Customer Retention and Profitability

In the previous chapter, we touched on the fact that finding new customers costs more money than nurturing and re-engaging previous customers. This has become a universal truth for businesses in almost every industry, but how and why is this the case? In this chapter, we’ll examine the profitability of customer retention compared to that of new […]

Chapter

Customer Retention and Profitability

In the previous chapter, we touched on the fact that finding new customers costs more money than nurturing and re-engaging previous customers. This has become a universal truth for businesses in almost every industry, but how and why is this the case?

In this chapter, we'll examine the profitability of customer retention compared to that of new customer acquisition and assess some of the factors that combine to make customer retention strategies a priority for a successful eCommerce business.

The Relationship Between Customer Retention and Profitability

Imagine that you have $100 to spend on marketing. You're given the choice between finding new customers and engaging current customers.

Ultimately, the second tactic will cause that money to go further. Here's why:

No matter what your customer acquisition strategy is, whether you're running a Google PPC campaign or boosting your social media posts, most of the money you spend will go towards getting in front of the right audience.

Once you've burned a chunk of the budget getting the attention of prospects, they still have a high buy-in to become tangible leads. After all, they've likely never heard of your brand before — why should they trust you after only seeing a single message?

To compare, let's say you turn away from spending that budget on cold campaigns and decide to try to re-engage current customers. You're already at an advantage if you go this route — you don't need to find them or get them to opt-in with their information; they're already in your system.

If you interact with these customers regularly, they're already likely to keep making purchases with your brand, so if you need to make a marketing push, it will likely generate a lot more revenue faster than a cold campaign.

Simply put — happy, loyal customers will purchase more often, spend more, and refer their friends to your brand. Keep reading to learn more.

The Positive Impacts of Customer Satisfaction on Profitability

Customer satisfaction, customer loyalty, and customer retention go hand-in-hand: customers who repeatedly have satisfactory experiences with a brand start to trust that brand more and more. As they trust the brand, they'll become loyal to it, choosing it over alternatives in the market. This repetitive cycle of satisfaction, trust, and loyalty is the primary driver for customer retention.

Here are three ways that satisfied customers mean repeat business for your eCommerce brand:

1. They Cost Less to Engage

We've already explored this, but it bears repeating. For every dollar you spend, the probability of selling to a new customer is up to 50% lower than the probability of selling to an existing customer.

This divide can be explained by differences in customer satisfaction. If a customer repeatedly has positive experiences with your brand, they'll be more likely to purchase in the future. Therefore, your cost advantage will be at the higher end (or even exceed) that range if you focus on nurturing your customer relationships and producing satisfied customers.

2. They Purchase More Frequently and Spend More

If you compare customer lifetime values (CLVs) of one-time customers and repeat customers, repeat customers will naturally be higher — but this isn't telling the whole story.

Repeat customers buy more often and spend more when they do. In fact, they spend 67% more per purchase than new customers. And, customer satisfaction and loyalty matter here too. The most loyal customers you have will outspend the rest of them by up to three times.

They also pay full price more often. While new customers often have to be tempted by introductory offers and limited-time discounts to make a purchase, loyal customers understand the value of what they're buying and don't need to be offered perks in exchange for making a transaction. This increases the average price of goods sold, boosting revenue without an equal increase in operating costs.

3. They Bring in New Customers with Referral Marketing

83% of consumers rely on the recommendations of the people in their lives to make purchasing decisions. It's likely, then, that if you can get customers to recommend your brand to their friends, family members, and colleagues, it will be at least as effective as any cold ad campaign you could run.

Providing customers with valuable interactions is the way to get these referrals — and it's not as difficult as you might think. In fact, 77% of customers are willing to recommend a brand after just one positive experience.

This is a factor that enhances the profitability comparison between customer acquisition and retention. While acquiring new customers has a minimal downstream effect on whether they'll purchase again after the first time, spending time and money on retention can directly lead to new acquisitions in the form of customer referrals.

Measuring Retention and Profitability

For most eCommerce entrepreneurs, it's not simply enough to understand the links between customer retention and profitability — you need to be able to measure them as well. This is done with a series of KPIs, which we'll explain in more detail in the next chapter:

  • Customer Lifetime Value (CLV)
  • Customer Retention Rate (CRR)
  • Purchase Frequency (PF)
  • Average Spend per Customer (AS)

For now, let's focus on why you should be using these metrics to not only measure your profitability now but keep track of it over time.

Why? Because if all four of those metrics are increasing over time, it means that the strategies you're using to boost customer retention are working, and it means that your eCommerce business is becoming more profitable.

We mentioned in the first chapter of this guide that eCommerce and the online retail market has become highly competitive — if you hope to compete, you'll need to use these KPIs to understand what's happening in the customer relationship and when it's time to try something different to engage customers and maximize customer retention.

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