Retention marketing is a data-driven approach that prioritizes customer retention over new customer acquisition based on a company's current position in the market.
If we were to ask you what’s better: acquiring two new customers or retaining an old one, what would you say?
In this article, we’ll try to make the case that retaining an existing customer is much better for business, a statement supported by experts in the community. Chip Bell said that:
"Loyal customers, they don't just come back, they don't simply recommend you, they insist that their friends do business with you."
Because of this belief, the strategies for retaining existing customers have evolved into a separate field within the marketing universe called retention-driven marketing. Knowing the value of retention helps founders avoid the bias toward acquisition that might lead to suboptimal growth.
Reading this article will help you learn what retention-driven marketing is, why you need it, and how to measure it. We’ll also share some of the best retention strategies that you can easily adopt.
Retention-driven marketing, also known as loyalty marketing, is a set of strategies that prioritize engagement, trust, and high customer satisfaction with the goal of retaining existing customers. It’s also referred to as a new type of marketing that becomes more and more prevalent in the eCommerce world.
More specifically, the concept of customer retention is defined as the company’s ability to turn customers into repeat buyers. But, we should note that in recent years, the term repeat buyers got somewhat of a bad reputation because it focuses on the number of purchases as a goal of retention marketers, which is misleading. The more appropriate phrase would be to say that retention marketing’s goal is to generate loyal customers. And loyalty is a multidimensional concept that includes:
Nevertheless, you should keep in mind that most times these two terms (repeat buyers and loyal customers) are used interchangeably.
Retention-driven marketing is a data-driven approach that prioritizes retention strategies over acquisition based on the company’s current position in the market. Successful retention marketing efforts result in an interactive and reciprocal relationship with customers who’ve already made a purchase. Keep in mind that this doesn’t mean that retention marketing won’t attract new customers. This is a common misconception on which we’ll shed light when discussing the benefits of retention marketing.
Another thing we want to make clear before continuing is the subtle difference between retention-driven marketing and customer loyalty. We’ve said that sometimes, retention marketing is called loyalty marketing, but these two practices might involve slightly different methods and metrics of measuring due to conceptual frameworks.
For instance, retention-driven marketing measures whether or not an existing customer continues to engage or do business with you. On the other hand, customer loyalty is a behavioral disposition, which indicates the likelihood of a customer to respond favorably toward your brand.
Is the difference significant? Well, yes and no - bear with us. When it comes to the goal of retention marketing, the difference is not really important as loyalty is a great indicator for retention and is used extensively in retention-driven marketing strategies. Having said that, if you’re preparing a campaign or reporting the results, you need to know how to explain the difference between these measures. The rates might not always mirror each other.
Let’s illustrate this with an example. Your analysis might show high repeat buy rates but low loyalty rates. One situation where this could happen is having a huge discount, promotion, or other incentives for existing customers. This is a great motivation for a repeat buy, but it doesn’t guarantee that those customers will stay loyal to you when that promotion ends.
Another interesting way to contrast the difference between simply retaining customers and loyal customers is: loyal customers don’t care whether the product is worth the price because they want it either way, while repeat buyers come back because of the value (quality vs. price).
Now that you know the theoretical background of retention-driven marketing, let’s see what that looks like in practice. How would you measure retention?
The following metrics are some of the most important indicators of retention that, when put together, give a full picture of your relationship with existing customers. Keep in mind, this also indicates loyalty.
As the name suggests, the customer retention rate is the most direct way of measuring how good you are at keeping customers in your own backyard and the frequency at which they buy from you. The rate is a percentage of customers within a specific time frame. To calculate it, take the total number of customers at the end of the selected time frame, subtract the new customers, and divide that number by the customers you had at the start of that time window.
Customer Retention Rate = ((total customers at the end - new customers during that time) / customers at the beginning)) x 100.
The churn rate, also known as the rate of attrition or customer churn, is a popular metric that measures how many people leave your service or stop doing business with you within a specific timeframe.
There are different ways to calculate the churn rate, but the simplest formula is to divide the lost customers by the total number of customers you had at the beginning of a specific time period.
Churn Rate = (Lost Customers ÷ Total Customers at the Start of Time Period) x 100.
Some more sophisticated formulas take into consideration seasonal customers and average customer rates over a long period of time so they can get a more precise number.
Similar to the churn rate we talked about above, the revenue churn rate is an indicator of lost customers but in the form of revenue. That is, the revenue churn rate calculates how much revenue you have lost because customers have left within a specific time period.
There are a number of indicators of customer churn, including canceling an order or a subscription or downgrading a subscription plan. Looking at these events through an analytical lens gives you a good indication of the value of retaining customers.
There are several different formulas you can use to calculate the revenue churn and most of them are in monthly intervals.
The interesting thing about the revenue churn is that it can take negative values, which means you’ve lost more money from leaving customers than what you’ve made from your total customers that month (new and existing).
The revenue growth from existing customers allows you to see how valuable your current customer base is in terms of revenue. Also, it’s an indicator of the success of your retention and loyalty marketing efforts, especially if you can compare it with past measures before implementing retention strategies.
As with other measures, the revenue growth is measured monthly, as a percentage of your recurring revenue amount (MRR). The MRR is a normalized measure of expected business revenue as an average of previous months.
Revenue Growth from Existing Customers = (MRR end of the month - MRR start of the month) / MRR start of the month.
The RPR or loyal customer rate is the percentage of customers that have returned to buy again from you. And, while it measures repeat buyers, it’s also a great indicator of loyalty, hence the name.
The RPR is calculated in a pretty straightforward way by simply dividing the returning customers by the total number of customers within a specific time frame.
The total active users is an alternative to the RPR metric for businesses that offer services instead of products, or as an addition for businesses that offer both. The logic behind this is that RPR is based on purchases, however, what if you make more revenue from advertisements within an online platform or application? In this case, you might be more interested to know how many people are actively using the platform instead of how many have made an account or downloaded it.
Best of all, the information about the total active users can be tracked with analytical tools such as Google Analytics.
The customer lifetime value is a predictive measure that shows how much a business is expected to make from one average customer if the relationship with that customer continues in the future.
The formula to calculate CLV takes into consideration the gross annual sales, unique customers, and the average lifespan of a customer.
Customer Lifetime Value = [Gross Annual Sales/Total Number of Unique Customers for the Year] x [Average Lifespan of Customers]
You should aim to increase or keep CLV steady because a decrease in this metric means you’re losing customers or they’re not motivated to do business with you.
Last but not least, the net promoter score (NPS) measures how likely customers are to recommend your business to friends or family (word-of-mouth referrals). It’s an indicator of customer satisfaction, but also of customer loyalty. While NPS doesn’t necessarily mean you’ve retained customers and they’ll repeat the purchase, it is highly related with measures of retention.
The NPS typically takes the form of a single ordinal question on a survey that asks: how willing are you to recommend our company/brand/product/service to your friends or colleagues?
Everyone needs retention-driven marketing! Of course, you first need to have an established customer base, but as soon as you reach your first milestone in terms of customer acquisition, you should start thinking about retention strategies. Why?
The reasoning behind retention-driven marketing is simple - happy, satisfied customers are more likely to buy from you again, make more frequent purchases, and tell their friends about your business. Reaching new customers is crucial, but without retention marketing, the acquisition is simply unsustainable. Think of retention marketing as a way to keep increasing the ROI of every paid acquisition. On top of that, the conversion rates among repeat buyers are a lot higher than acquisition. But, let’s take a closer look at all the benefits of retention-driven marketing in the next section.
It may seem like an exaggeration when we say that without loyal customers, the business won’t survive, but data, experts, and experienced businessmen all agree. In fact, statistics from 2021 reveal that a mere 5% increase in customer retention can boost revenue anywhere from 25% to 95%. Moreover, around 65% of a company’s business comes from repeat buyers.
This makes retention-driven marketing one of the most important aspects of your business. Here are the most significant benefits associated with retention-centered marketing.
We’ve mentioned this on a couple of occasions, but we didn’t really elaborate. The reason why retention marketing is considered more affordable and sustainable than acquisition is that customers are willing to buy from brands they trust and their first purchase demonstrates a need for that product. To put it in simpler terms, you have to work hard to prove to a potential customer that you’re better than the competition, that they need your product, and that the product is worth the price. However, once they decide to make a purchase from you, they’re already convinced of your value. If they have a positive experience with the product, they’ll want to buy it again - which is customer retention.
Therefore, the successful acquisition of new customers is dependent on many more conditions than customer retention. And, satisfying each of those conditions before customers can make a buying decision takes time, effort, and money.
Not only will retention strategies reduce your marketing costs, but you’ll also have better returns, all thanks to the behavioral dispositions of loyal customers.
According to data from Accenture, 57% of consumers spend more on brands to which they are loyal. This is further supported by the fact that leaders in loyalty programs grow revenues roughly 2.5x as fast as other companies in their industries. Finally, Incentive Solutions found that adding a loyalty program to an online shop can increase orders up to 319%, based on their case study on B2B customers.
Knowing that loyal customers are more forgiving of brands they love will take the pressure off. By no means is this an excuse to deliver suboptimal products or services, but it’s a breath of fresh air, knowing that sometimes, with new clients, little things that are out of your control like delayed delivery, can cost you a customer or even get you a bad review. To be more specific, data shows that around 78% of new customers withdraw their purchases due to bad customer service, while 89% of users say they’re willing to make an extra purchase after a positive experience with customer service. On the other hand, loyal customers are more forgiving and are less likely to withdraw their purchases after a bad customer service experience.
If you invest in retention-driven marketing, you can be sure that you won’t lose revenue due to minor misdemeanors - as long as you don’t make a habit of them.
One reason why retention marketing is so much more affordable than acquisition is because of word-of-mouth referrals. Turning first-time buyers into loyal customers increases the chances of them spreading the word around about your business. Therefore, successful retention strategies can also acquire new customers, even though that’s not the primary goal.
And, we don’t have to tell you the power of word-of-mouth referrals, right? It’s another separate type of marketing (word-of-mouth marketing) and many experts believe it’s the most valuable marketing tool. And, if we follow the data, we’ll find support for these claims. According to AdWeek, 74% of consumers said that word-of-mouth was a key influence in their buying decisions. Since it’s pretty much “free,” if we ignore the acquisition rate of the first customer, it’s a pretty sweet deal.
Knowing what your customers want will give you an opportunity to change and improve before you lose them to a competitor. So, how do you find what your customers think? You ask them! Simple as that.
Well, maybe not that simple if we consider the fact that not everyone will be inclined to spend time on your surveys, reviews, or other feedback programs. Fortunately, retaining customers affects this process, too! Loyal customers love speaking about the products they use. They love to feel special, appreciated, and know that their opinion matters when it comes to the products they care about and use all the time. This is killing two birds with one stone, as customer satisfaction will rise and you’ll gather powerful insights about your products.
Defining retention-driven marketing and practicing retention-driven marketing are two very different things. Before this, we’ve talked about the nature of retention marketing, so now, let’s see how you can take advantage of some of the best practices in the field and start leveraging retention.
Another component you need to really excel in retention-driven marketing is timing. As you write out a retention marketing strategy, consider the following steps of your customers’ journey to launch a retention campaign.
Hopefully, this introductory article on retention-driven marketing taught you everything you need to know to make smart decisions while designing your marketing and sales strategies. We understand the challenges and pressure of doing everything right when you’re the founder of a newly-minted business, which is why we aim to deliver easy-to-read and well-researched content.
If you liked this article, visit our website, Redwhale, contact us if you have any questions or requests, and keep reading the content that we regularly publish on our blog!
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