A term that every business owner is familiar with, and in pursuit of. When you ask someone what customer loyalty means to them, you will usually get one of two responses:
It means customers are less price conscious and less willing to shop with competition
It means that the customer is returning again and again to shop
At the core of each of these definitions is the idea of a one time shopper becoming a return customer and ultimately a repeat customer. Repeat customers are the reason that so many businesses today are in pursuit of customer loyalty, but just how valuable are repeat customers?
Why are returning customers so valuable?
Well there is the obvious reason, they are coming back to make a purchase again as opposed to the one time purchasers who buy something and then disappear into the night. But, there are many more reasons a repeat customer is profitable beyond that.
Repeat customers are cheaper to retain than a new customer is to acquire
Customer acquisition cost (CAC) is higher than it has ever been, and it is showing no signs of slowing down. This dramatic rise in costs is fuelled by the drastic rise in social ad costs like Facebook and Instagram. The cost of a Facebook ad has increased 588% over the last 5 years.
Because these acquisition costs are so high, the profitability of a repeat customer is partly due to the fact that you do not need to pay the same steep price to keep someone as you do to get them in the first place.
It costs 5x more to acquire a new customer than it does to retain an existing one.
You read that right, 5x more expensive to acquire, and that stat comes from The Harvard Business Review. Tools like loyalty programs, personalization platforms, and effective post purchase emails cost pennies compared to the steep cost of digital ads.
Repeat customers spend more per order
When you are able to use the right retention tools to keep your customers around, they end up spending more per order than your first time shoppers.
A repeat customer spends 31% more per order than a first time shopper.
After a shopper makes an initial purchase they learn more about your brand and the quality of what you sell. It establishes a relationship and the level of trust increases. It should come as no surprise that those return customers are willing to spend more each time they make a purchase.
You can encourage them to spend even more by offering additional loyalty rewards for purchases over your average order value, or by having free shipping thresholds.
Repeat customers are more likely to return for another purchase
When someone makes their first purchase, there is about a 25% chance that they will return for another purchase. When that customer comes back to make that second purchase, there is a 45% chance that they come back for a third.
A shopper who has made a purchase has a 27% chance of returning for another. When they make a second purchase the chance of returning increases to 45%.
The increase in trust and familiarity make it easier for customers to return to shop with you rather than choosing a competitor in the future. Every additional purchase you can create goes a long way in establishing a long lasting shopping relationship.
The more they continue to shop, the higher their LTV climbs, and the more profitable a repeat customer becomes.
Onsite conversion is higher for repeat customers
If you follow me at all, you know I hate talking about conversion rates. It turns shopping into a machine to optimize rather than something to experience. The ecommerce world is too obsessed with conversion rates, but here is a conversion stat I like to show.
A returning customer is 9x more likely to make a purchase when browsing a site than someone who has not made a purchase.
Conversion rates are higher for those who have made a purchase in the past. I know this might be obvious, but what it shows is that even brands who are obsessed with the top of funnel metrics can benefit from customer retention.
Customer retention leads to overall profitability
All of the points above all add up to one main point. A repeat customer is super profitable! The more you focus on retention marketing, the more profitable your business will become.
This final stat from Harvard sums it all up.
A 5% increase in retention can lead to an increase in profitability of 25% - 95%!
If you are unsure how to get started with retention marketing, or feel like your current efforts have stalled out, let’s talk! It could be the decision that increases your profitability by 25-95%!
The key takeaways
The above was a lot, I get it! That is why I will always include the key takeaways for you to grab at a glimpse.
A 5% increase in customer retention can increase profitability by 25% - 95%!
That is because:
Retention is 5x cheaper than customer acquisition
Repeat customers spend more per order, 31% more to be exact
Repeat purchase breed more repeat purchases
Conversion rates are higher