:
Lower Customer Acquisition Costs (CAC)
Your Customer Acquisition Cost (CAC) is simply how much it costs you to gain a new customer. If you spent $1,000 in 2018 and gained 10 new customers, your CAC is $100. In other words, you had to spend $100 to gain a single new customer.
The higher your customer retention rate, the lower your total acquisition costs will be. You don’t need to spend as much on getting new customers because your existing customers purchase from you on a regular basis.
Higher Customer Lifetime Value (LTV)
Customer Lifetime Value (LTV) represents approximately how much a customer spends on your products over the lifetime of their relationship with you. A higher customer retention rate means that customers are coming back, again and again, to purchase from you, and the total amount you make from a single customer significantly increases. As Michelle Bitran of Yotpo notes:
“…the work involved in earning and retaining a loyal customer pays dividends. Some 60 percent of these customers will share their favorite brands with friends and family. You can’t beat that kind of word-of-mouth marketing, especially since referred shoppers come to your site with a pre-established level of trust.”
Additionally, 52.3 percent of loyal customers will join a rewards program, and 39.4 percent will spend more on a product even if there are cheaper options elsewhere. That kind of price-blind dedication is invaluable in the hyper-competitive modern eCommerce space.
The ability to focus on growth
As noted above, it’s extremely difficult to grow and scale your business if a majority of your efforts are focused on constantly acquiring new customers. If you consistently need a large volume of new customers in order to keep revenue coming in, you’ll never be able to dedicate the necessary time and resources to growing your business.
Increasing your customer retention rate ensures that revenue continues to flow even when you’re not actively seeking out new customers. This, in turn, allows you to focus on expanding into new markets or increasing your product offerings.
How Brands Get Customer Retention Wrong
Unfortunately, many brands can’t effectively execute a winning customer retention strategy. They find themselves making one of the following common mistakes:
Focusing on the wrong customer segment
To state the obvious, your goal should be to retain your best customers. These are the ones who love your product and don’t need special incentives, such as discounts, to be persuaded to purchase from you on a regular basis.
Using a discount to try to improve customer retention rate is almost always a losing strategy because it appeals to the wrong segment of customers: those in search of a discount.
A better strategy is to use Conversion Rate Optimization (CRO), which allows you to improve the retention rate of your best segment of customers without relying on discounts.
Bombarding customers with offers
We’ve all had the experience of getting email bombed by a company after making a purchase. In a desperate effort to get you to purchase again, they send email after email, each containing a different offer or discount. This is the wrong strategy for at least two reasons.
First, it’s simply annoying. You’re not going to win back many customers by overflowing their inboxes.
Second, you’re again focusing on the wrong customer segment. You’re trying to win repeat shoppers through discounts instead of providing customers with a seamless shopping experience.
Yes, there is a place for offers and discounts, but focusing on that over user experience is putting the cart before the horse.
Getting Customer Retention Right (Step-By-Step)
So how can ecommerce brands avoid the mistakes above and actually get customer retention right? By adhering to the following steps:
1. Focus on the right segments of your customer base
The first step in customer retention success is to identify the segment of your customer base that provides the most revenue and then focus on providing them with the ideal shopping experience. These are the 20 percent of customers who generate 80 percent of revenue.
Increasing your retention rate with these “whale” customers (as opposed to the “minnows” who only make one-time or discount purchases) will provide a significant boost to your bottom line and free you up to focus on growing your business.
2. Build a consistent shopping experience across your brand
Customers expect the shopping experience you provide to be the same both online and offline. Few things are more jarring for customers than having a good shopping experience at a brick-and-mortar location, only to find the website confusing, outdated, and clunky.
Don’t expect your retention rate to be high if there is a significant discrepancy between your online and offline experience. Use Conversion Rate Optimization (CRO) techniques to ensure that your online shopping experience is just as pleasant as the offline one.
3. Don’t limit your retention strategy
When it comes to customer retention, most businesses rely on a few well-worn techniques, such as email marketing, retargeting purchasers, and offering discounts.
While these techniques may work with varying degrees of effectiveness, you’ll attract and retain more engaged customers in the first place if you focus on providing a great experience.
Consider Netflix. Why have they been so successful? Much of it has to do with the superior experience they provide to their customers. They make finding something to watch incredibly easy, which in turn creates passionate, engaged customers. Their high retention rate is primarily due to the user experience they provide, not their superior email marketing or retargeting strategy.
The same concept applies to Amazon. They’ve done everything in their power to make the shopping experience as simple as possible. From their Dash Buttons to 1-Click ordering, Amazon has invested heavily in creating the ideal user experience. The result is a massively loyal customer base.
As a general rule, user experience and Customer Lifetime Value (LTV) tend to rise and fall together. The better the shopping experience you give customers, the higher the lifetime value of those shoppers will be.
4. Offer perks to loyal customers
Giving your VIP customers the VIP treatment is an excellent way to keep them coming back again and again, as well as evangelizing on behalf of your company. The VIP treatment can include all manner of perks, such as:
- Early access to discounts
- VIP-only discounts
- Special events
- Access to exclusive products
- Input on product development
Your goal is simply to make your best customers feel like you truly do value them. You want them to know that you’re grateful for their business and provide them with the best possible shopping experience.
The Intersection of CRO and Customer Retention
The beauty of Conversion Rate Optimization (CRO) is that it enables you to increase your overall retention rate without resorting to techniques such as discounting (which cuts into your bottom line and hinders growth).
By helping to create a seamless, pleasant shopping experience, CRO does a lot of the heavy lifting when it comes to boosting repeat conversions and maximizing your ROI. Specifically, CRO enables you to:
- Identify your most profitable customers CRO starts with a deep-dive into your website data. Using specific tools like analytics and heatmaps, you are able to identify which segments of your customers are generating the most revenue. Once this is done, you can then double down on those segments, seeking to raise conversion rates by improving the user experience.
- Identify your most profitable channels In addition to identifying your most profitable customers, CRO also helps you determine which channels are driving the most revenue. Which is performing better: email or PPC? How effective is your social media strategy? What’s the conversion rate for Facebook ads versus PPC? CRO enables you to determine which channels are generating the most revenue and then double down on those channels.
- Adapt to the preferences of your customers Ecommerce is constantly changing, and what worked last year probably won’t work as well this year. As Amazon founder and CEO Jeff Bezos put it:
“One thing I love about customers is that they are divinely discontent. Their expectations are never static—they go up. It’s human nature. We didn’t ascend from our hunter-gatherer days by being satisfied. People have a voracious appetite for a better way, and yesterday’s ‘wow’ quickly becomes today’s ‘ordinary’. I see that cycle of improvement happening at a faster rate than ever before. It may be because customers have such easy access to more information than ever before—in only a few seconds and with a couple taps on their phones, customers can read reviews, compare prices from multiple retailers, see whether something’s in stock, find out how fast it will ship or be available for pick-up, and more.”
Bezos knows that ecommerce changes rapidly, and he is constantly working to ensure that Amazon stays at the front of the pack. The good news is that, even though you’re not Amazon, CRO allows you to see where the preferences of your customers are changing and then adapt appropriately.
For example, you may see that the conversion rate on a particular page has dropped 20 percent in the past year. Using proven CRO techniques, you can dissect the data to determine why the conversion rate is dropping and what you might do to fix it.
- Determine why customers aren’t converting in the first place To state the obvious, if someone doesn’t initially convert on a page, there’s no chance of repeat conversions. Hence, a low initial conversion rate translates into an even lower repeat conversion rate.
Using CRO, you can determine what is keeping people from making an initial purchase. Analytics may reveal that your navigation menu is too confusing, causing people to become lost as they try to navigate your site. Or user testing may show that your checkout process is too cumbersome, leading to an abundance of abandoned carts. Once you’ve identified these issues, you can then take steps to increase your first-touch conversion rate.
- Maximize your existing retention efforts CRO is like steroids for your existing customer retention efforts, creating a virtuous cycle. Customers come to your site and, due to your CRO efforts, convert at a relatively high rate. When they come back to your site, due to email marketing or retargeting, the repeat conversion rate is also relatively high because of the CRO techniques you’ve employed.
In a sense, it’s like compound interest that keeps building on previous investments. CRO boosts both your initial conversion rate and the conversion rate of repeat customers.
Want Repeat Customers? Invest in the Experience
The phrase “A rising tide lifts all boats” is usually used in reference to the economy, but it applies equally well to the customer experience. When you invest in improving the experience on your site, it tends to improve all your other marketing efforts as well.
In other words, if you increase your conversion rate, your email marketing and advertising and retargeting become all the more effective. The rising “tide” of the conversion rate raises the “boats” of your other marketing efforts. The average ecommerce conversion rate is approximately 2.86 percent. Amazon’s conversion rate for non-Prime members is approximately 13 percent, and for Prime members, it climbs to a staggering 74 percent. How has the company achieved such heights? By intensely focusing on user experience.
It’s been said that in the early years of Amazon, Jeff Bezos invested 100 times more in user experience than in advertising. He knew that investing in user experience would create repeat customers who passionately evangelized on behalf of his customer.
If you want strong and consistent customer retention, follow Bezos’ example. Focus first and foremost on user experience, and trust that it will amplify the effects of all your other marketing efforts.