Do customer acquisition or customer retention strategies deliver a higher return on investment? Today’s marketers are pulled in many directions, and the answer to this debate has an effect on their budgets and how they spend them.
While pulling in new customers has always been important, marketers are realizing that allocating their marketing and ad spend on acquiring customers who either rarely shop or buy once, never to return again, is not a winning strategy. Instead, cultivating loyalty and value with existing customers — and acquiring customers with the intention of those newly acquired customers becoming repeat, happy customers — boosts return on marketing spend on all fronts.
While perhaps an outlier, a good example of a retailer banking on customer acquisition versus retention is Wayfair. The online furniture and home goods retailer runs four other online stores, including Joss & Main, AllModern, Birch Lane and the upscale Perigold, in addition to its flagship site, Wayfair.com.
In November 2018, Wayfair posted numbers that appeared positive: the number of active customers grew 35.2% year over year to 13.9 million. However, advertising expenses in the same quarter grew to $203 million from $142 million, as compared to the same quarter one year previous. In total, Wayfair had spent over a half a billion dollars on advertising since the start of its fiscal year, representing 49% of its gross profit. This is a shockingly large amount of revenue spent to capture 3.9 million new customers. Doing the math, this comes out to approximately $196 per customer.
The Wayfair example aligns with our perspective that most companies are too fixated on acquiring new customers and spend too much doing so, when they could achieve growth more cost effectively by focusing on retention and reactivation. In fact, a 1% improvement in retention has a positive compound effect on growth, while acquisition starts from zero year after year.
When you talk about customer retention, loyalty is a big part of the conversation, so let’s first explore the growing importance of loyalty programs.
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Loyalty Is a Critical Part of Customer Retention
Loyalty rewards and programs aren’t new, but they are definitely making a comeback, especially in the hospitality, travel and retail markets. Loyalty is all about creating an indelible bond with a customer, and the best way to accomplish this is to cultivate and acknowledge customers through loyalty perks and rewards. Loyalty programs are a winning strategy for B2C brands because customers are much more likely to buy from you if they have a relationship with you.
Do you have the Starbucks app? Then you are one of the approximately 16 million Starbucks loyalty program members. According to Starbucks President and CEO Kevin Johnson, the company expanded its active member base by half a million customers in the second quarter of 2019, a 13% increase. Johnson noted that loyalty program members accounted for 41% of sales in US stores over the same quarter.
Starbucks employs a points-based loyalty program, which is common for B2C businesses and better suited for their needs. Points-based loyalty programs, such as what is offered by CrowdTwist, will help with very detailed and layered loyalty initiatives. Points-based solutions can either expose the points system to customers or leverage it behind the scenes to drive loyalty program engagement.
Customer data platforms can support points-based loyalty programs because CDPs act as an intermediary: collecting data sources and sending loyalty segments to execution channels. Two of the most common channels are email marketing service providers and personalization engines.
When a loyalty system works in conjunction with a CDP, it can be incredibly powerful because it can:
- Segment customers by using predictive intelligence, such as identifying customers likely to engage based on all available attributes and pulling from insights learned from customers who exhibit similar behavior, rather than just relying on transaction history.
- Perform advanced segmentation to identify candidates and VIPs. The CDP then sends these segments to a loyalty program for further segmentation. In turn, the loyalty platform then passes this data to the execution channel.
Loyalty programs are definitely evolving, with one-size-fits-all rewards coming to an end. Instead of offering the same incentives to all customers, offers can and should be customized on a person-by-person basis.
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Don’t Discount Customer Reactivation Strategies
Reactivating “lapsed” customers is also beneficial and cost-efficient because it’s about 10 times less expensive to coax customers back than to acquire new ones. When a customer disengages from you, all is not lost. Reactivation programs for lapsed customers are a low hanging fruit for marketers looking for new revenue streams. Of course, it’s even better to prevent a customer from lapsing in the first place, but reactivation should not be taken off the table.
When a customer leaves, it may be too late to get him or her back. Your chance of gaining a customer for life are much greater if you proactively reach out to an existing customer than if you wait for that customer to leave and try to get them back later. A machine learning-based CDP can help marketers identify customers with a low likelihood to buy, then segment and target customers to re-engage in multiple channels, including email, direct mail and Facebook. A few key strategies that successfully encourage customers to re-engage include:
- Offer discounts to customers with a low likelihood to buy. Rather than relying on traditional segmentation strategies that use recency, frequency and monetary metrics to identify at-risk customers, a CDP with machine learning can intelligently identify customers with a low likelihood to buy. By offering aggressive discounts to these customers, you can increase retention and build the relationship.
- Promote the store closest to the customers with low engagement. Rather than drive customers to the website and trying to re-engage with online activity, send email, direct mail or Facebook ads promoting a local store activity. Attending an in-person event will help re-engage customers who are at risk of churning.
- Leverage non-email channels to re-engage customers who have opted out of email. Opting out of email is a sign of low engagement, and it can be particularly difficult to re-engage these customers since they are unreachable by email. But by reaching out to them through other channels, such as a callout campaign, direct mail or Facebook, you will be able to win back customers without needing to rely on email.
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Treat Your Customers Right and They'll Reward You in Turn
Whether you employ a membership- or points-based loyalty program, both are well worth the investment. Given your customers are more likely to buy something from you if they have a relationship with you, rewarding them for shopping, staying or traveling with you is one way to give back. Just like in any relationship, you have to “give to get.”
Increasing customer lifetime value is an important marketing KPI that measures the profitability of each customer. But keep in mind your customers aren’t just numbers on a spreadsheet — they are one of your most important assets and expect to be treated as such. if customers feel valued by your brand they will most likely return, again and again.