In line with our risk management framework, today we published our Q4 2019 performance update.
5 ways to improve customer retention
There is a variety of literature and research illustrating the importance of building brand loyalty, albeit with some degree of variance. However, the common theme is the enormous gains which come from sustaining high customer retention rates.
According to collated data from Outbound Engine, the acquisition of a new customer is 5 times more costly than retaining an existing one. Furthermore, even improving your customer retention rate by a mere 5 per cent can boost profitability by anywhere between 25 and 95 per cent. And, to drive the point home, the average success rate from sales to an existing customer is 60 to 70 per cent, while the equivalent success rate with new customers is usually between 5 to 20 per cent.
And yet, according to Pure360, just 18 per cent of UK companies focus their resource on customer retention, and although the figure is a bit more favourable among retailers, it is clear that this low-hanging fruit is not being sufficiently picked.
How do I measure customer retention?
A loyal customer doesn't just spend more at your store - they also advocate your brand to others. In fact, according to Harvard Business Review, nearly a quarter (23 per cent) of customers tell more than 10 other people about a good experience with a particular brand. Loyal customers also provide invaluable data which can be pivotal in improving your product(s) and making key strategic decisions.
Yet it is difficult to meaningfully improve customer loyalty without having mechanisms in place to actually quantify it. Luckily for retailers there are a number of means through which you can track this in numeric terms. Below we have outlined three that are particularly useful:
Customer lifetime value: As the name suggests, this is the revenue you expect to make from a customer during your business relationship, minus the acquisition and/or retention costs you incur. Although this isn't always an exact science, it is a basis upon which retailers can determine their flexibility when it comes to price and margins in order to retain customers.
For example, it may be worth offering a product or service as a loss leader upfront if you believe that the initial knock to your profits will quickly be eclipsed by repeat purchases, and/or the opportunity to cross sell. Tracking expected lifetime value will also give you an idea of the level of resource you should be focusing on acquisition versus retention.
RFM: The RFM (Recency, Frequency, Monetary value) model takes a three-pronged approach to segmenting repeat customers, determining their value, and assessing behavioural changes.
- Recency: the last interaction between retailer and customer, thus showing how fresh the relationship is.
- Frequency: the number of purchases during a set time period, giving the retailer key insights into purchase cycles.
- Monetary value: total customer spend during this set period. Remember, bigger purchases with scarcer regularity could collectively exceed those of a frequent customer who buys in small amounts.
NPS: There are a number of review sites which you can subscribe to as a retailer, but Net Promotor Score (NPS) is well established as an independent, impartial medium which has the trust of both retailer and customer alike. These scores provide a true acid test of customer satisfaction, and monitoring trends in your score can provide valuable insights as to what you're doing right, and where you might be falling short. Additionally, customer feedback provides a qualitative measure of customer satisfaction and brand loyalty as a whole.
Should I put more focus on customer retention?
Some retailers may not be convinced by committing resource to customer retention, especially in industries where customers interact exclusively on a transactional basis. Customers freely use comparison websites to make purchasing decisions, especially when price is the overwhelming influence on a purchase.
Furthermore, retention is not without its costs, and the big danger is that, if you initially allure customers with special deals, they may grow accustomed to this, and expect continued discounts as a prerequisite for doing business with you. You may thus feel that there is better return on investment within customer acquisition.
Yet, rather than dissuading you from focusing on customer retention, this should act as encouragement to find more creative, sustainable ways of engaging and retaining customers (as we discuss in the next section), instead of depending on pricing strategies. Additionally, even in heavily-transactional retail sectors, boosting brand loyalty could provide a golden opportunity for ongoing sales growth if you are able to keep hold of customers that your competitors can’t.
How do I increase customer retention rates?
There are a variety of methods for building brand loyalty, and, to some extent, best practices will depend on the nature of your business and/or industry. Nevertheless, we’ve listed five powerful ways you can boost customer retention rates below:
Retailers face a maddening conundrum. Customers expect personalised offers, and a personalised shopping experience. Yet in a world of regular high-profile data breaches and rampant fraud, consumers are keeping their cards closer to their chests than ever before in terms of personal information.
But there is one tool which all online retailers have at their disposal: product recommendations. As a case in point, more than a third of Amazon’s sales are driven by targeted, relevant product recommendations based on a purchase which customers have just made, and/or their on-site behaviour. And you don’t need to be a digital behemoth to set up this sort of thing either. Plugins such as Shopify cost as little as £25 per month, and automate the process for you.
In addition to product recommendations, putting a personal touch on your communications, customising the customer journey and personalising offers will bolster customer retention. Ultimately the best way of persuading customers to share their personal data with you is to ensure that they receive a better experience in return for doing so.
2) Customer Relationship Management
Customer Relationship Management (CRM) is something which should underpin your digital marketing strategy, and, in particular, cutting-edge email marketing can yield quick wins. Sending the optimal volume of emails can be a tough balance to strike, but tactical emails to positively reinforce a purchase that’s just been made, offers of relevant products, cart abandonment follow-ups, strategically-timed renewal offers or even just sending a message to wish a customer on their birthday have a big effect on retention rates.
CRM software systems such as Salesforce have a substantial upfront cost, but, once up and running, the return on investment is significant – particularly given the level of sophistication and automation available.
Of course, it isn’t just email where you need to fire on all cylinders. Aside from traditional lines of communication such as phone and live chat, social media channels are fast becoming the lifeblood of building and sustaining valuable customer relationships – and providing the vehicle through which brand advocates can spread the word about you.
3) Loyalty schemes
Loyalty schemes are nothing new, and date back more than three decades in UK retail. So commonplace have they become that they are no longer a differentiator, and customers now expect rewards as part of doing business with retailers. In fact, it’s somewhat of a tired concept, and a 2017 Deloitte study found that 42 per cent of retail customers require more than just loyalty points in order to shop repeatedly with a retail brand.
That said, loyalty schemes are still an important component of customer retention, with the study asserting that 26 per cent of UK customers use them at least once a week, while nearly 50 per cent use them on at least a monthly basis.
So yes, offering a loyalty scheme should be a given, but the opportunities arise from being a bit creative, and providing customers with something different. The aforementioned Deloitte study found a particular affinity with personalising rewards; both in terms of gearing points to purchase history, and offering freebies or discounts linked to individual lifestyle activities – particularly among younger consumers.
Communications also have a role to play. Rather than generic letters in the post, you can increase the impact of loyalty programmes with more individual communications through favoured channels. Timing is crucial too, as you’ll want to synchronise offers at strategic stages during the customer lifecycle.
Other clever ideas could include providing exclusive offers, or first refusal on new products for long-serving customers. Perhaps you could even mark special occasions such as birthdays or anniversaries with personalised gifts.
First and foremost, you want to make it as simple as possible for customers to make repeat purchases. Storing payment details on site is just one means of doing so, and these little gains are vital to a slick online store. But the power of technology goes well beyond this, and, in particular, automation and artificial intelligence (AI) could hold the key. The level of insight AI can extract from customer data opens up new avenues of personalisation, targeting, and adding value to the customer experience.
It doesn’t necessarily mean embracing robots, but smart digital signage solutions are an excellent way of capturing data, sending targeted messaging during the journey and identifying pain points to reduce friction. There are a variety of such platforms to choose from, and indeed the world of AI is an intimidatingly-vast one. The starting point is to clearly define the deficiencies within your ecommerce platform which are best filled by automation; then select the key areas on which to focus, and acquire the requisite functionality to drive customer loyalty. For many retailers, AI is an untapped goldmine, and a glorious chance to steal a march on competitors by harnessing its considerable power.
5) Retail finance
Offering an assortment of digital payment options is now part and parcel of being a retailer in the UK, but one area which has breathed new life into the cause is retail finance. Offering frictionless finance at the point of sale has had a profound impact in terms of boosting order values and increasing conversion among retailers, while uplift in brand loyalty is another core benefit.
A recent study by Ikano Bank found that retention rates were twice as high among retail finance customers versus non-finance in 2015/16. Furthermore, over three times as many retail finance buyers (43 per cent) had been a customer for 3+ years compared with non-finance (12 per cent).
Fundamental to retail finance is a smooth purchase journey, which requires minimal effort on the part of the customer, and yields an instant decision. Particularly when it comes to buying big-ticket items, retail finance also enables customers to sensibly spread the cost of a purchase over many instalments, without the hassle of having to apply for credit through traditional methods. And, by availing such a facility to customers, the inevitable result is a greater affinity with the brand, and the knowledge that repeat purchases will be stress-free.
As a retailer, you have a couple of options. On one hand, you could simply implement a few plugins to your website and go it alone. Alternatively, for something more sophisticated, you could integrate your platform with a broker or lender. Especially in the latter case, the benefits are seamless customer journeys, minimal ongoing resource on your end, and negligible upfront costs. Compound this with a guaranteed rise in customer retention rates, and you’re well on your way to taking online retail performance to the next level.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
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