Since 2015, customer acquisition costs (CAC) for eCommerce brands have jumped 60%. Many are now winning new buyers at low margins, or even at a loss. That makes retention - generating revenue from existing customers - business critical for today’s online stores.
The upside to a retention-focussed growth strategy is clear - it is 6x cheaper to keep an old customer than it is to win a new one. Despite this, the average DTC brand devotes 80% of their marketing spend to new customer acquisition. And whilst stores are haemorrhaging retained revenue through high churn and inflexible subscriptions models, this seems like an odd choice.
Why is this? And what can be done to solve the retention rubix cube? To find out, we assembled an all-star cast of eCommerce experts - including Olipop’s Eli Weiss, Maude’s Éva Goicochea, Bryony MacLaren of Huel and Hamid Saify from Liquid Death - to myth bust DTC retention.
We cover the state of retention within the eCommerce industry today, and break down lifetime value (LTV) into its component parts, to look at the key inputs and outputs that make up a top retention strategy.
eCommerce retention today
Rewind to the mid-2010s and ad-fuelled acquisition was king of the DTC jungle. Brands scaled by throwing up smartly designed Shopify stores around niche product sets, and dumping marketing budget into slick advertising creative for social media platforms.
Profitability was often an afterthought, with brand founders aiming to go public or exit before retention issues caught up with them. As digital ad costs have increased, however (Facebook ad prices have never been higher), this “grow at all costs” mentality has hit a roadblock.
Under pressure from spiralling CAC, today’s merchants are increasingly seeking to generate revenue from existing customers. And with good reason. Returning buyers are 6x cheaper to convert onsite and spend 3x more at checkout than first timers.
In practice, however, many stores still struggle to move customers from first to second orders, or keep subscription churn low. This is because retention is a nebulous issue, one that is tough to measure long-term and requires a holistic approach to improve.
Whilst a brand’s marketing function typically owns its retention ‘budget’, in reality, a consumer’s decision to churn or not is influenced by multiple internal teams. The ad that brings them in, their website experience, shipping and delivery handling, product usage and customer service all impact heavily upon whether a customer is retained.
Put simply, if a buyer has a positive experience at every point of the customer journey, they are 93% more likely to purchase again. If not, 33% will churn after just one instance of poor service.
In the next section, we’ll break down the key inputs brands must put in place in order to minimise customer churn after the first order.
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Key inputs to eCommerce retention
When thinking about how to improve retention, many brands look at output metrics like LTV and reorder rate and build strategies around them. These numbers are important but they’re only part of the picture.
Instead, brands must approach retention from the ground up, ensuring they hit fundamental criteria early in the customer journey to facilitate retention further down the line. Here are the top four inputs to successful retention, as recommended by our expert panel:
Good retention starts with smart acquisition. If your growth or marketing team is siloed at the top of the funnel, and KPIed on generating maximum revenue for the cheapest CAC, LTV will ultimately suffer.
Incentivised in this way, marketing are likely to use social ads to bring in customers on a cheap promo deal who have limited connection to your brand. These buyers are unlikely to stick around long-term.
Viewing acquisition through the lens of which customers are easiest to retain long-term is the first step to creating an effective retention engine. Whilst it might mean spending a few extra CAC dollars to bring in new customers via a channel you know works best for your business, you’ll see the pay off further down the funnel.
Product availability and ease of (re)purchase
You don’t need an all singing, all dancing loyalty programme to move the LTV needle. Simple stuff like keeping your products top of mind and easily available to customers when they’re ready to repurchase is critical.
You can do this in a variety of ways, but SMS is one of the best channels for driving immediacy and reorders. Try using historical purchasing data to understand when your customer is likely to be interested in buying next, and drop them a compelling text message highlighting a relevant SKU.
To make it even easier to purchase, include a link to a checkout pre-filled with the payment and shipping details they used for a previous order - making it a one click purchase. Ensuring ease of reordering is often one of the biggest drivers of LTV, without costing a ton to implement.
It goes without saying that customers who are treated well are more likely to buy from a store again. Yet despite this, eCommerce has a terrible reputation for CX.
Having ploughed resources into new customer acquisition, post-purchase support is often an afterthought for brands. Sometimes it’s even outsourced to a third party. This creates a poor experience, customers churn, before marketing try to buy them back with re-engagement emails and discount offers.
This makes no business sense, especially considering that a solid customer experience isn’t rocket science to implement in the first place. The CX bar is so low in eCommerce that creating goodwill through your support interactions can be as simple as being a decent person and doing the right thing if orders go wrong.
For example, a delivery company messed up and your product got delivered late? Offer a full refund. Yes it might cost you in the short term, but going above and beyond to correct mistakes can turn angry consumers into brand promoters.
Being proactive in your support outreach is also key. On average, 96% of customers churn without ever telling a brand why. However, 67% of that churn is preventable if issues are solved at the first touchpoint. Actively reaching out with post-purchase feedback requests via SMS and email is critical to uncovering and solving such problems before they go on to undermine LTV.
Creating a brand ecosystem
Retention is about keeping your brand top of mind. But however compelling your product is, consumers won’t repurchase at every touch point they have with your store.
That’s where the creation of a brand ecosystem that delivers value beyond simple financial transactions becomes important. The best way of keeping your audience aware of your brand long-term is to consistently deliver engaging content.
This is something sexual wellness brand Maude does in spades via its Maudern blog. The publication sees high engagement rates onsite and via its newsletter every week, despite the fact Maude’s core product offering is typically reordered every 6-9 months.
The same is true of canned-water merchant Liquid Death who go hard on outlandish content to capture eyeballs. A recent 30-min ‘Infomercial’ skit produced by the brand has over half a million YouTube views, with 30% of those watching the whole video.
Such plays create multiple, high quality brand-customer touchpoints that keeps a store top of mind and drives LTV long-term. Having covered some fundamental inputs to retention, we’ll now look at the leading outputs that brands can measure to track the ongoing performance of their retention strategy.
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Leading outputs of eCommerce retention
With the right inputs in place, it’s possible to gauge the early success of a retention strategy through measuring what we call leading outputs. These are trackable indicators that suggest whether or not good retention will happen in the future.
Overall retention metrics like LTV and AOV are notoriously difficult to measure over time, making these leading outputs an especially useful barometer of short-term progress.
For example, you might action a project you think will ultimately improve LTV, but not see an uptick in the numbers for six months or more. In the meantime, the following leading outputs can give you a steer on whether or not your retention strategy is working:
Positive subscription edits
Subscription models can be a double edged sword when it comes to improving LTV. Yes, they might guarantee revenue, but consumers are wary of being locked in to payment plans, and are often quick to churn.
For today’s brands, the best way to capture the revenue benefits of subscriptions plans, whilst keeping churn low is to manage them flexibility. This means making it easy for customers to skip or edit their regular orders as it suits them, as opposed to cancelling outright due to product overload.
A customer skipping a delivery, but not cancelling their subscription plan entirely, is a leading output of good retention, because although their short-term usage might have gone down for whatever reason, you’ve still kept their business.
Beverage merchant Olipop found success enabling subscribers to swap and skip their orders via SMS. Over 70% of their subscriber base have used the functionality, and the brand has subsequently seen a tangible uptick in LTV amongst this cohort.
Keep a close eye on the numbers of positive subscription edits customers are making. It’ll give you a good idea of whether your audience is happy to keep buying from you, or whether you need to change things up.
Nothing screams good retention before the event like people going crazy for your brand. Your audience won’t buy from you at every touch point, but levels of engagement across your marketing channels is a positive indicator that many will buy again in the future.
Liquid Death goes hard on merchandising to drive both short-term incremental revenue and long-term retention. The fact they are able to get their audience to wear their logo on t-shirts demonstrates high brand engagement that indicates strong future retention potential.
The merchandise also serves as a physical reminder for fans to come back and repurchase their core water product.
Want to get an idea of how many customers will buy again in future? Reviews from first time purchasers will give you a good sense of how your product and CX is landing.
Some brands find it tough to extract enough useful feedback from customers to help them iterate on their offering. This is where you can use proactive CX to do more than just solve support issues. By using customer service interactions as an opportunity to listen and ask questions of your audience, brands can extract in depth insight on how they are being perceived.
Insights from NPS surveys and review platforms, as well as engagement on social media also work in the same way. Feedback that is largely positive suggests that LTV will increase at a later date. Negativity indicates you need to go back to your inputs and make improvements, which is also ultimately a valuable retention exercise.
Now that the leading indicators suggest that your retention strategy is working, we’ll now turn to the end-game - the lagging outputs that prove your retention metrics are on the up.
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Lagging outputs of eCommerce retention
Lagging outputs are the metrics you think of when you hear the word retention - LTV, AOV, reorder rate, churn rate etc. They are the numbers that tell you whether your retention strategies are working.
Changes you make in your inputs to retention are ultimately felt here, and it’s critical to have a handle on these metrics over the long-term. Here are the top four lagging outputs of retention to focus on, according to our experts:
Lifetime value is the mother of all retention metrics. It describes the average revenue that a brand will generate throughout their relationship with a single customer, and is the key lagging output of a strong retention strategy.
Calculating LTV across your customer base over a long period of time isn’t easy - just 42% of brands can do so accurately.
LTV reflects the aggregate response of customers to a whole range of factors, including product quality, CX, messaging, branding, pricing and more. This means it can be tough to isolate variables in order to extract useful insights.
To overcome these challenges, investing in a robust analytical framework to number crunch long-term is key. It’s also important to understand the time it takes to produce measurable results from inputs you make to retention, meaning ROI is unlikely to be attributed immediately.
Cross-sell and upsell rates
Cross-selling is the practice of offering a customer products that are of similar value to that which they’ve already purchased. Upselling aims to sell higher value items to a buyer. Both are common retention plays.
The percentage of customers a brand is able to cross and upsell to after they’ve purchased at least once is indicative of the strength of their retention.
Stores with a high number of SKUs have more opportunity to generate multiple purchases in this way. Nutritional food brand Huel implemented a cross sell play which enabled customers to uncover new products in their expanding range before settling on a favourite.
The healthy uptick the brand saw in cross-sell rates suggested their retention strategy was in a good place.
Moving buyers from first to second orders and beyond is a high priority pain point for eCommerce brands. This makes reorder rate a key lagging output of good retention. Similar to cross sells and upsells, reorder rate describes the rate at which customers purchase the same product repeatedly.
A great way of increasing reorders is sending customers an SMS message at a custom time frame, based on when you know they’re likely to purchase again. The more segmented you can be with this strategy the better - as customers are more likely to hit repurchase if they receive the right product at the right time.
For brands with retail offerings, reorders can become harder to track - but physical stores still play an important part in driving multiple purchases for brands.
Since moving into retail channels, Huel have seen existing DTC customers who might previously have fallen off the wagon return after seeing their products in the supermarket.
It goes without saying that the better you execute on inputs to retention, the lower your churn is going to be. A huge amount goes into churn reduction, but taken as a whole it can offer a clear lagging indication of how your retention is going.
Experimenting with your offering can result in unexpected upticks. When Liquid Death shifted their subscription model from a subscribe and save deal to a free t-shirt offering to each new subscriber, they feared customers would sign up to get the freebie then leave.
In reality, their subscriber volume boomed, whilst their churn cut in half. As a result they had a ton of new subscribers acting as walking billboards for them in the real world.
This brings us to our final lagging output - subscription conversion. The rate at which customers convert onto your subscription model is a strong indicator of retention.
When upselling customers to subscription, however, less is sometimes more. Consumer skepticism around recurring payment models means hard selling is often ineffective, and produces high churn.
Rather than defaulting to subscription at checkout, educate on the benefits of subscribing using a well designed landing page and crafted messaging.
If you're able to track strong lagging outputs - congratulations! You've got a great retention strategy. Let's finish up by looking at some key takeaways.
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Key retention takeaways 🎁
A customer’s decision whether to churn or not rests on their experience of every touch point with your brand. That means each internal team contributes in some way to retaining buyers. When making changes to your retention strategy, think holistically about how to optimize each part of the customer journey.
Stop wasting CAC
eCommerce marketers spend insane amounts of money acquiring new customers in a market where CAC has never been higher. Allocating just a fraction of that budget to looking after your existing (and more valuable) customers is far more efficient use of capital long-term.
Stop overlooking CX
Customer support is the bread and butter of any good retention strategy. The CX bar in eCommerce is so low that treating your audience like real humans can go a long way to winning fans and driving retention. Support interactions are also an underused means of capturing in-depth customer feedback on your brand.
Think inputs before outputs
The temptation is to look at output metrics like LTV and build tactics around them. In reality, those numbers will take care of themselves if you get the right fundamentals in place from the ground up.