One of the most concerning trends eCommerce businesses should be vigilant of is declining customer retention rate. In today’s article, we’ll dissect some of the core factors at play that cause this as well as strategies to get back on track.
First of all, when we discuss “retention” in eCommerce, it’s often used in broad terms without a clear cut definition.
For some people, retention is solely about generating a strong Customer Lifetime Value (CLV), essentially your net sales minus your SKU costs. However, this ignores the fact that maybe your contribution margin increases greatly on first order, but overall repurchase rate goes down. Regardless, all that truly matters is that you yield more profit from the custom when measuring them over a period of time.
This is why the discussion involves a lot of nuance and often confusing semantics.
In most of my discussions with brands, their main concerns focus on two particular metrics/KPIs:
- Their repurchase rates within cohorts are not as strong year-over year
- Their returning customer revenue is in decline year-over-year
Both are legitimate concerns that any growing eCommerce business needs to be aware of and as such, require further investigation.
To make your store a healthy, profitable business in the long-term, you want your retention to be stable and trending upwards, not down.
Here are some of the most common reasons why your overall retention may be stagnant or declining.
1: Your Product isn’t Build for Strong Retention
If you sell a product in a category that is generally a one-time purchase (i.e. mattresses, sofa, etc) then you need to focus on optimising for maximum contribution margin on the first sale, not repeat purchase rates.
This leads us nicely into number 2, which is:
2: You’re not Releasing Complimentary Products
Strategically increasing your product assortment is a powerful way to get returning customer revenue spiking again.
This is especially important if your product falls into factor 1 and you start to reach your Total Addressable Market (TAM). At this stage, it’s logical and a necessity to carefully expand your portfolio and leverage your existing customer database to increase retention.
Two examples from brands we have worked with:
Case study: Big Blanket
However, let’s say that you’re not selling 1-time purchase items and you’re in a category such as FMCG or fashion. If your retention is in decline in these categories, it’s highly possible that your latest releases were disappointing flops compared to previous years.
I have seen this before on several occasions: new products don’t live up to expectations, customers are disappointed and cohorts take a hit. It happens.
In this scenario, you just need to get back to the drawing board and de-risk new product development by leveraging qualitative research to find out what your customers actually want to buy from you in future releases.
3: The Quality of Your Product Has Dropped
When I worked in the sports nutrition industry, one of the brands I worked with started formulating their whey protein with a different supplier to save margin. Customers immediately noticed and went berserk.
The fall-out from this was massive, and although I wasn’t monitoring the exact numbers at the time, the discontent across social media was enough to let you know that their retention probably took a battering.
Ask yourself the same question: am I maintaining a consistent quality product aligned with our customers values? People don’t like freakish change, especially when they’re in the habit of buying your product frequently.
I recommend surveying historical VIP customers from time-to-time to further investigate this issue as well. It is always worth staying connected to your customer base.
4: You’re not Price Competitive
Have you needed to raise prices recently in order to improve your margins or profitability? If so, it could have had a detrimental effect on your retention.
If you are operating in a highly commoditised industry, I recommend paying very close attention to the impact your pricing may have on your returning customer revenue.
It is my sincere belief that pricing experimentation is one of the most important and neglected levers DTC brands can pull, but it can also be dangerous without carefully monitoring the long-term impact it has on your customer base.
5: You’re not Attracting the Right Type of Customers
It is common knowledge that some customers are more valuable than others. Your job is to identify your VIPs and try to put as many as possible on that path in your marketing model.
You can slice-and-dice this in a myriad of ways, including which hooks bring in the best customers through your advertising, as well as how discounts impact CLV.
If you’ve recently switched to a discount-driven model or started experimenting with different hooks and positioning of your products, be aware that this may have led to a different set of expectations with your customer base and adversely impacted retention.
6: You’ve Introduced other Channels that Cross-Pollinate Your DTC Data
If you’ve been exclusively DTC for a while but suddenly launch an Amazon or brick-and-mortar expansion plan, don’t be surprised to see your DTC retention take a hit.
You need to consistently ask yourself: “what is the unique benefit of buying from my storefront directly compared to other locations?”.
A lot of customers shop exclusively on price and shipping times, and you’re not going to beat Amazon on either of those unless you control the experience directly.
We worked with a brand that had the usual Covid-surge online in sales, but when customers returned to retail (where their products used to make up 90% of total sales), returning customer revenue to the website plummeted.
If you run an omnichannel operation, be aware of how each location can both positively and negatively impact certain metrics and align your expectations accordingly.
7: Customer Service Quality has Dropped
Finally, it’s one that often has a lagging impact, but is incredibly important to consider and monitor: is your customer service still up to standard?
Analyse the speed of which your tickets are resolved; shipping complaints; and product reviews. Are there any concerning trends that need to be addressed? If so, take massive action to rectify it immediately, as this will erode your profitability and increase the amount of headaches within your internal operations.
Conclusion: Diagnosing Retention Problems is Hard
Your retention woes may be a combination of many of the above factors or even none. It can be difficult to diagnose and often requires rigorous investigation.
Here’s one thing you can do to immediately help dissect the problem though: speak to your customers. Not just your best ones either - call up the one’s you p*ssed off and find out what they didn’t like about your brand, or the one’s that used to love you and then divorced you.
Set up as many of these automated feedback loops as possible to keep a finger on the pulse and be willing to prioritise and act upon insights that can shift the trajectory of your business positively when the opportunity arises.
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