In part one of this series, we established that the foundation for growth lies in a solid, accurate understanding of your customers. Once you understand your customers and how many you have, you can accurately track KPIs and can grow your revenue consistently. With an accurate understanding of your customers in hand, it’s time to dive into measuring and boosting your Customer Retention Rate.
“Running Up a Down Escalator”
To grow, brands have two options:
- Acquire new customers
- Improve customer retention to (as close to) 100%
Customer Acquisition, especially via social and digital, has become too expensive for most brands. Facebook and Instagram don’t work as well as they used to, differentiation online is very difficult, and consumers are more careful with discretionary spending than they were just 12 months ago.
One client told me he felt like he was “running up a down escalator.” He assumed customers loved his products and would readily buy again, but it wasn’t happening frequently enough to grow. To keep hitting his sales goals, he had to constantly acquire more customers and in his words, “we can’t afford to grow through acquisition.”
To improve his bottom line, he needed to increase the number of times existing customers purchased. He needed to increase customer retention.
This theme is prevalent throughout LiftEngine’s client base. While the acquisition of new customers will always be important, the goal for most of our clients in 2023 is to maximize profitability through an increased customer retention rate.
What is Customer Retention Rate?
Your Customer Retention Rate (CRR) can be defined as the ratio of active and acquired customers vs. your lapsed customers. Typically, a lapsed customer is one that hasn’t purchased in 12+ months, though that can vary based on your industry and sales cycle.
The formula for annual CRR is the following:
For example, if you started 2022 with 50,000 active customers, added 10,000 new customers throughout the year, and ended 2022 with 54,000 active customers, your 2022 CRR was 88%.
While 100% customer retention is virtually impossible, even a small improvement in retention can impact your financials.
For example, consider a brand with the following customer metrics:
- Average Order Value (AOV) of $125
- Customer Acquisition Cost (CAC) of $100
- Retention Cost per Order (RCO) of $33
In this scenario, each percentage point increase in CRR yields a 1.1% increase in gross revenue and, more importantly, a 3% increase in gross profit. When a brand increases its CRR by 10% year-over-year, revenue will increase by 11% and gross profit by 30% (call me if you want to walk through the math)! Those benefits compound over time as your customers become loyal, brand enthusiasts.
Improving your Customer Retention Rates requires two things:
- Baseline your current Customer Retention Rate
- Develop a new strategy and tactics to convert one-time buyers into brand enthusiasts.
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Determining your Baseline Retention Rate for 2022
- Establish the number of active, individual customers you had on 1/1/22 and 12/31/22. By customers, we do not mean the number of emails on file, but real people.
- Identify the number of New Customers added in 2022
- Calculate your Customer Retention Rate.
Strategy and Tactics to Build Retention
Now you know your baseline CRR, here are some suggestions to convert buyers from one-time and lapsed purchasers to loyal brand enthusiasts.
- Do something more than what you’re currently doing. Your current programs (automated emails, retargeting, etc.) have only taken you so far. If you want to improve, do something different and evaluate new strategies and tactics.
- Personalize creative: Not all customers are the same. Align creative with segments of consumers based on gender, family type (married, single), presence of children, age bands, etc. Use creative that speaks better to your customers.
- Give a special birthday offer to customers. Better yet, when it fits with your product mix, target spouses with a birthday gift guide and help them buy for their loved ones.
- Track and target near-lapsed (typically 9-12 months) and lapsed (13+ months) customers. Decide how best to engage with customers who are about to lapse. Do they get a special offer? Do you invite them to provide feedback on what your brand could do differently to earn their business again? Deliberately act before these valuable customers are gone.
- Speak to customers consistently across channels. The same cross-sell products and birthday offers should be made to your customers in social, digital, email, SMS, direct mail, etc. While the personalized creative doesn’t need to match perfectly, ensure the theme is consistent across channels too.
- Re-calculate your CRR at least every quarter to ensure you’re improving consistently over time.
Maximizing profitability is the theme in 2023. If you have feedback or thoughts, please let me know!
Keep an eye out for the next blog in this series, “Increasing AOV in ’23.”
Published on Feb. 13, 2023, Last Updated on Nov. 08, 2023