Editor’s Note: This post was originally published July 10, 2014 and was updated for accuracy and comprehensiveness on April 13, 2018.
Customer retention is the activity that a retailer performs in order to reduce customer churn and improve customer lifetime value produced.
In plain English: customer retention is trying to keep more customers for a longer period of time so they spend more over their lifetime.
Customer retention is the opposite of customer acquisition, which is when a retailer tries to get new customers. Adwords, SEO, buying email lists, outbound sales, etc, are all examples of customer acquisition. Historically, retailers have focused on customer acquisition, and gave little to no thought to customer retention. In ecommerce this was especially so, until retention gained popularity around 2011.
Why Customer Retention?
A study conducted by the Harvard Business Review yielded the following results:
The bottom line: increasing customer retention rates by 5% increases profits by 25% to 95%.
Harvard Business Review
As one of the most cited names in the retention industry, I think it’s safe to trust them!
There are other studies that link retention to profit, a quick Google will find hundreds.
A lot of these studies show increases of profits caused by increases in retention, due to three simple facts:
- It usually costs significantly more to acquire a new customer than it does to retain an existing one
- A successfully retained customer is a patron for longer, which means they’re spending more money with a retailer over their customer lifetime
- A successfully retained customer is much more likely to refer other customers. These referees are cheaper to acquire, and usually have a higher lifetime value than a customer acquired via conventional channels.
There are a lot of ways to retain customers, since retention is simply keeping customers longer so they will spend more over their lifetime. Think of them all like several paths up the same mountain. while they are different in some way, they are all trying to do the same thing: keep more customers for longer to spend more.
Keep this in mind: the #1 goal and purpose of customer retention is usually to increase profit. There are other good things that happen, like customer satisfaction, loyalty, brand perception, etc, but they will never replace the #1 goal: profit.
Strategy vs. Tactics vs. Tools
Now we know what retention is, how do we go about achieving it? We have three methods to increase customer retention: strategies, tactics, and tools. Navigating the retention space is confusing, but it is easy when you approach everything as a retention strategy, tactic, or tool.
A retention strategy is a plan designed to achieve the overall goal of retaining customers.
An example is “keeping customers happy so they spend more.” It is a plan, but it doesn’t say how this is done (tactics) or what will do this (tools).
A retention tactic is an action or act carried out with the goal of creating retained customers.
An example is “checking in with customers 2 weeks after their last order.” It shows what we will do, but it doesn’t say why (strategy) or what will do this (tools).
A retention tool is a system or implement used to carry out customer retention functions.
An example is “using live chat to speak with customers.” It shows what we’ll use to do something, but it doesn’t say why (strategy) or what we’ll speak to them about (tactics).
All men see these tactics whereby I conquer, but what non can see is the strategy out of which victory is evolved.
Combining all three: “Keeping customers happy so they spend more (strategy), by checking in with them 2 weeks after their last order (tactic), using live chat (tool).” Keep this in mind as we go through the next sections.
Customer Retention Strategies
A retention strategy is basically a plan used to create customer retention. All retention tools and tactics will attempt to achieve at least one of these retention strategies, although there is often quite a bit of overlap.
1. Customer Satisfaction
Also known as: customer experience, customer service
Customer satisfaction is a measure of how products and services supplied by a company meet or surpass customer expectation.
Customer satisfaction strategies attempt to improve retention by increasing: how satisfied a customer is with a retailer, the number of customers who are satisfied, or both. This is the most common form of retention.
2. Customer Loyalty
Customer loyalty is the measure of how likely a customer is to purchase again from a company.
Customer loyalty strategies attempt to improve retention by increasing the likelihood that a customer will make repeat purchases with a retailer, and decrease the likelihood that a customer will purchase with a competitor. These strategies sometimes use incentives to motivate customers to purchase or perform actions. Incentives can be in the form of points, rewards, free items, discounts, status, or more.
3. Customer Referral Marketing
Customer referral marketing is the measure of how likely a customer is to refer others to a company.
Customer referral marketing strategies attempt to improve retention by increasing the likelihood that a customer will refer others (often stated as their “friends and family”). The goal of these strategies is not necessarily to get customers to actually refer others. Correlations between a customer’s likelihood to refer and profit have been established, so increasing this metric theoretically should increase profit.
Customer Retention Tactics & Tools
Customer Service and “Magic Moments”
Providing extraordinary customer service, or as some call them “magic moments,” is a strategy and tactic that is used to increase customer satisfaction and referrals. One of the best examples of an organization using customer service as a retention strategy is Zappos, who has a one year, free return policy. A great example of a magic moment is when a video game developer Bungie reached out to a father whose son recently had a liver transplant to send some Halo (video game) gear.
Proponents of this strategy often cite statistics such as “86% of consumers would pay up to 25% more for a better customer experience.”
Critics of this strategy often argue that a more effective method of retaining customers is to invest in preventing customer service issues instead of trying to go above and beyond the “call of duty.”
Generally we’d advise this solution for retailers who: have a high customer lifetime value, offer technical products, are vertically integrated (they manufacture and sell their own products), and have a customer demographic with very social tendencies.
Patronage Discounts and Coupons
Giving existing customers discounts or coupons is a tactic that is used to increase customer satisfaction and loyalty. This is done by giving loyal customer discounts, which increases the value that they are able to receive. If no other merchants are giving similar discounts, then this can also increase customer loyalty. An example of a patronage discount is the classic “buy 9 get 1 free card” – the most widely used retention program in the world. Another example would be giving customers who have been members for 1 year a 5% discount on all their orders.
Proponents of discounting and coupon systems say that they are easy to implement and, when done correctly, are effective.
These programs are often critiqued because they condition customers to expect discounts, as well as the ability for competitors to price-match and remove any loyalty or satisfaction effect.
Generally we wouldn’t advise using these kinds of programs, although they are easy to implement and run.
Customer Retention and Rewards Programs
Rewarding customers for actions, purchases, and behaviors is a tactic and tool used to increase customer loyalty and sometimes referrals. Customers can be directly rewarded, or can be spend “points” or “credits” on discounts, status-based rewards, experiential rewards, charitable donations and more. Points are often used to mask the value of the reward a customer is receiving. An example of a customer retention program is Starbucks “My Rewards” in which customers can collect “stars” that can be spent on free beverages, food, and items. This program also contains tiered rewards.
Proponents of customer retention programs claim that they have a 100 year history within retail and sufficient data to prove they are profitable. Customers are often already familiar with the basic mechanisms of a loyalty program.
Critics of rewards programs claim that the average household is involved in multiple loyalty programs, so often only the best programs are effective.
Generally we’d advise these solutions to retailers who have at least 10% margin, have a relatively high customer lifetime value, and have customers that can purchase repeatedly.
Personalizing the customer experience is a tactic or tool that is used to increase customer satisfaction through more relevant experiences with the brand. Depending on the type of data being used to personalize the experience, it can also be used to increase customer loyalty – provided it is difficult for competitors to have access to the information being used in the personalization.
Example: shopping history. An example of this is a shopkeeper recommending certain products based on their knowledge of the customer’s purchase habits, preferences, and tastes. The king of ecommerce personalization is Amazon, where affinity basis is used to determine which products are most likely to be good recommendations.
Proponents of personalization say that customers who experience personalization have higher conversion rates and customer satisfaction.
Critics of personalization cite studies that found that personalization can sometimes have a negative effect on sales.
We’d recommend personalization for a merchant that has a large customer base, with a lot of customer data being collected, and enough time & employees to perform sufficient analysis.
Applying game mechanics to the customer experience and purchase process is a tactic or tool that is used to increase customer satisfaction by making the process more enjoyable and more likely to be performed. Gamification programs often use leaderboards, badges, status, and points to reward engagement. Unlike a loyalty program, these rewards are usually not redeemable; they are rewards in and of themselves. Gamification programs will often have elements of a loyalty program, and vice versa.
An example of ecommerce gamification is Bonobos, who hid images throughout their ecommerce site and would reward visitors with $25 credit for finding them.
Proponents of gamification claim that the video game market created consumer behaviors that can be used to align a customer’s motivation with actions that are valuable to a brand.
Critics of gamification cite that it isn’t studied enough in a retail context, and those studies that do exist are typically sourced by vendors.
We’d recommend gamification for retailers with a demographic that is very familiar with game mechanics. We’d also recommend retailers with loyalty programs to bring some gamification elements into their loyalty program.
Customer Relationship Management (CRM)
Customer relationship management is a tool used to increase customer satisfaction by enabling a comprehensive view of a customer’s “journey.” A CRM tool is often implemented to work in tandem with a retailer’s retention strategy. For example, displaying a customer’s point balance within the CRM system. Examples of a CRM tool include OroCRM & Nimble.
Proponents of CRM claim that aside from operational benefits, CRM can aid customer experience by having a single source of all customer information and interactions.
Critics of CRM argue that CRM is simply a tool and won’t improve customer satisfaction or loyalty with an acquisition or retention strategy.
We’d recommend CRM to retailers that do have established customer acquisition and retention strategies, have several interactions with customers over several years, and have a high customer lifetime value – especially subscription ecommerce merchants.
Customer churn prediction is a tool and tactic used to increase customer satisfaction. Churn prediction uses a merchant’s data to predict which customers are at risk of leaving, or “churning.” Usually a customer service representative will get in touch with these customers before they churn. Churn prediction is most often used in the financial and banking industries.
Proponents of churn prediction claim that churn prediction directly lowers marketing costs since less has to be spent in order to replace customers that would have likely churned.
Critics of churn prediction state that churn prediction doesn’t solve the core issue of what is causing churn – it is merely a “band-aid” and re-activated customers are likely to churn again.
We’d recommend churn prediction only to retailers with extremely high lifetime value, subscription ecommerce, and with other retention strategies in place.
Help Desk/Support Systems
Help desks are a tool used to assist customers who are having issues in order to improve customer satisfaction. Generally these use email, live chat, and/or phone systems to aid customers. An example of a help desk is Zendesk or Freshdesk.
Proponents of support systems say that when customers are having issues they are at most risk of churning, so this is one of the most crucial interactions. Making these experiences as positive as possible will have a great effect on customer satisfaction.
Critics of support systems or help desks claim that they are simply tools that make the experience of receiving support better, but don’t remove the cause of the issue.
We’d recommend a help desk or support system to retailers who have technical products, products that require installation, vertically integrated retailers (retailers that manufacture, or retailers that have high customer lifetime values.
Customer Feedback Surveys
Customer surveys are tactic and tool used to increase customer satisfaction by identifying points of improvement in a customer’s experience. An example of a customer survey tool is Survey Monkey.
Proponents of customer surveys state that they are very easy to implement and can be written to provide actionable results. They also provide a “forward look” into customer loyalty (they measure how the customer feels right now), whereas most loyalty metrics provide a “backward look” at loyalty (they measure what has already happened to affect how the customer feels).
Critics of these surveys state that they are often too long, tedious, and boring, so getting feedback depends on incentivizing the respondent – which skews results.
We’d recommend using a simple, quick survey such as the net promoter score survey.
What Customer Retention Tools, Programs, and Strategies Should You Use?
These strategies, tools, and programs, are all paths up the same mountain – they are not mutually exclusive. They should be combined and used in what we are calling “Full Stack Retention”.
Full Stack Retention (taken from the term "Full Stack Developer") refers to a retailer that has a full solution set to retain customers all throughout their customer lifecycle.
This solution set is designed for an average small-to-medium sized business doing $10m – $100m in revenue both online and in brick & mortar operations.
The objective of Full Stack Retention is to have at least one retention component in place for customers all along their customer journey. The goal is to move customers along this optimal customer path:
Based off this customer path, we recommend using the following:
- Rewards program with gamification elements blended in
- Light personalization
- Customer help desk and a focus on customer service strategy
- NPS surveys
Customer retention is a great strategy and should be getting as much, if not more, focus as customer acquisition. There are a lot of strategies, tactics, and tools to retain customers. Choosing the right set of solutions can be difficult and confusing. But don’t worry; as long as you’re always trying to keep customers happy and spending – retention – you’ll be working towards the right goal.