Manufacturing News

Why you should be thinking about customer retention – not just acquisition

Manufacturing News


It goes without saying that customer acquisition is an essential aspect of any business’s marketing strategy. But customer retention — the art of holding onto the customers you already have — is equally important. In fact, depending on where your business is at in its journey, customer retention might even be more important than acquisition.

For starters, retaining customers takes less time and is less labour-intensive than trying to gain new customers, meaning retention marketing offers more bang for your buck. Existing customers are also far more likely to become advocates and ambassadors for your brand, and this kind of loyalty is pretty much the most valuable kind of promotion a business can get.

But before we get into all that, let’s briefly revisit our beloved friend, the marketing funnel.

The almighty marketing funnel


As we explored in our previous blog, the funnel is key to a successful marketing strategy. It maps the journey of your audience from awareness, to consideration, to conversion and then, finally, to loyal customer.

This last phase of the funnel — loyalty / advocacy — is what we’re going to delve into in this blog. It’s the stage at which your customers are transformed from mere one-off buyers to the people who will return to your business again and again, leave glowing reviews, tell their friends about their experience, refer others and share information about your products or services through social media. This kind of organic exposure leads to brand equity, and is really the Holy Grail when it comes to promoting your business (brand equity, as we know, is the often-intangible value ascribed to your business through your reputation and relationship with customers).

Customer retention versus customer acquisition

Basically, acquisition is how you build your customer base, while retention involves strengthening relationships / sales / advocacy with existing customers.

Obviously, you can’t retain customers without first acquiring them. Any business plan needs to begin with attracting customers, and the acquisition of new customers should always be part of your strategy. However, if you become overly focused on gaining novel customers, and neglect to take care of the ones you already have, you’re missing a huge business opportunity and ultimately working harder than you should be. One of the key things to note here is that acquiring a new customer can cost you anywhere from five to 20 times more than retaining an existing customer.*

While first-time customers tend to be tentative and conservative in their buying behaviour (ie. a lower shopping cart amount), returning customers are more likely to feel comfortable spending a higher amount of money on your business. This is because they’ve experienced your product or service, understand its value, and have formed a relationship with your brand. In other words, they’ve been successfully converted.

Of course, this all depends on the nature of your business. Businesses that sell typically once-off products — say, luxury furniture or glassware — will have a different customer acquisition and retention strategy than ones that rely on customer loyalty and repeat visitation (however, those businesses that offer “once-off” services still require the positive brand equity that leads to word-of-mouth, referrals and other displays of advocacy).

Your strategy also depends on whether your business is new or established. As a rule of thumb, brand new businesses will focus 100 per cent of their marketing activity on acquiring new customers; businesses with a consistent flow of customers should devote 70 per cent of their efforts to acquisition and 30 per cent to retention; and well-established businesses should split their activity 60:40 in favour of retention.*

Hence, once a business is established, customer retention becomes both more economical and more powerful than acquisition. And now for the fun part: actual strategies to encourage customer retention.

How to improve customer retention

While the customer acquisition phase is characterised by brand awareness and capturing your target audience’s attention, the retention phase is all about fostering a positive relationship with your customers and deepening their appreciation for your product or service.

A big part of retention marketing involves satisfying the human desire to be recognised and acknowledged, which in turn builds a sense of familiarity and belonging. We all know the feeling of visiting a favourite cafe and having the staff remember our name and coffee order. If you can help your customers to feel seen and valued, and that their needs are understood, they’re more likely to become part of your loyal and stable customer base.

Retention marketing is comprised of activities such as:

Electronic Direct Mails (eDMs).

eDMs help customers to feel that they’re part of your community by keeping them abreast of sales, promotions, new products and general business updates. eDMs can also deepen the perceived value of your offering by providing helpful content. If you’re a seller of sustainable cleaning products, for example, you might send an email that links to a blog you’ve written on eco-friendly cleaning tips.

Membership or loyalty programs.

These sorts of programs might involve rewarding customers for their continued patronage through points being accrued or gifts being offered, or even just a website account that retains their information for a smoother transaction next time. Think of how effective Qantas’s ‘Frequent Flyer’ program has been (or, on a smaller scale, coffee loyalty cards! Simple but effective).

Thank you messages.

Following a customer’s first purchase, you might send a brief follow-up email or message thanking them for their business and inviting them to get in touch with any questions or feedback. This helps keep you front of mind and lay the foundation for an ongoing relationship with this customer by showing that you value them.

Handwritten notes.

If your business sends out physical products, a handwritten note can add a personal touch and create the feeling of being acknowledged.

Deliver excellent customer service.

As well as general friendliness, this includes responding to customer questions and resolving issues quickly, plus exceeding customer expectations wherever possible. Having a live chat function on your website can be helpful here so that customer service is easily accessible 24/7.

‘Returning customer’ discount.

Knowing that repeat customers are likely to spend more money than first-time customers, it can sometimes be worth offering discounts to encourage consumers to buy from you again. These deals might be offered after the initial transaction (for example, a discount flyer that accompanies the customer’s product delivery), or can be used to prompt a repeat purchase if it’s been a while since the customer shopped with you (for example, emails with a “We miss you” or “We haven’t seen you in a while” angle).

Reminder emails.

While businesses are sometimes wary of harassing their customers with too many emails (and rightly so), well-timed emails or messages that anticipate when a client might be running low on an item (for example, coffee beans or facial cleanser) or due for their next appointment can be very helpful. This is especially true if the email makes the repurchasing or rebooking journey simple.

‘Refer a friend’ incentives.

This is a way of inviting your customers to become active advocates for your business — for example, a gym that offers a two-for-one deal for current members that bring a friend to try out a fitness class, or a bank that issues cash rewards for any customers who successfully recommend their services to a friend.

Calculating your customer retention

By now you might be curious as to how well you’re actually doing on the customer retention front. Fear not: for this, there are a few key metrics and formulas you can use!

For businesses in the e-commerce transaction category:

First, you need to work out your repeat customer rate. To do this, work out how many customers have purchased from you more than once over a set period of time. Next, calculate how many different (ie. distinct) customers have made purchases over the same time period. Divide the first number (customers who have purchased more than once) by the second number (unique customers) to get your repeat customer rate.

You can calculate your business’s purchase frequency by taking the number of purchases and dividing it by the number of unique customers over that same time period. If you’ve processed 100 orders over the past year, for example, and you’ve had 50 unique customers, then your purchase frequency is two.

Then, it’s time to work out your average order value, which tells you how much each of your customers is spending when they purchase from you. This involves dividing your yearly revenue by the number of orders placed. If you made $50,000 from your business and processed 1,000 orders, then each customer is spending an average of $50. Whether this is a healthy figure or not depends on the average price of what you’re selling.

If you multiply your purchase frequency (eg. two) by your average order value (eg. $50), you get your customer value. In this example, it would be $100. In other words, each customer is worth $100 to your business.

And the once-off, service natured businesses:

You should focus on customer retention rate (CRR). To calculate this, you need to work out how many customers you had at the beginning of a certain time frame, how many you had at the end of that time frame, and how many you lost along the way. If you started the year with 107 customers (S), for example, and lost eight of them but gained 21 new customers (N), you ended the year with 120 (E).

The CRR formula is: ((E-N)/S)*100

For this example, CRR = ((120-21)/107)*100

CRR = 92.5%

In an ideal world, your CRR would be 100%, meaning that you didn’t lose a single client. But as long as your retention rate improves each time you measure it, you’re heading in the right direction.

At the end of the day, nailing customer retention is really just about nurturing relationships and showing your existing customers that they matter to you — which, of course, they most certainly do! For more tips on how you can boost your customer retention rate, get in touch with PIER today.


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