What is Customer Retention, and Why is it Important?

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Editor’s Note: This post was originally published July 16, 2019 and was updated for accuracy and comprehensiveness on January 7, 2020.

 

As a retailer, what’s one thing your business counts on? If you haven’t thought about customer retention before then now is the time!

Customer retention is about trying to keep more customers for a longer period of time so they spend more at your business over their lifetime; it’s about keeping loyal customers instead of just recruiting new ones. 

Customer retention is the opposite of customer acquisition, which is when a retailer tries to get new customers. It takes more than acquisition alone to grow your business sustainably, and without the ability to engage and retain customers over time your business is bound to flatline.

That’s why customer retention is so important. Knowing what it is and why it’s important can mean the difference between your brand’s success or decline, making it one of the most powerful terms you’ll ever learn as an ecommerce merchant. 

However, customer retention doesn’t happen overnight—this is why many merchants don’t believe in it. While acquisition is easy to see an increase in revenue, the type of customer engagement retention relies on is not quite so straightforward because it takes time for merchants to see positive results from retention strategies.

You can start to see the benefits of customer retention in as little as six months.

For merchants planning on running their business for a long time, six months isn’t that long to wait! Even better, every small change you make sets the stage for massive improvements over time.

Why customer retention?

A study conducted by the Harvard Business Review found that “increasing customer retention rates by 5% increases profits by 25% to 95%.” That’s a pretty significant jump! 

Customer retention usually costs less than spending on acquisition strategies, and successfully retained customers are more likely to refer other customers to your business. Also, referred customers usually have a higher lifetime value than customers that were acquired through conventional channels too. 

Keep this in mind: the number one goal and purpose of customer retention is to increase profit. However, there are other great outcomes of retention, like customer satisfaction, loyalty, and brand perception. So if you’re wondering, “why customer retention?” Know that investing in retaining your current customers is an investment in increasing your profit, and what business doesn’t love that? 

Using strategies, tactics and tools to kick-start your customer retention plan

Now that we know what retention is, how do we go about achieving it? We have three methods to increase customer retention: strategies, tactics, and tools. Navigating the retention space is confusing, but it is easy when you approach everything as a retention strategy, tactic, or tool. 

It’s important to know how strategies, tactics, and tools work together to create a bullet-proof customer retention strategy

Retention Strategy:

A retention strategy is a plan designed to achieve the overall goal of retaining customers. Some examples of strategies include improving your business’ customer experience and increasing your customer referral marketing. 

One specific example of a strategy is keeping customers happy so they spend more. Although this is a plan, it doesn’t say how this is achieved (tactics) or what will be used to achieve this (tools).

Retention Tactics:

A retention tactic is an action or act carried out with the goal of creating retained customers. 

An example is checking in with customers two weeks after their last order. This shows what the business will specifically do as an action to carry out the retention strategy. Other examples include giving existing customers discounts or coupons and offering a loyalty program to reward customers for actions.

Retention Tools:

A retention tool is a system used to carry out customer retention functions. A few examples are using live chat to speak with customers or using gamification mechanics (leaderboards, earning badges, points, etc) in your customer loyalty program.

Combining all three gives you the strategy, tactics, and tools needed to achieve customer retention to help your business grow and increase profit.

Using a loyalty program to increase your customer retention

Like we said, using a loyalty or reward program is a tactic and tool to help you increase customer retention. The best way to understand how this can be done successfully is by looking at an example of a brand doing it well. Pink Lily offers a program called “Pink Perks,” and they’ve done a good job at making sure the program is relevant to the brand and personal experience for their customers. 

For just signing up to the loyalty program, every member automatically gets 200 points. Also, Pink Lily offers simple ways to continue earning, such as 1 point for every $1 spent, liking the business on social media, or simply writing a product review. Offering points for reviews is a smart tactic because it will keep customers coming back for more products that they can review to earn more points; it’s a win-win for both Pink Lily and the customer. 

They’ve also incorporated gamification by creating a VIP tier program. When customers make it to a new tier, they earn a gift. This motivates customers to continue shopping so that they can make it to the top of the tier and receive the best rewards. Who doesn’t love a good gift? 

These types of incentives offered through a loyalty program are what help a business with customer retention. When they continue to offer rewards for repeat shoppers, it’ll keep them coming back for more. This tactic and tool, along with others, will give you the foundation you need to find customers who will continue to be loyal to your brand for their lifetime. 

Retention improves exponentially over time

Since customer retention is a long-term benefit and not a quick fix, the best way to understand its value is to forecast retention-driven revenue. This is an idea we’ve talked about before with our friends at Shopify, but it’s worth revisiting this graph:

Revenue over time graph

Source: Shopify

As you can see, the longer you work on building a retention strategy the more it pays off. Small changes in retention leads to huge results, while focusing primarily on acquisition sees significantly smaller dividends.

This forecasting makes sense when you consider the type of metrics you’re trying to improve with customer retention. No matter what you sell, you’re probably trying to improve things like repeat purchase rate and customer lifetime value by retaining more of your current customers. 

When you look at what each of these metrics are, it’s easy to understand why you can’t see results right away:

  • Purchase frequency requires existing customers to make more than one purchase, so unless you’re selling something they actually need every day the chances of them making their second purchase immediately is slim.

  • Repeat purchase rate builds on purchase frequency to measure what percentage of your customers are making more than one purchase with you. 

Investing in each of these metrics becomes a way for you to lay a sustainable, profitable foundation that will help you multiply your business over time, no matter what stage you’re in.

Build retention into the big picture of your marketing strategy

As your business grows, your marketing strategy must evolve with it. That’s because you have different objectives at every stage. So, aside from your strategy, tactics, and tools to increase customer retention, it’s also important to build retention into your overall marketing strategy.

Retention can easily be built into your business’ growth plan in a series of stages:

  • Stage 1: just starting — customer retention helps you build on the foundation of customers you’re building by maximizing revenue for every customer you acquire.
  • Stage 2: gaining traction — investing in your retention strategy makes your store irresistible to those who have already discovered your brand while improving the experience for those who are just getting to know you.
  • Stage 3: consistent sales — retaining your current customers allows you to dig into their ongoing profitability by giving you the tools to invest in the relationship you have with each of your customers.

Acquisition and retention spend balance

Once you have consistent sales, emphasizing your customer retention strategy is the most powerful way to push your success forward. By harnessing the power of retention tactics like loyalty programs, re-engagement marketing, and value-add marketing, you will continue to improve your overall customer experience. 

Loyalty programs, re-engagement marketing, and value-add marketing work together to improve customer retention at every stage of growth.

These tactics will complement the other reasons your customers already love your brand, such as your customer support, product quality, and branding. Each of these elements work together to impact the way your customers feel about you, and it’s these emotional connections that ultimately determine whether they want to make another purchase in the future.

Investing in a customer retention strategy guarantees that your business will continue to grow over time. With retention, you can stop investing in only ad space and start investing in what really pays off: your best customers.

Retention is a way of thinking, not a single action or decision

An effective customer retention strategy is designed to achieve the overall goal of retaining more of your current customers. Through a combination of tactics and tools, you can easily integrate it into other parts of your business and unlock the success you’ve always dreamed of.

Ultimately, customer retention is not tied to a single decision you make. Instead, it’s the result of combining other acquisition and customer engagement strategies to encourage more customers to choose you over your competitors. As one piece of a bigger plan to acquire, engage, and retain more customers, customer retention is success worth waiting for and, if done properly, can be the piece of the puzzle that sustains your ecommerce business for years to come.

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A small lift in customer retention can mean big profits.
Start investing in your retention strategy with our expert’s guide to customer retention.

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