Despite the fact that acquiring new customers costs 5 to 10 times more than selling to a current customer — and current customers spend 67% more on average than those who are new to your business – customer retention in marketing has long taken a back seat to acquisition.
Additionally, brands are also facing the challenges of increased consumer privacy regulations, customer acquisition costs, and a 2X increase in the cost of advertising on social, search, and display ads. This is forcing companies to focus on their customer retention strategies, so we’re examining which of those strategies are truly effective in cultivating loyal customers.
Customer retention is a measure of customer loyalty and refers to how well a brand or company can keep its customers returning over time. High customer retention rates mean that a majority of your customers are repeatedly choosing to purchase your products or services, deepening their relationship with your brand as they climb the customer loyalty ladder.
Retaining customers may mean convincing them not to defect to a competitor or keeping them engaged with your brand, product, or service to prevent lapse and churn. Businesses use a variety of customer retention tactics and strategies to encourage customers to return, including customer relationship management, customer loyalty programs, loyalty offers, and rewards.
Historically speaking, companies have often undervalued customer retention’s importance, instead concentrating on customer acquisition in an effort to demonstrate growth to their stakeholders. Research has shown that 44% of companies make acquisition the priority, while only 18% focus on retention.
However, these numbers are shifting as more brands and marketers recognize how critical customer retention is to revenue growth and long-term business success. Existing customers have a 70% likelihood of making a purchase (vs. 20% for new customers), they buy as much as 31% more on average, and their customer lifetime value (CLV) is estimated to be 10x that of their first purchase. For online retailers, more than 40% of their revenue is generated by just 8% of their customer base—the customers who are most loyal.
It’s also typically less expensive to retain customers than to attract them. In surveys, 82% of companies agreed that retention is far cheaper than acquisition. In fact, according to the Harvard Business Review, it can be anywhere from 5x to 25x more expensive to acquire a new customer than to keep an existing one.
Added to that, COVID-19 completely shifted consumer shopping habits. Customers who once may have made decisions based solely on price or quality will now be considering online and offline shopping options. They’ll consider the brand’s social impact, and they’ll be looking into whether or not the brand provides them with an engaging and fun experience. This environment makes acquiring new customers even more challenging and retaining existing ones even more critical.
To build a strong retention strategy, it is crucial to recognize your brand's strengths and weaknesses. Measuring and setting goals against key metrics (customer retention KPIS) gives insight into how well your strategy is working to retain customers. How customer retention is measured will differ from brand to brand. While there are over 10 Key Customer Retention Metrics You Should Be Using to Track, here are a few customer retention KPIS to start a strong customer retention strategy:
Brands need to adopt to survive a world where customer loyalty is no longer assured. Consumers have an infinite number of choices; they expect personalization, need relevancy, and desire an emotional connection. Three-quarters of consumers are more inclined to shop at brands that make their loyalty experience fun and rewarding. And two-thirds frequently make purchases in order to advance their status in loyalty programs.
The best customer retention strategies are built on business goals and understanding the right actions customers need to take to go from first purchase to lifetime brand loyalist. One of the best ways to do that is with dynamic offers. With dynamic offers, brands can explicitly define and target incremental behaviors such as spend, visits, and engagement at the individual level in order to maximize revenue from each customer. Then the machine learning from a platform like Formation’s creates personalized offers that incentivize customers to take those actions based on their previous purchases and brand interactions. Dynamic offers use machine learning to analyze that data and provide a balance of highly-personalized rewards and non-transactional actions the consumer can use or take, which can create that emotional connection that drives real brand loyalty.
After identifying the metrics you’ll be using, make sure all decisions keep customers top of mind. Ensure you're setting yourself up to grow and connect with customers through their journey by creating a flexible tech stack that continuously adapts to changing consumer behaviors and optimizes offers and experiences based on new data.
Now let us look at seven effective strategies to increase your retention percentages.
When developing your customer retention plan, focus on these key areas to keep customers coming back.
1. Build customer trust and long-term relationships. Fostering customer trust requires a strategic focus on every aspect of the customer experience. To build lasting relationships, deliver relevance and value at every stage of the customer journey.
To build trust, you must listen and empathize with your customers. Through listening to customers you will collect customer feedback that will enhance how you deliver customized experiences.
2. Create a robust customer loyalty program. Maybe your brand already has a loyalty program, but you’d like it to deliver better ROI. Or, perhaps you’re just expanding your retention efforts for the first time. Either way, an effective loyalty program should contain these three elements at a minimum:
3. Leverage your customer data. Many lists of customer retention strategies mention the ubiquitous customer feedback survey—but to retain customers successfully, you need to understand their preferences and motivations without always having to ask. Collecting and mapping customer data like transaction histories, customer service interactions, and loyalty program data will help you prevent churn and identify where the wants of your customer intersect with your business objectives.
4. Re-engage customers using marketing automation. Today’s marketing automation technologies can take on entire marketing processes to simplify workflows for marketing teams. Re-engaging customers is just one of these processes. Instead of your marketing team needing to track which customers have lapsed, a marketing automation solution that uses AI and machine learning (ML) can automatically recognize when customers lapse and re-engage them with personally relevant offers.
5. Measure customer lifetime value. Customer lifetime value (CLV) is an estimate of the net profit attributed to your brand’s future interactions with a customer. Understanding CLV can enable you to shift from a short-term business strategy focused on the next quarter’s profits to a long-term one that values ongoing customer relationships.
The simplest way to calculate customer CLV is to subtract the amount you spent acquiring and retaining a customer from the amount of revenue that a customer generates. You can also use an online calculator, such as this one from WebFX, or this more complex option.
6. Personalize your offers and communications. Beyond simply putting the customer's name in an email subject line, use the customer data you’ve collected to make your marketing offers and messages more personally relevant to your customers. There are four types of offers:
However, launching a succession of personalized campaigns that continue to be individualized based on the most up-to-date data science models has been historically challenging due to technology integration and scale limitations around the number of hours the team has to create variations and their technology’s ability to support more variation.
For example, a dynamic offer platform generates an offer for a customer that asks them to complete multiple purchases across different decor categories or brands and in return reap a larger 25%- off discount than the original 15%. This allows marketers to drive incrementality in a new and dynamic way.
The closer you get to dynamic offers, the greater relevance and value you will deliver, and the more you will retain customers.
7. Surprise and delight with gamification. “Surprise and delight” has become something of an overused buzzword—but that’s because it works, and nowhere is that more evident than with gamification. Using game design to motivate customers is highly effective because it leverages people’s competitive natures while at the same time lighting up the reward center of the brain.
Gamification incorporates game mechanics to increase customer engagement, improve sales, and strengthen brand loyalty. Allowing you to engage with customers in a modern way, a gamified loyalty program provides benefits to both you and your buyers.
Early gamification tactics often tacked simple game mechanics, like badges or cartoonish elements designed to feel like a video game, to existing loyalty programs. But those badges didn't convey any status or provide any meaningful value; they didn't build a relationship with customers. On the other hand, modern gamification leverages customer data insights and creates experiences with multiple steps, all connected to driving value for the customer and business outcomes for the brand.
By taking a strategic approach to customer retention, you’ll be able to encourage customers to stay loyal for the long haul. For more information on how focusing on CLV has a powerful revenue impact on a brand, check out our post on why CLV is the most important loyalty metric. You can also contact us to see how Formation’s dynamic offer platform can improve the way you engage and retain your customer base.