Acquisition is retention fuel; there is no such thing as long term growth through retention. Many disagree, but here’s why they are wrong.
This content was published in the No Best Practices newsletter on 5.1.2022.
This is part four of the “How To Destroy Your eCom Business” series, aka what not to do to build a healthy customer file. We’re covering common business decisions that appear to pay off in the short term, but make it harder to succeed in the long term.
Reminder: a healthy customer file enables a business to succeed today, but it also sets a business up for success in the future.
The last newsletter covered the risks of brand repositioning, which is one of two strategies that many companies will pursue when growth stalls out in the core business. This time we’re going to cover the other popular strategy: “growing” by investing in retention.
Investing in retention goes by many names, because there are many avenues for technology vendors and consultants to profit from this strategy. When brands talk about investing in personalization, they’re investing in retention. When brands focus on leveraging customer data, they’re investing in retention. And when brands invest in the “omnichannel experience” they’re investing in retention.
While this strategy is popular with large heritage retailers, it’s just as popular with a certain type of “career hacker” making his or her way up the eCom food chain at smaller brands. You can use this approach to produce what appear to be strong results for a few years…until the bottom falls out and the business tanks. But your “career hacker” has long since moved on by then.
This newsletter is especially important for founders with light experience in marketing. If you can’t spot this pattern, you’re vulnerable to exploitation, straight up. Don’t worry, I’m going to cover the full “marketer-operator vs careerist weasel” dichotomy in a future newsletter.
“Growth” Through Retention From The Outside
Let’s face it: acquiring new customers is expensive. And that’s because it’s hard. You need to move someone from zero (what is this brand?) to one (I’m going to buy this brand!). It gets more expensive when there are issues with your brand proposition, or when you rely on a single channel for customer acquisition and that channel gets more competitive.
What if, instead of investing more in acquisition or coming up with creative ways to reduce other costs, you could simply convince your existing customers to spend more? That’s the flawed premise of “growth” through retention.
For brands that have visibility into new and returning customers’ contributions to sales, retention initially appears to be an untapped gold mine. The list of active customers is long, and there is an even larger list of customers who haven’t purchased in a while. “Surely” you think to yourself, “if we start marketing to these people, a large number of them will come back and buy again?”
Brands without visibility into new and returning customers’ contributions to sales are the perfect target for the careerist weasel. The weasel will promise to return the business to growth, or maintain the current rate of growth, while reducing marketing costs. He or she will frame the “how” in terms of tactics instead of customers, concealing his or her true strategy.
The “growth” through retention playbook is thick, because a lot of it was written by consultants who specialize in building long slide decks:
- Improve the omnichannel experience so that customers acquired in one channel are more likely to spend in all the other channels.
- Put more personalization technology on the website so that conversion rates go up.
- Partner with 3rd party marketplaces, payment gateways or buy now pay later vendors to give the customer more options for checking out.
- Use customer data to improve the efficiency of performance marketing.
There are two objectives, stated or not:
- Increase the lifetime value of existing customers
- Improve the efficiency of lower funnel marketing efforts
For these strategies to yield any fruit, you need customer data. Existing customers, ideally those with multiple purchases, have the most data. And you need someone to interact with your ads or website to generate any meaningful data. So these strategies do nothing to drive top of funnel awareness or reduce the cost of doing so.
The best place to observe the outcome of “growth” through retention is publicly traded companies. They will often tout the playbook above in earnings calls, and then you can look at their financial results to see how things play out.
Macy’s started investing in becoming “America’s Omnichannel Store” in 2016, and its sales numbers have been sliding ever since. The correlation between struggling retailers and the enthusiastic embrace of the retention playbook is observably high.
What Retention Myopia Does To The Customer File
In most mono-brand businesses selling a single product category, only 20-35 of every 100 customers you acquire in a given year will come back and shop again the following year.
The percentage of customers who come back will be higher for businesses that sell multiple categories, sell multiple brands, or have a broad physical retail footprint. Still, it’s rare to see year over year retention rates higher than 50 or 60 percent if you’re selling physical goods.
This means that your average consumer business is a “leaky bucket”. If you don’t maintain your pace of customer acquisition, sales will begin to decline. I wrote more about the math behind this here.
Unfortunately, this is just what the “growth” by retention playbook advocates: diverting resources from customer acquisition–or ignoring problems with acquisition entirely–and making up the difference via additional sales from existing customers.
If the brand has a deep enough customer file, this can appear to work…for a little while. This is especially true if the brand in question never had a dedicated lapsed customer reactivation program in the past. If you have a list of a million or more lapsed customers, some of them will return at a higher rate when you start speaking to them directly.
Many data-driven tactics do improve marketing efficiency. So if you’re spending a lot on performance marketing the improved conversion rates will also appear to boost sales in the short term.
Here is an example that illustrates how this strategy can appear to work for a larger brand…at least at first:
In this example let’s pretend that Covid never happened, for simplicity’s sake.
This brand has been struggling with customer acquisition. New customer counts and spend per new customer have been flat to slightly down for a few years. This brand simply can’t crack the acquisition nut.
So in 2018, they decide to focus on growing revenue from returning customers. They invest in a new customer data platform and a new email service provider. They launch new paid retention initiatives and set a higher return on ad spend threshold for all performance media. (BTW, if you read the first newsletter in this series, you know why ROAS-first budgeting is bad.)
This strategy bears some fruit in 2018 and really takes off in 2019. But by 2020 growth slows down, and by 2021 the brand is back on a negative trajectory. And that’s because the underlying problem–flagging customer acquisition–was never solved.
You’ll also notice that the improvements in customer counts and spend start to fade out in 2020-2021. There are two reasons this happens:
Because your business is a “leaky bucket”, customer acquisition is retention fuel. Your L12M active customer pool draws heavily from your L12M new customer pool. When acquisition suffers, so does retention.
Data-driven optimization has diminishing returns. There is a limited pool of tactics you can employ, and the benefit of each optimization diminishes over time.
What To Do Instead Of Trying To Drive Growth Through Retention
This is usually the section where I provide some analytical frameworks to help you determine if you have the problem I outlined here. To keep it simple: break down your annual sales by new customers, customers who were active in the last 12 months, and customers who were last active 13+ months ago. If the numbers look like the example in the last section, you have a problem.
A reminder of how we got into this pickle: the brand’s core business was no longer growing. In a high churn business like…selling almost any physical consumer product…that typically means a customer acquisition problem. And solving that problem typically requires some creativity and risk taking.
The best way to solve a customer acquisition problem is to prevent it from happening in the first place. You can do that by:
- Creating reasonable goals for new and returning customer contribution to your overall sales goal.
- Making sure channel teams understand their work in terms of customer acquisition and retention, so they develop strategies for each objective.
- Doing a post-mortem each year to determine where your sales came from in terms of products, channels and customer segments.
- Kick off each new year with a clear-eyed understanding of which growth can be realistically “comped”.
- Develop a customer acquisition plan to achieve the sales that can’t be “comped”. This should include enough tests and ideas that you will achieve your goal even with a 50-70% failure rate.
Following this process will keep your brand “fresh” and reduce the chances that you’ll slide into a state of entropy.
Unfortunately, a lot of what we consider common knowledge about retail today was developed in an era where mall foot traffic always went up. “Comping” assumes that traffic will always go up. Running the same playbook of product launches and promotions on the same days each year assumes that traffic will always go up.
In today’s retail environment, that’s no longer the case. Your audience, and where they’re coming from, is constantly changing. To keep growing, you need to pursue growth proactively.