Intense online competition and spiralling acquisition costs mean that many direct-to-consumer (DTC) brands are now winning new customers at low margins, or even a loss.
In this environment, long-term profitability depends on a merchant’s ability to turn initial purchases into repeat orders.
And to do that, they must up their retention game.
But how can brands - many of whom have hitherto been heavily acquisition-focussed - rebalance their marketing efforts towards retention? Which metrics should they be measuring? And what specific strategies can they action to increase retained revenue?
To find out, I spoke to Shopify’s eCommerce retention expert Kristen LaFrance, alongside review software provider Junip and DTC brand operators from Ugly Drinks, Days Brewing and Solo Coffee.
Why should brands care about retention?
During the mid-2010s, ad-fuelled acquisition was king of the DTC jungle. Direct brands grew by throwing up smartly branded Shopify stores around niche product sets, and dumping marketing budget into slick advertising creative for social media platforms.
And while the cost of these ads remained cheap, this model worked.
During this era of easy-to-execute, high-reward acquisition plays, customer retention - that is, the long-term nurturing of brand-buyer relationships to win repeat business - wasn’t high on many agendas.
Fast-forward a few years and the days where merchants could give $1 to Facebook and expect $10 in return are long gone. Customer acquisition costs (CAC) have jumped 60% since 2015, leaving brands with little option but to take retention seriously.
Without a cheap, reliable source of new revenue, DTC players are now having to extract maximum value from their existing customer bases to ensure long-term financial sustainability.
But avoiding high CAC isn’t the only reason why retention is important. Investing in strategies designed to foster deep-rooted customer relationships is also inherently more capital efficient than acquisition-focused spend. This is because:
Retained customers spend more
A merchant’s most loyal 8% of customers spend 3x more per order than other buyers. On average, this small segment accounts for 41% of an eCom store’s revenue, with the other 92% of shoppers contributing the remaining 59% of income.
Despite this, the average DTC brand devotes 80% of their marketing spend to new customer acquisition. To an extent this is understandable - if consumers aren’t attracted to a product in the first instance, you don’t have a business.
However, it’s also clear from the data that incentivising more new customers to become long-term buyers is one of the biggest things a brand can do to see significant return on their initial acquisition spend.
Repeat customers are easier to convert
Conversion rates for new visitors to an eCommerce site sit between 1-3%, whilst existing customers have a 60-70% chance of reconverting once they’ve returned to a store.
This is because repeat buyers already understand what to expect from a brand’s product and CX. They do not need re-educating when they revisit, and take much less convincing to buy, provided they’ve experienced the merchant positively in the past.
Why endlessly repeat the hard work of reaching new consumers if you can establish a solid base of existing, qualified customers willing to buy from you repeatedly?
Retained buyers are more likely to keep coming back
The more occasions upon which a customer buys from you, the more likely they are to return to make a further purchase in future.
On average, an individual consumer has a 27% chance of returning after making a single transaction. This figure increases to 45% after a second visit, and 54% after a third. The more a brand can incentivize customers to move from one purchase to the next, the more revenue they’ll ultimately drive.
Loyal customers boost acquisition
Buyers who have enjoyed multiple positive experiences with a brand also support new customer acquisition by referring others through word of mouth or via social media UGC. The likelihood of a customer exhibiting such beneficial behaviour increases with the amount of purchases they make.
After 10 orders, for example, shoppers typically refer 50% more people than a one-time buyer. Brands who are able to co-opt repeat customers into doing their marketing for them get a win-win in terms of acquisition and retention.
DTC brands, who by definition own direct relationships with customers, are well-placed to realise the benefits of incentivising recurring purchasing behaviour amongst their audience.
The good news is that small changes can be impactful - a 5% increase in retention can boost profitability by 25-95%. The challenge here is that moving the retention needle, and measuring progress made, doesn’t come easily.
Which retention metrics should you measure?
Having a strong understanding of the importance of retention doesn't necessarily make it easier to measure. Only 42% of brands are able to track customer lifetime value (LTV) - the queen bee of retention metrics - with a high degree of accuracy.
Because retention describes the revenue generated from a long-term relationship between merchant and customer, its measurement requires the quantification of data over an extended period of time.
Generating the right data can be complex. Whether a customer decides to reorder from a brand or not, is an aggregate response influenced by a whole range of factors including product quality, CX, messaging, branding, pricing and more. Isolating variables to extract insights in this context can be tough.
Equally, strategies designed to increase a brand’s retained revenue will take months to produce measurable results - meaning the ROI of time and money spent on developing retention plays can’t quickly be attributed.
Challenges aside, robust measurement remains fundamental to improving any brand’s retention revenue. Amongst the key qualitative metrics to track are:
The particular product a brand sells naturally has a huge bearing on what they can expect from their retention metrics. A beverage merchant, for example, is likely to have a much higher repeat purchase rate, but lower AOV than a mattress vendor.
All brands, however, can leverage such metrics to specify which of their products, campaigns, and channels typically bring in the most loyal customers. Armed with this information, they can decide upon and optimise a suite of suitable retention strategies to drive repeat revenue, and ultimately, long-term profitability.
What are the best retention strategies?
In the past, DTC brands have thought about retention simplistically - as cookie cutter email sequences following a purchase.
Increasingly though, retention is becoming a powerful strategic lever for direct players seeking to extract sustainable revenue from their existing audience base.
Decisions around which specific retention plays to pursue are category, product and merchant specific. All great retention, however, offers consumers a series of high-quality, relevant touchpoints with a brand, which serve to keep a merchant top of mind and ultimately, incentivise multiple purchases over the long-term.
What follows are seven of the most effective retention strategies in DTC today, examples of the brands who’ve nailed the art of retained revenue and recommendations for the top retention-supporting software solutions currently on the market.
Product & CX
Strong retention starts with a great product. No consumer is repurchasing something they didn’t enjoy the first time around.
Equally important is the CX wrapper around the product itself. Time and money spent by brands improving their shipping, tracking, unboxing experience and customer support also increases retention.
In response to customer complaints of late deliveries and damaged products last year, UK cold brew merchant Solo Coffee revamped their CX to provide an improved end-to-end experience for consumers.
Honest communication, beefed up packaging and upgraded delivery ops mitigated against buyer dissatisfaction and boosted repeat orders.
Creating this kind of customer feedback loop, and using it to constantly refine a product offering fosters the kind of brand-buyer relationship so crucial to all retention efforts.
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Email & SMS
As the most prevalent means of brand-customer communication, email and SMS are the bread and butter of any effort to improve retention.
In the next year, DTC brands will look to conversationalise these channels in an attempt to develop intimate, 1:1 relationships with individual buyers.
Personalization is attractive to consumers - 72% won’t engage with bulk messaging. It also enables brands to more effectively move buyers from an initial order to those all important second and third purchases.
This can work particularly well in CPG categories, where deep knowledge of an individual’s buying habits allows merchants to send timely, relevant reorder prompts via integrated email and SMS flows.
The same logic applies to upselling customers to higher ticket items. UK beverage brand Days Brewing recently used email automation overlaid with SMS messaging to prompt customers to trade up from a 4-bottle taster pack to a larger box of 12 beers on their second order.
Auditing your existing email and SMS messaging flows to understand the touch points where customers come into contact with your brand, and optimising them to improve retention is an easy win here.
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Subscription
A large body of subscribed customers, and the (almost) guaranteed recurring revenue that comes with it is the holy grail for many DTC brands.
As a retention model it’s particularly powerful for those selling consumable, low AOV and high frequency products - such as beverage, food, petcare and beauty items.
But moving high numbers of customers to a subscription model, when so many similar options are available to them isn’t easy for an individual brand to achieve.
Lengthy phone tariffs and difficult-to-cancel cable TV packages have made consumers wary of subscription models. To overcome this, DTC brands must make customers feel safe in their subscription by giving them control over it’s terms.
Beverage brand Sound Tea does exactly this by enabling customers to modify, pause or cancel their monthly subscription at any time via SMS.
Customers also need compelling reasons to become subscribers in the first place. Access to discounted pricing, free shipping, exclusive content and limited edition product drops are common.
Merchants who closely align the value proposition of their subscription model with their brand identity are particularly successful. A standout example is Atlas Coffee Club, whose deliveries to subscribed customers include educational content on the country each coffee bean originates from.
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Customer Reviews
Whilst customer reviews offer acquisition-driving social proof for DTC brands, they can also become powerful retention plays if used effectively.
Reviews are gold mines of quantitative and qualitative feedback shared by people who likely have a strong opinion of a particular merchant.
Leveraging this data to address areas of customer dissatisfaction can rapidly improve the shopping experience, and ultimately prompt more buyers to return.
Positive reviews can also help brands identify and build relationships with their loyal ‘superfans’, whose enthusiasm might be rewarded with exclusive offers or membership of VIP communities. Equally, engaging with and mitigating negative reviews are a chance to win back underwhelmed customers with great CX.
In addition, sending feedback requests via automated email and SMS flows are a great way to open a conversation with a customer. CBD brand Not Pot built a bank of over 3,000 reviews using this strategy - improving retention in the process.
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Loyalty Programs
A loyalty program seeks to increase the LTV of a brand’s most engaged customers by offering them a value exchange that includes, but goes beyond, purchasing transactions.
Typically, desired customer behaviours like repeat purchases, brand advocacy and content consumption are incentivized by a merchant in exchange for loyalty points, which can be traded for some sort or reward.
Like subscription models, loyalty programs come with historical baggage - their reputation having been undermined by clunky-to-use frequent flyer initiatives and hotel points systems offering little in return.
To address consumer hesitancy, DTC brands are getting innovative with loyalty. Customers of socially conscious beauty player Pacifica win loyalty points for returning empty packaging, which the vendor then recycles. Merchandise store The Chivery have even gamified their loyalty program - ranking customers competitively against each other based on their engagement with the brand.
With competition for customer attention more fervent than ever, optimising the value exchange offered by a loyalty program in an innovative way that reflects both a brand’s values and consumer desires is crucial.
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Community & Content
Retention plays based around engaging a community with content were already huge during the DTC 1.0 era - beauty brand Glossier being an early trailblazer.
Today’s brands will continue to double down on this strategy - leveraging new platforms like Clubhouse, Twitter Spaces, Geneva Chat, TikTok and Whatsapp.
The most effective community and content plays are those that build out from a vendor’s specific niche to address a wider interest group or societal issue.
Solo Coffee’s print magazine Outside the Box explores coffee culture, creative caffeine-based recipes and lifestyle elements to engage customers between purchases.
Adolescent self-care brand Blume went one step further, highlighting the low availability of sex education in the US and attempting to bring about political change. The brand host an independent website where teachers and students can download free sex ed content and sign petitions on the issue.
Because community groups and content can address an almost endless list of topics, this is one of the most universally applicable retention strategies for merchants across all categories.
New Products
Keeping customers interested enough in a product set such that they return to buy again and again is a huge challenge for any retention-focused brand.
For those selling high AOV items with low reorder rates, this issue is particularly acute - consumers don’t come back to buy another mattress a month after an initial purchase.
To increase LTV, such merchants must expand their product range. Cookware brand Equal Parts did this particularly effectively, launching a line of kitchen accessories to appeal to customers who’d already purchased their non-stick pots and pans.
Even in CPG categories, which lend themselves to high reorder rates, brands must keep product options fresh to prevent customers becoming bored with the same flavours and varieties.
Beverage brand Ugly Drinks began doing exactly this last year by releasing monthly limited edition product drops. Relationships with engaged customers were strengthened by involving them in the development process, and production runs sold out in a matter of days.
For brands who want to improve their retention, but haven’t considered it too closely in the past, it can be difficult to know where to start. To cut through the complex metrics and myriad strategies, Kristen shares her top five actionable tips to kickstart your retention plays:
Do a brand audit
Founders and marketers are so focussed on building that they often forget what the experience is like from a consumer perspective. Put yourself in the customer’s shoes - go buy your product from your store and document every touch point that takes place thereafter. Objectively analyse the buyer experience and optimise as necessary.
Email is the lowest hanging fruit
Improving your email flows is the quickest fix you can make to improve retention. Start with building a welcome flow that maps out a 0-90 day vision of how you are reconnecting with your customer post purchase. Think about automations, timings, tone of voice, CTAs, messaging, content, personalization and integration with other channels such as SMS.
Don’t try to do it all at once
Retention is about serving your unique customer in a way that is different from the next brand. That means running only those retention strategies which make sense for your category, niche and specific audience demographic. It’s much better to build brand-customer relationships with a small number of high quality, relevant touch points over the long-term, than spamming your audience unthinkingly. You can’t just annoy somebody into purchasing again!
Ask customers what they want
The best way of figuring out which retention plays your customers would find valuable is to straight up ask them. Segment your most loyal customers, by whichever measure your brand deems a high engagement rate. Then send this group an email and ask them to join a Zoom call or fill out a survey. More often than not a customer will tell you whether they want a subscription service or a loyalty program or not.
Dedicate headcount to it
As brands focus more energy on retention plays, they are beginning to hire personnel in roles dedicated to improving repeat revenue metrics. Either employ somebody as ‘Head of Retention’, or shift the focus of one of your existing marketers to think more holistically about this increasingly important business function.
