Key factors in developing an e-commerce retention strategy

customer retention

So your business is up and running and you have some customers coming through your (virtual) doors. If you’re following best practice, you also have a marketing plan in place that includes running promotions at every opportunity, for example, around Easter, Mother’s Day, Back-to-School, Black Friday and Christmas. The question is, do you also have a plan to keep your customers coming back? An e-commerce retention strategy is the key to creating loyal customers and building a strong business.

What is an e-commerce retention strategy?

Your retention strategy is a plan:

  • To encourage customers to come back and buy from you again; and
  • To increase the amount each of those customers spends with you.

The theory behind it is that it costs a lot more to attract new customers than it does to sell more to existing customers, who already have a trust relationship with you. In fact, research by Harvard Business School shows that a mere 5% increase in your retention rate boosts your profits by at least 25%.


Factors that influence an e-commerce retention strategy

How you go about creating the right e-commerce retention strategy for your business depends on several factors:

1. The type of business you have and the products you offer

If you are selling high-value products that customers only buy occasionally, for example, cars or power tools, your strategy will be very different to that of a business that sells lower-cost perishable items like vegetables.

At both ends of the scale, you need to focus on attracting new customers and on encouraging them to come back. Very often though (although not always), the lower the item value, the more frequently customers need to buy it, and therefore the more you should focus on your retention strategy.

The graph below shows some examples of how these strategies might differ, depending on the product being sold.

Purchase Frequency graph

2. Where you are in the lifecycle of your business

There’s no doubt that when you first open your store, your priority needs to be attracting customers. While it’s worth giving some thought even then to how you will keep them going forward, at this point, acquisition strategies should be your main focus.

As your customer base grows, you can then start shifting some of your focus to retention. By the time your business is well-established (and hopefully automated as much as possible), you should be investing much more of your budget and resources in retention strategies.

While your own business might look very different, the example below illustrates this shift, in this instance using sales to identify the stage of the business.

lifecycle of your business

3. The budget and resources you have available

Once you’re clear on what strategy you need to focus on at any given time, whether it’s acquisition or retention, make sure your budget split reflects this. Also keep your team informed of the change of focus and why it’s important, so they can support that, rather than unknowingly working against it.

Steps to create a retention strategy

  1. Find out what your customers want: It’s important to build your retention strategy on data from your own business, so try to understand what makes your specific customers stay. For example:
    • What makes them feel you care about them?
    • Do they feel valued and listened to – and why?
    • When someone leaves you, do you find out why they left?

    When you start investigating, you should be able to uncover what is happening. For example, you may find flaws in your customer service support. You might establish that your customers feel the lack of incentives, promotions or free gifts from you. Or they may let you know that they enjoy the occasional email from you, but that it is not tailored to their needs or previous purchases.

  2. Involve customers in improvements: Think of ways to encourage your customers to give you ideas about what would make them stay. Perhaps they would like to create products with you, or request special features in new products, or take part in competitions that excite them. Social media contests or forums can help you gather this information.
  3. Create incentives: Using all the data available, consider your options for e-commerce retention strategies. Then create initiatives that work for your business and for your customers. Measure these incentives on an ongoing basis to evaluate their effectiveness and tweak them when needed.
  4. Grow existing customers: Once you have a strong customer base and know how to keep them loyal to you, you can use that to build your relationship with them. For example, you could become their trusted advisor with a useful blog, or add value to their lives by cross-selling or up-selling relevant products to them. As they become loyal referrers of your brand, they can also help you expand your customer base even further, for instance, with online reviews.

Measuring e-commerce retention

If you want to improve any aspect of your business, you need to find a way to measure it. For customer retention, it’s especially important to compare apples with apples. That means you need to:

  1. Decide for what exact time period you are measuring – is it for a day, a week or a month?
  2. Then compare that with exactly the same period the previous year.

Note that seasonality, holidays and even promotional days like Black Friday can drastically skew results. Some companies go so far as breaking their yearly calendars up into 13 periods of 4 weeks each. This counteracts the fact that some months have 5 weeks and others have 4 (which would change depending on the year). They can then get extremely specific about their year-on-year results.

Retention strategy metrics

When you’re trying to boost your retention rate, the metrics described below will be helpful.

1. Repeat customer rate

Calculate the average number of times customers buy from you:

Number of customers who bought more than once

Number of unique customers

2. Purchase frequency

Calculate how often customers come back:

Number of orders placed

Number of unique customers

3. Average order value (AOV)

Calculate how much customers spend each time they buy:

Total sales amount

Number of orders placed

4. Customer value (CV)

Calculate how much an average customer is worth:

Purchase frequency x average order value (AOV)

5. Average customer lifespan (or retention time)

Calculate how long your customers keep buying from you (or if you are using accounts, how long accounts are active for):

Sum of (date of last purchase – date of first purchase for each customer)

Number of unique customers

6. Customer lifetime value (CLV):

Calculate how much an average customer spends with you over time:

Customer value x average customer lifespan

Begin by calculating these metrics as a starting point, then work them out again each week/month/year to see how you’re progressing. Understanding the behaviour of your customers over time, and knowing exactly what metrics you want to improve, will also help you fine-tune your retention strategies.

Now that you’re aware of what you’re working with, these four retention strategies will give you some ideas to experiment with.

The bottom line…

To keep your e-commerce customers satisfied, you need to engage with them in a way that adds value and builds trust on an ongoing basis. Get that right, and you’ll have a loyal and ever-expanding customer base that keeps you in repeat business for a very long time.

Contact us for your e-commerce business needs.

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