Your repeat customers are your business' greatest asset, and your best bet for generating recurring revenue. Here's what all businesses should know about customer retention — and a strong case for why you should ALWAYS opt to give a little more love to your existing customers.
The Acquisition Trap
I bet you think the best way to grow your business is by acquiring new customers — and during my career at Yelp, I believed this was the case too. I helped businesses advertise to first-time customers through online ads.
Unfortunately, this approach didn't drive value for merchants, and often ended up costing more money than it created. Want to know why? It costs 7x more money to acquire a new customer than to drive an additional visit from an existing customer.
Bottom line: new customers are expensive.
It takes some sort of monetary investment to gain a new customer (we refer to this as CAC, or Customer Acquisition Cost). If your CAC is too high, i.e., it far exceeds the lifetime value of your customer, your business is going to fail. One easy way to drive up CAC is by running untargeted marketing campaigns aimed at acquiring brand new customers: giveaways, ads in magazines, billboards.
On the other hand, a customer who already knows and loves your brand might be willing to come by again just from a personalized message. This is why targeting people who've already visted your business is easier and more cost effective: you can outreach specifically to these existing customers, rather than marketing to the faceless crowd via a traditional "spray and pray" campaign. In this case, we're investing in incremental visits and increased lifetime value, not throwing money at a potential first-time visit from a new, unproven customer.
In terms of dollar spent per visit, this is why targeted retention marketing outperforms untargeted advertising 7 to 1... meaning you'd have to spend $7 on an acquisition campaign to get the same result that $1 would drive in a retention campaign. Put simply: targeted retention marketing has greater ROI than acquisition marketing.
Customer Retention is a money maker
So now, the question becomes this: How do I market to my existing customers? How do I even get a hold of them?
The obvious first step in targeting your customers has to be figuring out who the heck they are. A large number of merchants don't have the resources to identify their customers — when it comes to revenue attribution, they're data blind. Without any info on your customers, it's impossible to target them in a way that's meaningful to them when they're outside the four walls of your business.
Take it a step further: you know who your customers are, but who are your TOP customers? When it comes to targeting your high rollers, this can have the greatest return of any marketing campaign you launch. Why? Nearly 70% of a merchant's revenue comes from their top 25% of customers.
Why VIP programs work
Our mindset here is very similar to a frequent flyer program with an airline: The customers who fly the most and spend the most money receive some sort of special treatment. This VIP treatment (which they have earned) keeps them loyal and minimizes the chance that they choose another airline. The airlines will automatically notify customers when they are almost at VIP status, or when they are about to lose their VIP status. This is why you see frequent flyers take another flight just to become a VIP or to retain their current status.
“Wow, I am about to hit VIP status, I am going to go spend some money.”
"Wow, I am going to lose my VIP status, I am going to spend some money."
The status itself, whether wielded as a carrot or a stick, becomes an incentive to increase frequency and spend. This drives profitability — even when accounting for the costs associated with maintaining a VIP-tier program. This type of status-sensitive messaging is only possible with customer data.
The difference between an airline and a restaurant (or retailer, or car wash for that matter) is that airlines collect an abundance of customer data during the transaction: Customers willingly enter their personal information while buying airline tickets because it's necessary. The same cannot be said for transacting at your favorite restaurant or retailer: it's burdensome, it interferes with the experience, and feels unncessary... yet in pursuit of valuable customer data, companies (even still! in 2016!) ask customers to enter their phone number in into a piece of hardware at checkout, or to write their phone number on their receipt to be considered for loyalty rewards (I can name more than one woman who would be vehemently opposed to writing their phone number on their Buffalo Wild Wings receipt just because the waiter asked them to).
Your VIP program needs to be data-driven
Bottom line: The customers who spend the most need to be identified and treated like legendary customers. Now, they will come back more and spend more to obtain and retain their legendary status. As a merchant, the most important thing becomes getting customer data in a way that doesn't disrupt or detract from the experience (shameless plug: Thanx is the only loyalty program on earth that does this!).
Current “loyalty” programs put far too many hurdles in front of customers, diminishing the likelihood that you'll be able to collect customer information. Without customer information, it's impossible to identify and retain your VIP customers. If you remove these hurdles, you will know exactly who your VIP’s are, and you can begin the very profitable process of keeping them loyal.
So, let's summarize how brick-and-mortar businesses should market profitably and intelligently:
1. Collect customer data in a way that's frictionless for your customers
2. Using that data, identify your loyal customers and invest in driving incremental value from these people who already know and love your brand
3. Stop spending money on untargeted ad campaigns with low ROI.
Want to learn more about customer loyalty? Email me at firstname.lastname@example.org and we can troubleshoot your existing program. Just want some good content to read? Download our eBook: 2016 Loyalty Benchmarks by clicking the link below:
Check out our other blog posts, written by customer retention experts & merchants alike!
1. Checklist: Is your customer loyalty program working?
2. Learn about customer retention psychology and start using it today
3. See how your business can fix (and prevent!) bad Yelp reviews with this simple tactic