You’re probably measuring retention marketing the wrong way (and wasting thousands in the process). Here’s how to measure retention marketing the right way.
This content was originally published in the No Best Practices newsletter on 09.25.2022.
For most brands, retention marketing destroys value.
I’m (finally!) going to outline exactly why this is true, and how you can measure and manage retention effectively.
In almost every organization I’ve worked for, or consulted with, retention marketing is shorthand for email marketing. In the past five years, the definition has expanded to include SMS and direct mail.
But very few organizations understand how their customers behave, and how their marketing efforts are influencing that behavior (if at all).
How To Measure Retention Marketing: What’s Missing
Story time: Let’s say you own a dog grooming business located in a fairly busy power center. You hire a marketing company to hand out fliers around town that advertise your business and contain an offer for 20% off the bearer’s next appointment.
The agency sends over three people, and you give each person 100 fliers. At the end of the first day, these are the results:
- Person A distributed all their fliers; they come back to you empty handed.
- Person B distributed 20 of their fliers
- Person C distributed 40 of their fliers
- 30 people came in for services, and 22 of them had fliers
Take a minute and ask yourself: who would you ask to return for day 2 of your marketing blitz? Person A, B or C? Unfortunately, you did not create unique promotions or flier creative for each Person. But you did ask your cousin to spy on all three and report back.
Your cousin tells you that Person A dumped all 100 fliers in a trash can about a mile from your shop and then spent the rest of the day watching football at a local Chilis.
Person B stood in the parking lot near your shop and handed fliers to people that already seemed to be walking into your shop.
And person C canvassed local parks and handed out fliers to people walking dogs.
Only Person C’s strategy has a chance of winning you net new business. Person A represents traditional impressions-based marketing. And Person B represents a lot of what passes for retention marketing these days–sticking a touchpoint between a high intent customer and their conversion, and then claiming credit for that conversion.
When last-click channel performance is shorthand for retention performance, the incremental impact of retention is never measured. Believe it or not, some of your customers would return to purchase with you, even if you did no marketing at all.
That is the purpose of marketing: to change customer behavior in a way that results in profit for your brand after all costs associated with that marketing are taken into account.
Some people disagree with me on this point. They think that marketing has a loftier purpose, and you can’t always see it reflected in the P&L. If you’re one of those people, you should probably stop reading now.
Measuring Baseline Retention Rate
The first step in understanding the impact of your retention marketing is to understand your baseline retention rate. This is the percent of customers who would purchase again in the absence of any marketing.
It’s very difficult to truly measure this, because most brands kick off some kind of retention marketing at the time of launch. Your baseline retention rate is also going to change based on the types of customers you acquire and the average tenure of your customer base.
If you’re marketing heavily and focusing on minimizing costs, you’re going to bring in more casual customers who are less likely to repeat. If you’re investing in pre-purchase marketing across multiple touchpoints, the customers you acquire will be more likely to return.
Shifts in the assortment also impact customers’ likelihood to return. So, to a certain extent, you need to separate the impact of marketing from the impact of merchandising strategy. This is especially difficult for fashion brands, or other brands who turn over their assortment frequently.
The optimal way to measure your baseline retention rate is to take a universal holdout group. This is 10-20% of your customer base that you exclude from all forms of marketing. You want this group to be representative of your entire customer base. So you wouldn’t email them, even if they subscribe. You’d add them to a suppression list for paid social ads. Etc.
You would then compare monthly repeat purchases and revenue between your holdout group and the rest of your customer file. The lift in percent of customers converting and dollars spent per customer is the incremental impact of your retention marketing.
In reality, it’s almost impossible to exclude a group from marketing completely. Online identity matching is far from perfect. But this methodology can give you a good directional answer.
Another option is to use media mix modeling to isolate the impact of all marketing activities on returning customer spend and attempt to back into a baseline retention rate. Again, this will not give you the perfect answer, but it will give you some good directional data.
A third option is to compare conversion rate and spend between customers who are subscribed to email in a given month vs non-subscribers. If you’re not doing a ton of paid retention marketing and don’t have the resources for the first two approaches, this is a good option.
How Much Should I Spend On Retention Marketing?
Let’s say that you’re the head of marketing for the high-performing business below. How much money would you allocate toward retention marketing initiatives next year?
At first glance, you might think: retained customer revenue increased by $268K YoY. We’re clearly doing something right! Imagine how much better we could be doing if we invested in some personalization technology, or sent some postcards to existing customers!
But this view doesn’t even tell you half of the story. This business is obviously investing in new customer acquisition. And, if your business model is sound, more acquisition will always lead to more retention. So let’s take a look at our holdout view:
We see here that marketing efforts caused a slight increase in response rate. They also resulted in a lift in spend per customer for those who shopped in the last 12 months, although spend per customer for lapsed customers is slightly lower YoY.
Of that $268K YoY increase in retained customer revenue, only $67K (about 25%) was the result of marketing activities. Because no holdout model will ever be perfect, we can assume there is a margin of error of ~+/-5%.
Let’s assume that this brand is doing email and SMS marketing. Annual platform fees would eat up 25-50% of that incremental benefit immediately. Any other retention-focused apps or programs would chip away at it further. And this isn’t even looking at the situation from a contribution margin perspective.
This brand might actually be losing money on retention! I guess the old “iTs cHeApEr tO rEtAiN a CuStOmEr tHaN aCqUiRe A nEw OnE” chestnut isn’t so true after all.
You could look at this situation from two perspectives. The first: maybe this brand could do retention marketing more effectively. They might need to invest more time in customer research and email copywriting, and send more emails to the right people.
The second: maybe this brand has a limited upside to their retention efforts, and they should figure out how to scale back on expenses while maintaining a baseline strategy.
The revenue numbers I presented above represent a relatively young brand with a relatively soft customer file utilization rate. I would advise this brand to examine if their product assortment is optimized to support retention, and prioritize that before tweaks to marketing strategy.
However, these numbers are completely made up!
But What About Muh Channels?!
If you want to run an effective retention program, you need to start with customer strategy, not channel strategy. And that starts with setting reasonable goals.
Your product, your product category, and your customers’ relationship to those two things determine 80% of your retention potential. You’re not going to get people buying two cars a year, every year, at scale. If you sell handbags and two in three new customers never come back, you’re not going to improve that new customer retention rate to 50%.
The one exception is changing the assortment strategy, or entering new categories. That is outside the scope of this post and typically outside the scope of the retention marketing department.
Most retention marketers treat “our existing customers” as a monolith. They get the same email messages on the same cadence with the same copy and offers. One to one personalization isn’t possible. It might not even be advisable. But there are moments in the “customer journey” (a barf-inducing term) that are high leverage when it comes to extending lifetime value.
You should think about a customer’s holistic experience during these moments. Not just the “special” email you’re sending them, but the total volume of marketing communications they receive. If you’re sending out one to three emails a day, every day, adding another email is not going to do much, if anything.
Here is a list of moments worth focusing on, ranked from most to least important:
- The first 30-90 days after a new customer’s first purchase
- The first 30-90 days after a customer’s 2nd and 3rd purchases
- 30 days before any event with a large revenue expectation
- 30 days before a customer reaches your brand’s average “lapsing” window
You’ll notice a recurring theme here: it’s important to keep customers engaged in the period immediately after they make a purchase. That is the moment when your mindshare is highest, and you want to use marketing to lock that in in a positive way.
By the time a customer reaches their 4th or 5th purchase with your brand, it’s highly likely that they have become “loyal”. This means that they’ll have a greater than 50% chance of coming back to purchase again.
If your retention marketing is channel-centric, you likely view your email file as a money tree that you need to shake hard to hit your “channel forecast”. But email revenue is a byproduct of customer evolution within the channel. If you don’t track how customers are progressing through their lifecycle within your email file, your results will be less predictable.
One final note: because product determines so much of your baseline retention rate, it is also the most powerful lever in your retention strategy. That’s another topic for another post. But something I’ve noticed in my 10+ year career is that marketers often fall back on promo codes to influence behavior because they lack visibility into how to use product as a marketing lever.
That’s actually the foundation of my consulting practice: using merchandising insights to make your marketing more effective. If you’re interested in unlocking this “secret weapon” for your marketing team in 2023, or simply want to learn more, you know what to do.