We’ve said it before, and we’ll say it again: retention is the new acquisition. While growing your customer file is essential, the fact that it’s 4x more expensive to acquire than to retain customers drives home the necessity of holding tight to your present-day customers.
For any sufficiently mature brand, effective retention efforts will deliver outsized ROI relative to acquisition, if only because cost-per-acquisition is so high. But that also neglects to mention that it’s more labor- and resource-intensive to acquire customers.
There’s a subtlety of this platitude that we’re going to focus on in today’s article: a small percentage of your active customers are worth much more to your business than all the rest. It’s totally normal to see, among our customers’ datasets, the top 10% of customers driving at least 50% of the annual revenue and sometimes as much as 80%.
It logically follows that up-leveling customers from the bottom half of your top 20% would add enormous points of revenue for your business. Even just adding 1% of top-tier-behaving customers to your customer file would result in a 5% revenue increase.
But it also follows — and very often happens in real life — that half of that top 10% churn out or downshift every year, meaning that an easy win has turned into 25% (up to maybe even 40%!) of lost revenue that needs to be made up in other ways.
Acquiring more high-value customers is its own topic, and something that we know lots about. But today we’re going to focus on nurturing and retaining big spenders and cultivating lower-tier customers into all-stars.
Given that, many questions are bound to emerge for you or anybody in any retail organization...
- Retention: How do we keep VIPs from quitting our brand?
- Upshifting: How do we get other customers to behave like the VIPs?
- Acquisition: How do we acquire new ones like these?
- Learning: How can we learn from these VIPs across our organization to help us achieve the above goals?
All of these questions will be addressed in the context of the Plan-Do-Measure methodology, the cyclical process which should frame any strategic initiative or KPI-driven tactic.
Life in retail is hectic, and unfortunately that leads to a lot of Doing that comes at the expense of thoughtful Planning and effective, targeted Measuring.
Abraham Lincoln is often quoted having said “Give me six hours to chop down a tree and I will spend the first four sharpening the ax.” Well, Abe, we’ll take that equation and raise you an extra post-tree interval for measuring success to assess how to more effectively sharpen and chop for your next arbor attack.
In less cheeky terms, it's in the Planning and Measurement phases where you can actually achieve a breakthrough strategy. Everyone can execute — being smart is harder.
So what does this “learning how to better sharpen the axe” look like?
One aspect of this is diagnosing revenue trends to understand what’s behind segment behavior. Below is an example of our causal tree. Imagine that this tree describes your top 5% of customers.
What it's telling us is that, first of all, revenue is down slightly this year — a 2% drop. Though this is a high-level figure, most organizations don’t even have visibility into a segment-by-segment revenue breakdown. But it’s just the tip of the iceberg for solving this issue.
So the causal tree asks, “What are the variables that drive revenue?” If you see a change in revenue, it is tied directly to shifts in one or both of the following variables: number of transacting customers and revenue per customer.
In this case, Revenue Per Customer is up and Total Number of Transacting Customers is down. So you can diagnose one problem there — you’re losing top-5% customers faster than you’re acquiring them.
But we’re not done. There’s almost never just one single variable dragging down that top revenue number. By getting a view of all the levers at your disposal, you can really start to exceed your goals with initiatives to boost each variable.
It’s also just as interesting to know what you’re doing right as it is to know what’s going awry — you don’t want to inadvertently overhaul the thing that’s driving above-average purchase frequency, for instance.
So we dig deeper on Revenue Per Customer to understand what’s driving the number up and what factors might be creating drag on that upward trajectory. The variables that directly affect Revenue Per Customer are Orders Per Customers (a.k.a. Purchase Frequency) and Average Order Value (AOV). Here we see that frequency is up and AOV is down. AOV is affected by Items Per Order and Average Unit Revenue, and here we find what might be holding back even better Revenue Per Customer.
If this is your organization that’s on the operating table, you’re probably processing a glut of ideas as to how to test fixing this problem. This problem-solving phase really is the fun part (for us, at least).
And that’s exactly what we’re going to get into next week — how Marketing can lead the charge while involving other departments across the org with the goal of acquiring, cultivating, and retaining those crucial VIPs.
In the meantime, you can read more about our causal tree right here.