Commerce Strategy Measurement Is retention more important than acquisition in ecommerce? Or the other way around? Posted on 15th December, 2022 The right answer to most interesting questions is: it depends. (Annoyingly) It’s also the right answer to the old debate in ecommerce: is it more important to acquire new customers, or to keep the ones we have? Well, it depends. In this article, we will explore this question through data sources and techniques that will help you make decisions about this very question: should we improve customer acquisition through conversion rate tactics, or should we improve customer retention through loyalty tactics How to measure acquisition and retention. Acquisition of customers is best measured by Customer Acquisition Cost (CAC), one of the most important KPIs in ecommerce. CAC is actually really simple to measure, however it takes a tiny bit of manual labour. The formula is New Customers / Marketing Spend. If you’re measuring this on a monthly basis, simply divide the number of new customers (which you can get from your CRM, customer database, or most web analytic packages such as GA4), by your marketing spend in that month (which you will be tracking on your marketing budget tracker – right…right?). Now, “retention” is an interesting one, because it’s just one of the factors that play into your Customer Lifetime Value (LTV), which is what you really should care about. The thing is, retention rate is a funny metric in ecommerce, because the idea of “retaining a customer” is only theoretical. If you haven’t bought anything from a shop in one year, does it mean that shop didn’t retain you? In the absence of a contract or a subscription that alerts us when a customer has left, all we can do is come up with definitions for “dormant” customers and consider them gone from us. Instead, think about the Lifetime Value; this is essentially the amount of gross profit you get from a customer across their lifetime, or across a specific period you are analysing. We have discussed at length how to measure and improve LTV. For now, consider that it’s made up of Average Order Value + Frequency of Purchase + Retention Rate. This is “how much customers spend when they come + how often do they purchase + how long do they keep that frequency for”. The KPI Framework shows us how metrics contribute to revenue. CAC and LTV sit at the top of it, as the most important metrics to measure. Mythbusting: Retention is cheaper than acquisition. We wanted to address this myth as soon as possible in the article. You heard it before – “It’s five times easier to retain a customer than to acquire a new one” is a timeless myth that floats around marketing teams and business leaders. It seems to make sense, but it’s completely misguided. First of all, “cheaper” it’s the wrong focus. We shouldn’t care about what’s cheaper, but about what brings more benefit to the business. Think about this. Retaining a customer can only extend their lifetime value, however acquiring a new customer brings their whole customer value. For example, if a customer is going to spend £300 in DIY tools across their lifetime, they are a lot more valuable to acquire (when they have £300 to spend) than to retain (where they only have a fraction left of occasions to purchase). Secondly, it makes an assumption that what the company does in terms of retention can be improved – – but what if there is little else that can be done to “retain customers”. In such cases, the company is focusing on retention tactics to little avail, when optimising customer acquisition could be a lot more impactful. Hence, the right question should be “should we focus on retention or acquisition, why and how?”. Actually: You can probably survive without retention, but not without acquisition Now, let’s do a thought experiment. For most growing ecommerce companies, most revenue comes from new customers. You can check this in your CRM or Google Analytics – it will entirely depend on your sector (need-based products have more frequency of purchase and loyalty), and the level of penetration of your brand (more established brands have a higher percentage of repeat customers’ business). Whether we like it or not, “our customers are people who shop at our competitors, who also sometimes shop with us”. If you run Brand Tracking, you know this for a fact. The majority of customers will leave you one day. They “exit the category”, because they already bought all the things they need, or have lost their taste for them. Or they will have a bad experience with your delivery service. Or a bad customer service interaction. Therefore, no matter how hard you try, relying exclusively on lifetime value tactics is a lost cause. Customers always leave, you need to replenish them. If you were acquiring customers at good rates, and the average spend per purchase is better than the cost to acquire them, you would have a healthier business even if no customers purchased twice from you. But, of course – you need both in the right amounts. This is what this article is about. How to prioritise acquisition vs retention? So far, we have argued that you need both acquisition and retention to form part of your ecommerce strategy – and that you need to understand how much of each you need specifically, rather than relying on broad statements about “which one is better”. These are the steps you can take to figure this out. Understand how you’re balancing CAC and LTV We discussed how to measure CAC and LTV. Now the beauty of these metrics is that, together, they tell us about the health of our business. The CAC tells you how much it costs you to acquire a new customer. The LTV tells you how much you get from each customer. Therefore, a healthy business is one that has a lower CAC than LTV. Probably, three times lower (although this depends on things like ratio of gross to net profit, an interesting conversation with your CFO right there!). Measure these numbers and open the conversation with your management team – what is the right balance between CAC and LTV for your business? If they’re out of balance, you need to decrease your CAC, increase your LTV – or probably, both. Compare your conversion rate to your peers. IMRG offers a data exchange for ecommerce retailers. By giving them your data in confidence, you will be able to access benchmarks for conversion rate (and much more). With this, you can get a sense of how good your conversion rate is. Can’t wait? Well, then you should know the average conversion rate for new visitors in Q4 2021 was 3%. (IMRG Capgemini Quarterly Benchmark) Can conversion rate be improved? Analyse your First Purchase journey For most growing ecommerce brands, the First Purchase Journey is the most profitable. Therefore, it’s the most important to get right – and the one that will have the most impact in lowering your CAC (by increasing your conversion rate). You can analyse a First Purchase Journey through Customer Journey Mapping. You can use something like this to identify and prioritise the journeys you want to analyse. The most important aspect of a Customer Journey Mapping is the user research. Here are some ways in which you can research how your first visitors are experiencing your site for the first time. Hotjar recordings: Simply install Hotjar and it will record videos of your users. On a Plus plan and above, you can use filters to zoom in on your new visitors, or those starting their journey on your homepage. Watching the videos will start sparking ideas on where new visitors are falling through on their purchase journey. Unmoderated user testing: You can design usability studies and get quick results from unmoderated testing. Unlike Hotjar, where you’re analysing real traffic, with unmoderated testing you will be sharing the study with users who (probably) never been to your site. You get to write some tasks and questions that you want users to follow, and hear them talk and watch their screens as they go about the journey you designed for them. Moderated user testing: With this type of study, instead of letting users follow your tasks, you are interviewing them live. This is the most expensive method of testing, because it takes a lot of time to run, and because you will need to pay your users more. But it genuinely is the most insightful, and it’s really good for exploratory analysis. You might choose one (or various) of these, depending on your resources and experience with research. This is not exhaustive. But you can really get to know your customer needs with these three research method. Measure your LTV If your CAC is higher than your LTV, and you know that there is room to improve your CAC (by improving your conversion rate), then you want to start there. But if the research shows that your conversion rate doesn’t have a lot of room to grow, it’s time to wonder about your LTV. Implement NPS scoring (or alternative metrics of customer satisfaction). The problem with Lifetime Value and Retention Rate is that they are not reactive metrics. Executing tactics that improve your LTV and / or Retention rate will take time to show. So, what to do? As well as LTV measurement, you can consider Net Promoter Score, a measure of customer satisfaction. We have written exhaustively about its usefulness here. Because NPS is solicited data (ie, you ask people to give it to you), it reflects your customer’s experience in the present. This means NPS is reactive to experiments and therefore allows you to learn what leads to customer satisfaction and dissatisfaction. By improving your NPS score, you will also (in theory) improve your retention rate and frequency of purchase, allowing you to spend more retaining customers. Final thoughts Acquisition (measured as CAC) and retention of customers (as part of the bigger LTV) are the two levers that you need to pull to grow your ecommerce business sustainably. The most important thing is that you know they are in the right balance, and that you identify which area is more susceptible to improvements. Then you can start narrowing down the problems and considering tactics to make an impact on them.
