Most retention tactics make it harder for a business to achieve profitable growth in the future. Here’s why, and what to do instead.
I am about to drop what is potentially my most polarizing opinion of all time: I believe that retention marketing destroys value for most brands. Most of the retention “best practices” you read about online actively make brands less profitable and destroy potential customer lifetime value.
This is a bold claim. If you’re about to counter it with some amazing last-click or in-platform performance stats that you’ve achieved, you can stop right there. The number one reason that retention destroys value is because we measure it incorrectly. Last-click attribution is not the right way to evaluate the success of a retention strategy.
When I’m talking about “destroying value”, I’m not talking about channel performance. I’m talking about shareholder value: a company or brand’s ability to increase cash flow, both today and in the future.
That is probably the biggest missed opportunity in marketing today: marketers are obsessed with improving channel performance and hitting today’s sales numbers. They don’t approach their craft with an owner’s mentality. And that’s what destroys value.
The Right Way To Measure Retention Marketing Programs
The first thing that marketers need to understand about retention: some percentage of your customers is going to return and buy from you again, even if you don’t do any marketing. Effective retention marketing would increase that baseline retention rate. Otherwise, you are spending money for no tangible benefit.
Most brands don’t measure this baseline retention rate. It’s rare that they even measure cohort retention over time (ex.” We acquired 100 customers in July and 25% came back to buy again within a year.”) And that is partially a failure of technology; I don’t know of any “plug and play” tool for measuring baseline retention rates.
Another thing that marketers rarely measure when it comes to retention: how a given strategy changes customer behavior over time. Retention has two stated objectives that are often at odds with each other: increasing customer lifetime value while delivering strong channel performance. Going after “low hanging fruit” like promotions and hard sell tactics delivers great channel performance, but it often results in lower customer lifetime value.
This is another failure of technology, but it’s also a failure of strategy. Again, there are no “plug and play” tools to break your customers into cohorts based on the campaigns they received. But you shouldn’t need to holdout test every campaign you run. There should be some overarching strategic objective that enables you to measure success based on audience-level metrics.
The Siren Song Of Last Click Attribution
You’ll often hear retention platitudes like “it’s cheaper to win another order from a returning customer than it is to acquire a brand new customer”. That’s true. The reason? That baseline retention rate I discussed above. Some percentage of your retained customer audience is likely to purchase even if you do nothing.
And that’s why it is so, so tempting for marketers to send tons of messages to existing customers and measure performance on a last click basis. The results often look amazing, because many of those customers were planning to convert. Even if your marketing strategy is hot garbage, the last-click transactions will roll in.
The only way to know for sure if your marketing actually accomplished anything is to set up a holdout test. Half the audience receives your message and half receives nothing. You compare the performance of each audience. If the audience that received the marketing converts at a (statistically significant) higher rate and spends more, your marketing did something.
Google Analytics doesn’t measure this. Neither does the in-platform analytics that most email and SMS vendors provide. Many email service providers do have an A/B test feature, which can be used to set up a holdout test. But that rarely happens. This is partially due to the perceived risk of not contacting your entire list. And it’s partially due to fear. If a marketer is confronted with the fact that they are delivering zero value, they’re going to have some serious work to do.
How Does Retention Marketing Destroy Value?
First, a caveat: I am not trying to say that you should turn off your email marketing program. But retention tactics like email and SMS quickly hit a point of diminishing returns. There are three main ways that retention marketing destroys value:
“Best Practices” Devalue Customers Over Time
Retention marketing best practices generally prioritize today’s revenue over tomorrow’s potential revenue. I’m talking about epiphanies like A/B testing subject lines and “discovering” that more aggressive promotional messaging results in more last-click revenue. Or “discovering” that a 25% off winback offer drives more last-click revenue than a 10% off offer.
When you run tests against your entire customer file or your entire email list, the most promotional messaging is always going to win out. And if those tests do not include a holdout group, you won’t know if your “win” actually generated incremental revenue.
Retention best practices pull existing revenue forward at best and take credit for sales that would have happened anyway at worst. When a business optimizes towards these false signals, it dilutes the value of the customers that were acquired and makes it harder for the business to sell anything at full price.
Organizations Spend Too Much On It
If there was a marketing tactic that would guarantee you a 4x return, how much would you invest in that tactic? You’d probably invest as much as you could until your return on investment went down. That’s just common sense.
But what if that 4x return was really a 0.5x return? And you spent millions of dollars before you found that out? And the only way you found out was because topline sales stopped growing, while this tactic still claimed to deliver a 4x return?
That is the fate many marketers resign themselves to when they invest heavily in retention-focused marketing technology. Measuring programs on a last-click basis distorts their performance, leading to over-investment. And brands never think to question that investment until something really bad happens–usually a prolonged failure to hit revenue targets.
Retention Myopia Creates An Opportunity Cost
Most consumer brands can’t grow without a consistent inflow of new customers. That’s just reality when only 25-35 of every 100 new customers you acquire makes it to a second purchase. And those are the numbers that most consumer brands are working with.
In this context, retention can be a value-add, but it will never “solve” the problem of growth. If you grew 25% year-on-year, you’ll need to maintain a similar customer acquisition trajectory if you want to log the same growth rate this year. Retention can help a little, but it can’t shoulder the entire burden.
Unfortunately, measuring retention efforts on a last click basis can misrepresent the upside potential. In organizations that are obsessed with big, quick wins, this can become a deadly distraction.
How Can I Ensure Retention Marketing Adds Value?
Here are four steps you can take to ensure that your retention marketing strategy is actually contributing to your bottom line and your brand’s future earning potential.
- Figure out your baseline retention rate. This is the percent of new customers who would return for a second purchase in the absence of marketing. You can also calculate the percentage of L12M active customers who would purchase in a given month in the absence of marketing. The best way to do this is with a universal holdout group–a sample of customers that you exclude from all marketing activities. If that isn’t feasible, measuring your current state for these rates is still helpful.
- Build strategies around the customer lifecycle, not around channels. Your retention goals should relate directly to specific customer segments, regardless of which channels they are opted-in to. For example: convert more new customers to a second purchase within 90 days. Get more customers to purchase at least three times in their first year in the business. Increase loyal customer AOV by 10%.
- Measure the right things. Last-click campaign performance is a good way to “take the temperature” of your email marketing program. It will tell you how things are performing directionally, but it won’t tell you if you’re achieving your most important goals. Use customer-level analytics to determine if your retention strategies are working. And use holdout testing to evaluate the effectiveness of new strategies.
- When it comes to martech, be picky. Something that we’ve covered a lot on No Best Practices: technology doesn’t solve business problems. So, unless you’ve taken steps one through three above, it’s unlikely that marketing technology is really going to grow your sales. Whenever you’re considering a new martech vendor, holdout test it first. Then compare the lift (if any) to the monthly or annual fees you’ll be paying for the tech.