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Customer Retention Costs Got You Confused? Here’s All You Need To Know

customer-retention-costs-got-you-confused?-here’s-all-you-need-to-know

It wasn’t too long ago the fashion store Never Fully Dressed was facing the challenge of wanting to enhance its brand identity and grow its community to even further heights. So how did they end up getting a 64% increase in repeat purchases? By focusing on their customer retention strategy.

By building out its loyalty program, NFD now has 32% of its revenue coming from loyal customers. 

When it comes to retention vs acquisition, the example from NFD shows retention can pull more than a few punches in the ring. We aren’t saying it should  be an either/or equation— a solid customer acquisition strategy is important too. But the  problem a lot of ecommerce store owners face is how to balance the costs of both.

This guide will walk you through the difference in cost between customer retention and acquisition. But since customer retention is our speciality, we’ll also go into more detail about retention rates and optimizing your strategies in this area.

The cost of customer retention vs. customer acquisition

The trouble with getting definitive figures on cost differences between customer retention and customer acquisition is the relativity—just because Big X corporation spent millions of dollars on paid social doesn’t mean your ecommerce store should. On top of that, it’s hard to find exact figures of difference and impact (we’ve tried).

We do know, however, that in the US, between January 2018 and November 2022, the average cost per lead (CPL) via paid channels in ecommerce was $98, while organic CPL was $83. But this figure doesn’t specify what those channels were.

However, we’ll illustrate the differences with some industry-wide examples of spending with separate figures of effectiveness. Let’s start with acquisition cost and spending.

Stuart Crowley from the ecommerce expo says the industry estimates suggest customer acquisition costs have increased by 60% in the last five years. Which is a pretty huge increase in that period.

Folks at Insider Intelligence suggest the ecommerce channel ad spending was $12.52 billion in 2019; fast forward to 2022, and this figure jumps to $28.57 billion. They do specify that Amazon makes up about three-quarters of the ad market in this case—with remaining competitors Walmart and eBay driving most of the remaining share.

From the IAB/PwC 2022 report, we can see that spending in paid channels keeps growing (though not at the levels they did during the pandemic)—with digital audio at 20.9%, video at 19.3%, display ads at 12%, search ads at 7.8%, and social ads at 3.6%. To top it off, the average cost per click (CPC) across all industries is $2.69.

When it comes to retention spending, this picture is a little less clear. The team at Antavo suggests almost half of the organizations they surveyed (48.3%) confirmed they’re planning to offer personalized rewards and offers in the next three years. In their 2023 report, they also said, “67.7% of businesses plan to increase or significantly increase their investments in customer retention in the inflation crisis and potential recession”.

But how effective are these strategies? Unfortunately, for acquisition, it’s not looking great. In their 2023 report, CommerceNext says 68% of surveyed retailers reported declining performance on paid social and that ad targeting capability changes are a big problem for them. 

Image source: CommerceNext
Image source: CommerceNext

These capability changes are at least in part due to Apple’s privacy updates in iOS prohibiting cross-app data sharing unless users opt in—while this is great for consumers, it has made advertising in apps like Facebook and Instagram a lot less effective than before.

On the other hand, inside PYMTS June Report, research shows 79% of revenue for subscription providers is generated by the top 30% of loyal subscribers. At LoyaltyLion, we’ve also found that emails sent using loyalty program information have a 20% click-through rate.

Finally, in Bond’s 2022 Loyalty Report, we get a lot of positive data points on the effectiveness of retention programs, including:

  • Program members spend more when they feel loyalty to a brand ($26 lift from program members, and $50 lift from credit card holders).
  • When brand purpose aligns with customer values, they are 3.4x likely to recommend the brand, 9.8x likely to go out of their way to do business with your brand, and 9.9x as likely to spend more with your brand.

So with all of this information in mind, it’s clear that customer retention strategies are vital in helping offset the increasing costs of customer acquisition.

How to calculate customer retention costs: formulas and examples

We recently published an article on the customer retention definition that goes into a lot of detail about different rates associated with retention (such as churn rate, repeat purchase rate, time between purchases, and more). 

However, customer retention costs (CRC) are slightly different than these regular rate-based metrics. 

CRC is basically how much you spend on attempting to retain your customers over a given period. There are two good formulas for helping you calculate your CRC; the first one is simple:

CRC = (total cost of customer success and retention schemes/initiatives) ÷ (number of active customers) x 100

Let’s look at an example. Imagine your total costs associated with retention (including loyalty program costs, email service provider fees, salaries of anyone specifically assigned to retention initiatives, etc.) for the previous 30 days was $8,000, and you had 3,000 monthly active customers. In this case, your average CRC would be $266.66 per customer.

However, this assumes each customer has equal value—which we know isn’t the case. If you want to find out the average lifetime CRC of individual customers, you can multiply the average CRC from above by the average customer lifetime. 

In this case, let’s say your business is subscription-based, and your average customer lifetime is 3 years—the lifetime CRC of your average customer would be $799.98. 

What is a good customer retention rate?

A good customer retention rate (the rate at which you retain your customers) is dependent on the niche your ecommerce store serves. For example, you wouldn’t expect a very high CRR if you sell bulky furniture items—unless you’re able to use several years to measure it. 

However, subscription-based stores, consumables (such as supplements), and clothing stores should typically have higher CRR. On average, between 70–80% CRR is good for most industries. If your CRR is lower than that, it could be to do with your niche—but it’s always worth figuring out if you can improve your retention rates regardless.

Optimizing your retention strategies (with the help of research and statistics)

We rounded up a bunch of research and statistics earlier in this article (so you don’t have to—you’re welcome). But it’s one thing to read these research points and another to use them as actionable insights that give you direction for your retention strategies.

We always think customer retention case studies are the best way of illustrating how using data-driven decisions to influence your retention strategy impacts your bottom line. 

For example, we saw the stat earlier that said, “Program members spend more when they feel loyalty to a brand ($26 lift from program members, and $50 lift from credit card holders)”. But can we see this in action? Yes we can!

In the case of REN Skincare, they created a fully-customized, integrated loyalty page for turning loyalty members into advocates—which saw a 68% increase in customer spending by program members, as well as 63% higher repeat purchase rates than guest visitors.

Image source: REN Skincare
Image source: REN Skincare

Similarly, by adopting a long-term loyalty program strategy, Waterdrop increased its customer spending by 90% and repeat purchase rates by 70%. In this case, Waterdrop now uses its retention strategy hand-in-hand with its acquisition strategy (by promoting its loyalty program via paid ads), which helps reduce acquisition costs. 

If you want to discover which specific strategies brands are using to improve their retention rates, including setting up a tiered loyalty program and making better use of their customer data, you can find a full list here

Start offsetting your customer acquisition costs with a LoyaltyLion

As we said at the beginning of this post; we don’t suggest completely abandoning customer acquisition efforts—after all, you still want your business to grow beyond your existing customer base, right?

However, to offset the rising costs of attracting new customers, using a solid loyalty program software like LoyaltyLion helps ecommerce businesses like yours maximize the value of your existing customers. 

By increasing your existing customer lifetime value and average spend, you get more wiggle room for reinvesting in your advertising efforts to help grow your business sustainably for the long term.

To learn how LoyaltyLion can help your ecommerce brand with customer retention, book a demo with us today.

Special thanks to our friends at LoyaltyLion for their insights on this topic.
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