This article provides 3 formulaic retention marketing strategies for each type of DTC business. Based on over 17 years of eCommerce experience, this is the playbook I’ve run for every brand that’s come through our doors at Magnet Monster.
There are several distinct types of eCommerce businesses, each requiring different approaches when it comes to retention marketing strategy (for the sake of our business, retention strategy = email/SMS/direct mail as channels).
This is due to a variety of factors, including purchase latency, product-market fit status, cash reserves, and operational challenges and goals.
In this article, we’ll be discussing 4 variable scenarios for different types of DTC businesses:
- Fast-moving consumer goods (FMCG) - i.e. cosmetics, toothpaste, supplements
- Consumer Packaged Goods (CPG); Somewhere in between - i.e. fashion, apparel, entertainment
- Subscription business - i.e. meal prep, deodorant delivery, prenatal products
- 1-time purchase - i.e. mattress, sofa, furniture, wiper blades
While there is no one-size fits all approach for every business, when the right questions are proposed to the client and correct answers are elicited, there are formulaic frameworks I’ve found to be incredibly repeatable across the scope of these businesses.
This article will provide a framework for each type of DTC business you can use to create strategy from.
Work through each step sequentially and it’s almost impossible to go wrong with creating strategy and not course correcting.
First, understand these 4 questions clearly
- Understand business goals and client expectations
What are they forecasting for the subsequent months and years ahead? This will determine your strategy in the short and long term.
- Analyse top-performing SKUs
Use the 80/20 rule to see where your focus should be when it comes to strategy. Even with a large product assortment, you’ll usually see a trend for a very specific hero product(s) that generates the lion’s share of the revenue.
There are also outliers that may crop up that we’ll cover in section 4.
- Unit economics calculator
Use this basic formula to understand profit per SKU using a simple calculator - client/brand should have this on hand so you understand levers you can pull and limitations on discounts in your strategy.
- Benchmark existing performance
Now you’ll need to go back to question 1 to find out where you’re currently at in regards to retention performance before deciding which strategy to pursue.
Depending on the business, it’s likely you’ll be looking at different things here. While everybody will want to increase profitable returning customer revenue and Lifetime Value, it’s important to go granular in order to set the strategy at the beginning.
It’s also critical at this stage to ask the client “what is your source of truth for measurement?”. For some, it’s Klaviyo. For others, it could be GA, Northbeam, Triple Whale, or simply Shopify. You don’t know if you don’t ask.
Let’s look at a few potential scenarios as well as our control over them:
Scenario 1: “I want to increase returning customer revenue contribution from email/SMS/direct mail”
This is a generally easy report to benchmark from Shopify by looking over previous months/years (NOTE: you’ll need to go into GA or your attribution tool to get channel-specific contribution historically):
You can also start to see areas for optimisation between first-time and returning customers using this view.
While it doesn’t tell the full story of what’s going on in their business, you get an indication of the high-level business KPIs, assuming that you’ve asked the right questions in section 1.
Scenario 2: “I want to increase Customer Lifetime Value within a 90-day period”
This one is definitely getting into a grey area of whether or not it’s possible to achieve, as it’s subject to a lot of outside influence, but it’s still something collectively we can strive to support the organisation with.
First, the organisation needs to be clear on the measurement method - don’t try to provide our own abbreviation as this can be a metric that’s easily misconstrued. Get them to clarify how they’re measuring CLV.
Let’s say we’re using this basic cohort chart in Lifetimely as a benchmark:
Ok, in this example, it’s clear it’s going to be challenging. The brand realises most LTV within the first order so our strategy to increase it within a 3-month period is going to be very challenging and require deep focus on which levers could make a difference.
Scenario 3: “I want to increase attributed revenue from Klaviyo/email/SMS”
This is a common request still, usually for brands that lack maturity and knowledge of how a DTC business operates.
However, there are many businesses who still see this as a legitimate goal and insist on it to reduce their dependency on paid ads, although it is never usually a long-term solution and can lead to poor tactics to achieve the desired goal.
Just be aware of the conditions upon which you’re operating and be realistic with the client on the longevity of expected results.
Pro-tip: Are there products in your assortment that lead to an unusually high LTV?
If so, find out what they are and integrate them deeply where relevant into your strategy and even suggest the acquisition team experiments with these products at the top-of-the-funnel.
NOTE: removing outliers/bundles to tidy up the data is key here
Which levers can you pull for each business?
Let’s summarise what we know so far:
- You understand the business goals and KPIs
- You understand the top-performing SKUs the company is built around
- You understand the unit economics around these SKUs
- You’ve benchmarked where the business is currently at and created a target for where it needs to go
Now, it’s time to look at the levers we can pull for each business-type along with where our primary focus should go.
But first, what are these levers that we influence and how do they support growth?
- List growth: more qualified leads in the system = bigger audience to target
- Deliverability: better inbox placement = more eyeballs on your messages
- Returning customer traffic: more clicks going back to your website = more browsing sessions
- Average Order Value (AOV) / Contribution margin: customers spending more = better contribution margin
These are the prime factors that allow us to increase profitable revenue, customer lifetime value and purchase frequency. It is important to note that the end result of improving these metrics is to improve these core KPIs and all strategy focused around them is to lead to better business outcomes.
There are, of course, secondary goals which many businesses focus on, that are a core part of the Value Framework we obsess over at Magnet Monster:
Now, it’s almost certain that you can and should try to optimise each lever simultaneously. However, depending on the type of business you’re operating, there will likely be different approaches you use to diagnose their issues in order to craft the best quality strategy. This section will focus explicitly around the nuances between these variables.
FMCG strategy framework
For FMCG brands, developing product stickiness is key. Customers need to extract utility from the products in order for repeat purchases to happen.
Think about it logically: why would you buy a product again that you don’t get value from? You wouldn’t, unless it was a gift for others.
The biggest lever retention marketers have for these brands is to train the customers to adopt the products to realise that second purchase. After this has been achieved, all subsequent offers, promotions and campaign concepts are more effective in driving LTV.
What is a good increase in LTV or repeat purchase rate? The short answer is it depends on numerous factors - you have to understand the business's unique unit economics and strategy. A general rule of thumb most look for is a 30% increase in LTV within 90 days of being acquired, or a 20-25% repeat purchase rate (anything above this is considered strong).
Here’s how I would dissect the data and craft a strategy for FMCG brands in a formulaic way that could be replicated across all verticals:
- Understand the hero product
- Benchmark repeat purchase rate within 30/60/90-day window (you can look beyond this, but realistically speaking, our chance to make an impact is in this window since email/SMS engagement plummets post-90 days)
- Analyse the median time between orders for repeat purchases (1st to 2nd purchase) - i.e. 28 days (consider how long the product is intended to last for - i.e. 30 vs 90 days as this will play a factor)
- If the repeat purchase rate is “low”, conduct qualitative research using this Jobs To Be Done (JBTD) framework to find out why customers aren’t receiving value from the products
- Use the answers from this survey to improve acquisition efforts (hooks/angles in creatives), product formulation and customer journey mapping
- I would now optimise relentlessly around ensuring customers adopt the product, build habit formation and extract the main value proposition they came in for at the top-of-the-funnel (i.e. improving acne from a skincare product)
- Optimise for repeat purchases with strategic cross-sells and replenishments around the median time between orders
Once you’ve created a strategy and implemented it around the above, benchmark performance from cohorts and analyse them again after a 90-day period to see its impact on core KPIs. Iterate accordingly.
Of course, you can continue to send campaigns to these customers along with setting up your usual flows to increase returning customer revenue but remember that if retention issues are present in the business, you first need to dissect why and then create a strategy around ensuring the qualitative insights are remedied.
CPG strategy framework
A lot of the above is equally as applicable here for CPG products that aren’t classed as essential.
For these brands, seasonality is often key as well as the product assortment being refreshed and consistent, leading to a high velocity of campaigns to keep customers “fresh”.
So while the above formulaic approach from FMCG would still be relevant, there may be less emphasis on habit formation and more on “what else is new”.
For example: you’re a fashion brand selling women’s apparel. Your customer has just bought a dress, but they haven’t yet seen handbags or accessories that may compliment your outfit.
There isn’t too much extra to add in this section that isn’t covered above.
Pro tip: have a high LTV product you’ve discovered that was covered in section 4? Make this prominent in your post-purchase marketing for these brands!
Subscription Strategy Framework
If you’re managing an exclusive subscription business, this chart is where you need to focus all of your attention:
You want to immediately focus on where the drop-off is happening; this is your main point of leverage for driving incremental value.
If the store has multiple SKUs, you also want to drill down into cohort-specific SKU retention to find out which products yield a high revenue per user (ARPU by SKU in the table below - not the best example but you get the point):
Let’s analyse a formulaic way to tackle subscription businesses to maximise retention:
- Find the hero product(s)
- Benchmark retention over a 12-month period and LTV
- Analyse the drop-off point to find your biggest point of leverage (in the example above, it’s clearly month 2)
- Drill down into why customers cancel (most subscription software provides you with these cancellation reasons)
- Create automation designed to overcome these objections and ensure that the product is sold effectively at the top-of-the-funnel to attract the best subscribers with highest LTV potential
- Create automation that helps drive reactivations based on overcoming objections
- Frequently target customers with campaigns to win their business back based on cancellation reasons
- Explore if there are any reward mechanisms (i.e. 4th order is free after 3 subscriptions) to improve product retention
- Cross-sell where appropriate to drive multiple subscriptions
What if the brand is a FMCG that has both one-time purchase and subscription in their checkout?
In this scenario, it’s best to analyse the data pragmatically to see what the opportunities are. If 90% of customers make single purchasers, then it doesn’t make sense to obsess over excessive planning on the brand's subscription model, unless their goal was to specifically phase out one-time purchase options in order to move towards an exclusive subscription model.
If it’s closer to an even split, then it may make sense to proactively push single-time buyers onto the subscription model, especially for repeat purchasers. In this scenario, it’s best to blend together strategies from the FMCG section alongside this one, analysing where the biggest potential is for incremental revenue gains.
1-Time Purchase Strategy Framework
For stores that sell items that are typically purchased once, the impact of our work as retention marketers needs to shift focus.
Without a consistently reliable source of returning customer revenue, we need to reanalyse the objectives post-purchase and manage our expectations of what is possible.
Here’s a simple cohort chart that illustrates the issue for a brand with product-market fit on where their priorities should lie.
What you see here is fairly obvious: we need to take a long-term view to engaging these customers as the purchase lifecycle can be much more prolonged, with repeat sales coming sometimes much further in the future after the first order (consider the impact of segmentation here in your strategy).
This guide provides a strong starting point of where to focus with these stores, and to summarise the steps:
- Maximise profits on first order: don’t erode margin too much on pop-ups; look to increase contribution margin with minimum order thresholds if you’re giving away a discount
- Focus the post-purchase journey on lowering CAC: if you can’t drive repeat sales, focus on how to generate Word of Mouth advocacy by creating an exceptional experience that will create viral loops and bring in new audiences
- Create a powerful referral program: be generous with the incentives
- Release complimentary products: this is one of the only true ways for these brands to move the needle on retention
Overall, your focus for these stores should be utilising the existing customer data to help discover new audiences, since acquisition is their primary focus.
A slower campaign cadence may be advisable, and expectations with the brand should be managed appropriately as to what type of impact email & SMS marketing can have on growing their revenue.
When it comes to reporting, I like to look at things on a quarterly basis in order to gauge the true impact of our strategy.
Email/SMS-specific metrics can be analysed on a daily, weekly and monthly basis, but the impact on overarching KPIs like repeat purchase rates and Customer Lifetime Value often take time to gauge the impact of strategy. A good middle ground is often returning customer revenue, which can and should be monitored daily by most CMOs.
Let’s wrap up what we’ve learnt about eCommerce and how we should approach strategy different for each business in sequential steps:
- Understand business goals and client expectations/KPIs
- Analyse top-performing SKUs (80/20 rule)
- Calculate the unit economics
- Benchmark existing performance (i.e. cohorts, LTV, returning customer revenue)
- Decide which levers to pull (i.e. AOV, list growth, inbox placement, returning customer traffic, etc)
- Create strategy for 90-day period
- Report on results from lever pulling and their impact on brand KPIs – iterate accordingly, starting at the beginning every 90 days
If you follow this formula to the tee, you’ll have indefinite room for optimisation with your strategy.
And don’t forget the caveat to all of this working consistently and effectively before we sign off: we need to work in harmony and have a steady supply of consistent (and preferably, growing) traffic. Without it, all our efforts will be limited.
Feed the ecosystem and watch things prosper.
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