There’s a crucial decision that every eCommerce business has to make — should they direct their efforts toward expanding their customer base or focus on relationships with their existing customers?
Scaling an ecommerce brand comes with the challenge of finding the proper equilibrium between customer acquisition and retention.
Many eCommerce brands find themselves going all in on customer acquisition. With vast sums invested in marketing campaigns, social media advertising, and other strategies to lure in new customers, the mantra seems pretty clear — “more customers, more revenue.”
However, a shift can also be noticed. In the eCommerce industry, there’s a newfound emphasis on customer retention.
So the question is — with fierce competition, how does an eCommerce brand balance the optimal focus between customer acquisition and retention?
In this blog, we’ll dive deep into the debate of customer acquisition vs retention. We’ll discuss why to focus on both of them and when to focus on what.
Let’s dive right in!
What is customer acquisition vs retention?
Customer acquisition is the process of bringing new customers into your eCommerce business, guiding them from initial awareness to their first conversion. In this phase, you put efforts into making your brand stand out, enticing prospective customers to choose your product over competitors.
On the flip side, customer retention revolves around nurturing existing relationships, aiming to foster loyalty and drive repeat purchases. Successful retention involves understanding and meeting the preferences and interests of your current customer base. .
|Attracts new customers
|Nurtures relationships with existing customers
|Converts prospects into customers
|Increase loyalty and drive repeat purchases
|Customer Acquisition Cost (CAC)
|Customer Retention Rate (CRR), Customer Churn Rate (CCR), Customer Lifetime Value (CLV)
|High initial investment
|Ongoing relationship building
|Cutting through the competition for attention
|Sustaining interest and loyalty over time
The customer journey is a dual effort—you can’t solely prioritize acquisition over retention or vice versa. Both are indispensable. Acquiring customers is the first step, but to thrive, businesses must also engage in activities that keep customers coming back for more.
Why focus on customer acquisition?
In eCommerce, the spotlight often shines brightly on customer acquisition, and for good reason. Whether a startup or an established entity, you need new customers to generate more revenue and drive success.
Here’s why eCommerce businesses, both starting out and well-settled, prioritize customer acquisition in their sales and marketing strategies:
1. Revenue: When profits dip, the search for new target audiences and markets becomes extremely crucial. Acquiring fresh customers injects new lifeblood into the revenue flow, offering a lifeline for businesses facing downturns.
2. Competitive edge: Focusing on customer numbers and revenue is a strategic advantage in the persistent race for market supremacy. The pursuit of competitive advantage often depends on outpacing rivals in acquiring a larger share of the customer pie chart.
3. Economies of scale: Scaling operations brings growth and cost efficiencies. Higher customer numbers contribute to economies of scale, creating the way for reduced costs and improved profit margins, a tempting prospect for businesses eyeing sustainability.
4. Market expansion: Introducing a new product or service to an entirely untapped market demands a strong focus on customer acquisition. A fresh market requires a fresh influx of customers to spark interest and drive initial adoption.
5. Stakeholder expectations: Stakeholders and investors who fuel the growth often expect tangible results. Customer acquisition remains a go-to focus, aligning with the expectations of those who hold the cheque.
6. Incentive structures: The very structure of sales and marketing teams often tilts the scale toward acquisition. Compensation structures that reward acquisition over retention create a natural inclination to prioritize the influx of new customers.
The opportunities to acquire customers have multiplied, with many touchpoints and cost-effective online advertising.
As digital advertising claims an ever-growing share of global ad spend, businesses find themselves at a place where new customers are a necessity and a tangible growth opportunity waiting to be captured.
Commonly used customer acquisition strategies
Here are four of the impactful and commonly used customer acquisition strategies that eCommerce businesses use:
1. Paid digital marketing
Use the power of platforms like Facebook, Instagram, Google, and TikTok. By strategically targeting your audience, paid digital marketing ensures your ads resonate with demographics most likely to convert into customers.
2. Content and social media marketing
Nothing fuels brand visibility better than content. You can boost brand awareness and attract new customers through compelling content on your blog, amplified by SEO and creative social media content.
3. Partnerships and collaborations
Build alliances with brands sharing a similar audience, amplifying awareness and building trust. Leverage influencer marketing, even through micro-influencers, to effectively promote your brand and offerings.
Make a mark by hosting or sponsoring events relevant to your brand. A marathon sponsorship for an electrolyte drink brand or a pop-up event with live music for an online clothing company creates engaging touchpoints, bringing in new customers.
Why focus on customer retention?
E-commerce businesses are shifting toward customer retention as a key driver of long-term success. But why the shift? Let’s break it down:
1. Fortress against competition: The eCommerce market is a fiercely competitive market, where customers can easily switch allegiances. Prioritizing retention maintains a crucial competitive advantage. A loyal customer base becomes a fortress against the allure of rival brands.
2. Predictable revenue modeling: Retention-focused businesses can anticipate income streams with greater confidence. Assured customer numbers provide a stable foundation for revenue modeling, enhancing financial predictability and stability.
3. Upselling and cross-selling opportunities: Retention takes precedence for businesses eyeing the launch of new product lines. Nurturing existing customer relationships creates a strong ground for upselling and cross-selling, driving additional revenue without the cost-intensive pursuit of new customers.
4. Invaluable data for development: Long-term customer engagement offers a lot of data for new product development. Understanding product usage and customer experiences over time provides a nuanced understanding that drives innovative and customer-centric offerings.
5. Risk mitigation during economic downtime: In challenging economic conditions, where market uncertainties occur, customer retention acts as a risk mitigation strategy. The stability offered by a loyal customer base becomes a shield against market volatility.
The outcomes of focusing on customer retention
In a business landscape shaped by subscription-based revenue models and the rise of the subscription economy, customer retention becomes the essential strategy for long-term success.
Prioritizing retention over acquisition generates great outcomes:
1. Hight CLV
By focusing on retention, businesses witness an uptick in Customer Lifetime Value (CLV), indicating the average value of each new customer brought into the business.
2. Impactful revenue optimization
Retention efforts directly impact the churn rate, measuring customer losses over a specific period. Keeping the churn rate low enhances the impact of marketing and sales expenditure, ensuring each customer acquired stays longer and contributes more to the bottom line.
3. Expansion and referral growth
Customer retention is not just about retaining; it’s about expanding and turning toward satisfied customers as advocates. Expansion revenue from existing customers, combined with customer advocacy and referrals, becomes a powerful strategy for sustained growth.
Commonly used customer retention strategy
A robust customer retention strategy lays the groundwork for lasting relationships, ensuring shoppers return for future purchases.
Here are five effective strategies to fortify customer loyalty:
1. Customer accounts
By providing a seamless reordering process, offering order visibility, and managing subscriptions, you enhance the overall customer experience. The portal becomes a personalized space, recommending relevant products and securely storing payment information for future transactions.
2. Discounts for repurchases or referrals
Incentivize repeat purchases by offering discounts on second orders or implementing a comprehensive loyalty program. Extend the strategy to referrals, encouraging customers to refer new leads while enjoying product discounts themselves—a win-win.
3. New and seasonal product drops
Introduce new products, especially those tied to seasons or offered in limited quantities. This strategy capitalizes on the customer’s desire for variety and urgency, prompting additional purchases they might not have otherwise considered.
4. Automated Marketing Campaigns:
Leverage automation to mirror customer behavior and create personalized interactions. For example, if your products have a defined usage window, automated reminders prompt reorders at the opportune time. A much easier option is offering subscriptions on products that are often required so you don’t have to send a lot of reminders.
Cost and ROI of acquisition and retention
The cost and return on investment (ROI) of acquisition and retention follow different metrics. Customer acquisition cost (CAC) reflects your marketing spend divided by new customers acquired.
To measure the efficiency, compare CAC to customer lifetime value (LTV). LTV, derived from the average orders and gross margin, signals the average ROI of your marketing efforts.
Ideally, LTV should surpass CAC by threefold for a profitable strategy.
For customer retention, ROI is assessed through initiatives impacting LTV incrementally.
Consider launching a loyalty program; if LTV rises from $200 to $250 per customer with 2,000 sales, the program’s ROI is $100,000 ($50 x 2,000). Calculating costs includes administrative expenses, advertising, and the margin cost of discounts.
What should you focus on — acquisition vs. retention?
Determining the primary focus—customer acquisition or retention—rests on the dynamics of your business model and the customer lifetime value metric (LTV).
For businesses heavily reliant on subscriptions or regular repeat orders, such as a grocery delivery service, the strategic spotlight naturally gravitates towards retention. Here, nurturing and sustaining existing customer relationships becomes crucial for maintaining a consistent revenue stream.
On the other hand, industries dealing with infrequently purchased items like furniture or dishware necessitate continuous acquisition efforts. The infrequent nature of these purchases demands a significant influx of new customers to sustain growth.
For eCommerce, in general, you should establish a robust customer acquisition channel to draw in the initial customer base. Subsequently, create a strategic roadmap for encouraging repeat purchases, creating a foundation for progressively diversifying acquisition and retention strategies over time.
Implementing innovative approaches like subscriptions and memberships allows eCommerce businesses to simultaneously address both acquisition and retention.
By introducing subscription-based models, businesses create a steady and predictable revenue stream, fostering customer loyalty through regular engagements. Memberships, on the other hand, offer exclusive benefits and personalized experiences, enhancing the value proposition for customers and encouraging long-term commitment.
The adaptability of such models allows businesses to build a loyal customer base while continually attracting new customers, striking the right balance that propels sustained growth.
Until next time…
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