Your Best Customers Don’t Need Heavy Discounts, Here’s Why

The top performing online stores create a “renewable resource” of loyal customers who keep coming back for more.

Here’s how they do it.

Unless you’re Amazon (stop booing at the back) – there’s rarely an exponential curve for ecommerce success, and once you hit a critical mass, growing revenue becomes difficult.

If hitting the revenue wall is commonplace for many, how do retailers get ahead of the growth slide?

By courting repeat customers. That’s how.

Top performing companies create a “renewable resource” of loyal customers.

If you’re in your first year or two of business, you can on average expect that up to 50% of your revenue will come from repeat custom.

For more established brands, that figure drops but can still be as much as 30-40%.

Surprised?

annual ecommerce growth by company size

Take for example the compounded annual growth projections for worldwide ecommerce which stands at 15%, over the next 2 years.

Is a 5% or so revenue increment this year, enough for your business? Most small to medium sized business owners want multiples of growth – not small steps.

If the wider market is growing at a steady pace then acquisition alone isn’t enough – buying customers is a crowded space. Therefore, retention is just as important for your growth, as is fostering relationships with your best customers.

For a little more context here, let’s dissect some numbers from the RJ Metrics benchmark report:

80/20 Sales In Action

This is a near perfect illustration of the Pareto Principle, or the 80/20 rule as its better known.

percentage-of-revenue-from-repeat-customers

It shows those ecommerce companies with a high percentage of repeat customers, are also in the top percentile of total revenue.

Looking at the bottom percentile, well they get a fraction of their revenue from repeat customers.

High repeat custom equates to high revenue.

That’s the theme here.

customer-lifetime-value
Understanding this can be explosive for revenue

The detailed report shows customer lifetime value (LTV) is even more exaggerated, with the very top few percent of lifetime customers spending 30 times more than the average.

Did you know: your very best customers can spend 30x more than your average?

If you weren’t really paying attention to customer retention and lifetime value before, hopefully you just sat up in your chair.

But again – I like some context, so here’s a caveat.

Do NOT Default to Deep Discounts!

Where a small increase in customer retention results in a big increase in profit, we have to understand that not all retained customers are worth pursuing.

That’s not some vulgar capitalist remark either, what I mean by that is that the common approach to customer retention is discounting to everyone.

We see it time and time again.

You know the drill – just throw a coupon/discount code or sale at your email list and hey presto – repeat customers!

In fact it seems like every other retailer is dedicating their homepage (often their most visited page) to sales.

asos-is-on-sales
Asos is on perma-sale™

Where’s the new merchandise?

Don’t get me wrong.

The idea of offering discounts and bonuses is perfectly reasonable. It’s part of the retail cycle.

However, without a strategy and the appropriate segmentation – these discount rewards mostly attract the low-frequency, price-sensitive shoppers in your customer base.

“Low-frequency, price sensitive shoppers drive margins to the floor”

And be warned: that subset of customer, is the user base that drives your margins to the floor.

Discounting should not be the default option, unless your data is telling you it should be.

Therefore, we have to be intelligent about who we target.

Let’s go from the top and find our ideal repeat customer.

To do this we have to start segmenting our existing customers and those new customers who behave positively and above the average – because the latter are retention ready!

Segmentation starts with: Demographics

Here’s a sampled snapshot from a clients Analytics account, it’s broken down by age here.

customer-segmentation-analytics

What you’re looking for is a demographic with higher than average conversion rates and order value to target for repeat purchase.

This example shows that the 55-64 year olds not only convert well, but they also typically spend a little more.

However, remember how I said sales were a dangerous default setting? Look what happened when we had this client remove the 55-64 and 65+ year old customers from their sales offers:

excluded-segment-brings-roi

A 4% increase in average order value by excluding those customers from the sales literature.

Now, of course, there’s morals at play here – what happens if this customer discovers they didn’t get the sale offer?

That comes down to segmentation again, in that your messaging should have been deemed not appropriate to their age range anyway.

In other words, they weren’t the obvious recipient of the offer and that should be plain for them to see.

Customer Layers

So that’s demographics. As with the example above, this basic level of detail will serve most retailers very well. Digging in to the data and just knowing the age and gender fit can help hone your marketing and targeting considerably.

However, for more focus you can add additional layers to this data.

This helps you further understand and segment your customer base. You might eventually find 10’s if not 100’s of different subsets that you can target.

Psychographics  – the sort of data you can pull from Facebook, find out what jobs people have, their interests and behaviours. You can also do this by surveying your customers.

Channel – where do people find you, such as organic, paid search, social networks, referrals and the like.

Website metrics – such as time on site vs conversion rate, you can create these segments in analytics. We like to look at ‘by the minute’ browsing, so 1, 2, 3, 4, and 5 minutes or more.

Device Habits – are they tablet users for example, and which brand do they use when they purchase?

Price level targeting – knowing what price level or bucket someone is in, is really important. Start with low, medium and high level spends based on your average order value.

Feedback – those that leave reviews on your site, are they more likely to be retained?

Churn – and finally understanding your churn rate i.e. how many customers you lose over time, is really important too.

Case in point – we recently looked at a client’s analytics and found that Twitter was driving a modest amount of traffic, but converting way beyond any other social channel.

twitter-converting-higher-than-facebook

Now consider the case where this client increases activity on Twitter, remarketing to their best performing demographic.

That would be layering in action – targeting a high performing segment of the existing customer base on their preferred channel. Another great retention boosting tactic.

And it works.

Recency, Frequency, Monetary = RFM

RFM Analysis is trickier, as you need a robust set of reporting tools on your store backend.

However, it adds a significant level of control and understanding –

R – Recency
F – Frequency
M – Monetary

For example if you apply RFM to your top demographic, where you know a typical order is above the median value, they shop every other month and the churn rate is lower, then you probably shouldn’t target cheap, low ticket items to these people.

A flash sale might be wasted on this segment as their primary driver to purchase is not price driven.

Hence my earlier comment that discounting should not be the default option.

So there you have it, we’ve gone from low hanging fruit to really deep potential in the data. All of which can boost retention and often at much lower costs than acquiring new customers.

But “It’s Easier to go After New Customers”

Marketers get lazy.

Boss wants more sales?

erm, a SALE it is then!

Best Buy: Cheap, cheaper, cheapest.

*yes I know Best Buy is all about cheap deals, but the new merch’ doesn’t have to be rock bottom too.

With such lucrative opportunities from returning customers, why are marketers letting these customers get away without converting?

More importantly, what needs to be done to get them to convert?

Think about it in really simple terms, if you put a product in front of someone they either like it or they don’t.

If they like it they click through. From there they either buy or they don’t.

They might buy on the spot or shop around and come back later, another day, a week later or even longer. Fact is, they buy or they don’t.

Acquisition just feels sexier and is often attributed as the key driver for revenue growth.

I’m a PPC marketing Nerd, so you could argue I’m one of those marketers that pushes acquisition – and you’d be right – but PPC can also drive retention through parallel strategies

From a paid search perspective we have a cost and a conversion value, if cost falls below the value returned then acquisition is working.

Again, I’m simplifying it to make a point – but the above scenario is much more straightforward than the retention formula.

Retention requires a deeper understanding on not only the marketing metrics, but the business metrics and to a certain degree – being able to predict the future – whilst coming up with a clever solution to fit!

You also have to put the tracking and data capture in place in order to assess and correctly interpret retention.

Acquisition just feels sexier and is often attributed as, rightly or wrongly, the key driver for revenue growth.

When you put it like that, acquisition sounds like a breeze.

One-and-done, move on.

Therefore, in order for retention to become more accessible you need formulas and frameworks to work with, hence RFM Analysis, which can be used to do just that.

If you aren’t currently converting well, what can you do to get more repeat customers?

Getting Hungry Customers to Come Back for More

Hopefully you agree now – stop prioritising sales, discounts and racing to the bottom.

What’s the answer then, what drives people back to your store?

Fresh, crisp and very new merchandise.

The latest threads at GAP

The latest stuff.

Yummy, minty and straight off the production line.

There’s your top customer segment, they’re coming back for more of you and your stuff – not just the sales crap from last year!

New stuff is pride of place at Dunelm

How can you lock in this segment, and build on it?

Instead of a discount newsletter (which is very much the de-facto standard), flip it, create a ‘be in the know’ newsletter where your best customers [will] sign-up to hear about new products first.

A smaller, tighter knit group of people who want your latest stuff at full RRP – and care a lot less about sales fodder.

Case in point is my own buying habits.

Love the pants, but Joules needs a big ‘new in’ push.

If you’ve ever seen a video or photo of me, I’m probably wearing a Joules polo shirt.

British country-chic, that fits me well; I buy them every year, and in-between sales too.

Joules get one thing right, they at least have a “New in” section to their site. They should be prouder, and make it more prominent still.

The homepage is adorned with big sales, but their new garb is at least first in line when the mouse heads to the menu bar.

“When it comes to merchandise, your latest = your greatest”

Another area we can learn from Joules, they often create a 3 for 2 offer on their polo shirts which (pending stock levels) I jump on.

Wait a minute, a discount! Yes – even I like a bargain, but is £70-80 for 3 polo’s really a bargain?

Best Buy probably has you covered for $10!

Regardless – at least they’re raising the average order value and often on older stock too.

It’s not all good news.

They’re missing a trick with is their newsletter, which unfortunately comes thick-and-fast, and littered with discounts that aren’t personalised to me.

I appreciate old stock needs to be haemorrhaged fast, but seriously – why aren’t more businesses prioritising LATEST over discounted?

That’s the new stuff covered, next:

Community Spirit Breathes Life Into Brand

Social media has certainly put the power in to the customer’s hands, but that can work to your advantage.

Building a loyal, passionate community is brand power. It not only attracts new customers so satisfies the need for acquisition, but scratches the retention itch too.

Here’s a fantastic example by Made.com, a UK homeware retailer.

made.com-making-a-point-of-rentention

Their unboxing feature is a ‘Pinterest’ style board of actual customer submissions, content that shows Made.com’s products but in the customers hands. Well, their houses at least.

It’s a phenomenal example of community building around products.

I wish it were my idea, I love it.

Why do I love it?

I think it does 3 key things very well:

Firstly

It visualises the product in an honest way. There are no stock or branded images, just products photographed in an actual home setting by obviously pleased customers.

Secondly

It offers an immediate level of trust in Made.com, if you like the product range – why wouldn’t you purchase from them after seeing this?

And finally

It’s integrated with social media – meaning that sharing is part of the experience at the start and end of the process. You upload and share, other people engage and share. Rinse-repeat and I assume, profit.

Too much too soon? Start smaller.

Your Fans are Out There

Depending on your product type – look at having an active Instagram page and literally go out and ask, via email, for your existing customers to share their product images with you.

gamification-users-classification

You can add a little gamification if you wish, like a weekly best image winner or handout branded prizes, or similar – you get the idea.

Oh and remember, of course – only hand out discounts if your data tells you that’s a good idea!

With this active social channel, then bring that imagery on to your product pages. Your existing, loyal customer base are literally marketing your product for you (but don’t abuse this privilege).

Cheap + Cheerful…

I’m not big on spending gazillions on branding, particularly for younger ecommerce stores. That said, spending money on the delivery experience is key to keeping front of mind and is a catalyst for retention.

Keep it simple to keep the budget down.

Branded boxing and bags is a nice start, but go further with returns information branded up and really simple to action – people will return stuff, so make it easy for them to do so. Trying to thwart or stall this inevitable part of selling a product and you’re not building credibility.

Brand fan art – circa 2017

You could also include a little branded trinket, it doesn’t have to be expensive – think memorable more than anything. Perhaps even collectable?

A simple branded sticker pack/assortment is enough cheer for many a package recipient!

Thuggies the Canadian purveyors of extreme comfort, have a “Sticker Club“:

These little touches help retain a customer because their experience feels right, it feels better than the norm.

Don’t look at Amazon and think, ‘well they only send brown boxes’ – they’ve got their own market that they built a long time ago.

They’re essentially writing their own rules – for now, at least.

Retention is all about appreciating what you’ve already won, and using the data and patterns at your disposal, to really amplify your business through retaining customers just as much as you attract them.

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Ed Leake

Author: Ed Leake

PPC nerd, founder and Managing Director of Midas Media, Ed started in 'tech' when he was 12 years old, building websites and selling computers from his parent's garage. Outside of work Ed enjoys yet more work, motorsport, attempting to cycle with clip-on shoes and refuelling on fresh doughnuts.

  • tommy

    Hi Ed, that was refreshing 🙂 Analytics gives you so much data that it sometimes become intimidating to start, or to generate meaningful segment or report to be able to act on the data you analyse.

    Can you let me know how did you generate the Session/e-commerce conversion rate/average order value report? I came really close but cannot add the Session variable.

    • Thanks Tommy! New year’s resolution is to keep adding to existing articles, instead of putting out ‘cookie cutter’ stuff like too many sites. Big changes are coming for this blog and it’s content.

      As for your question:

      I cheated, it’s a spliced screen grab! Because on compare, GA limits you to 2 metric groups. You can of course pull the data from both metric comparisons and create a chart in Excel/Sheets.

      • tommy

        Hi again 🙂 I read the updated version and the one thing which I am struggling to understand is the connection between your top performing customers and their retention.

        I mean I get it you can use Analytis to get some basic segments of best customers (e.g. demographics to start with) or that you can use more advanced RFM model (you probably need some backend software to help with that). I also get it that you can use this segments knowledge to target similar segments in PPC (i.e. new customers) but from the article I don’t get it how to retain those best customers so they purchase again.

        Let’s say the best performing customers are the 55-64 year olds – and now what 🙂 How can I make them a repeat customer?

      • tommy

        Hi again 🙂 I just read the updated article and the one thing which I struggle to understand is the connection between finding the best customers and retaining them.

        I understand that you can use Analytics to find some basic segments which perform best (e.g. demographics to start with) or you can use the more advanced RFM method (you probably need some more advanced backend software for that). I also understand you can use the segments knowledge to run PPC campaign targeting audience in your best segment (i.e. acquiring new customers).

        What I don’t quite get from this article is how to make the best customers purchase again.

        Let’s say the best customers are 55-64 year olds – now what 🙂 How to make them a repeat customer?

        • Hey Tommy – I obviously need to try harder, if it wasn’t clear! 🙂

          The key points are pushing latest products to the right segment, that are most relevant to them and their buying habits.

          That’s the 80/20 bit. Sound simple, but sometimes the simplest ideas are the best – especially in a world full of noise and a gazillion new ideas!

          The other two suggestions were value ad really, so creating a community is a bigger, longer term strategy.

          Gamification is more about brand loyalty, putting another layer on top to retain customers. This can be simple surprises, or more elaborate branding and ‘swag’ strategies.

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