How to retain customers in the age of Amazon, and why should you care

In this post we'll see why customer retention is the key to winning and sustenance. More importantly, we'll see tactics and techniques to successfully retain customers. We'll also see how leaders like Amazon, Starbucks and Dropbox have built incredible loyalty and give you a good start on designing your own retention playbook.

Let's address the elephant in the room. What does Amazon have to do with this? The short version, a lot. We'll get into the long version quickly.

But first, some context. If Amazon were a country it's 2017 revenue would make it the 55th largest economy in the world (tying with Algeria). Sure that's still smaller than Walmart, which would be the 25th largest economy ahead of Belgium (and many other western European nations). However that’s besides the point.

When it comes to ecommerce, Amazon is the behemoth. Amazon dominates 49% of all online sales in the United States and nearly 5% of all retail sales (the shares are even more staggering in countries like the UK, where Amazon makes up 18% of all retail sales). Both the company and the industry are still in their early stages of growth. Larger players will grow and smaller players will continue to enter the space. Across news, entertainment, accommodation, shopping, transport, productivity tools, education, customers increasingly buy online.

 While that's great for the industry, it poses a major challenge to the players. 92% of traffic of the average ecommerce store is either browsers or one time customers. Only 8% traffic comprises returning customers. In a crowded, noisy marketplace, storefronts constantly hawk for fleeting attention on Google, Facebook and other platforms, often against Amazon. As the competition intensifies, stores will keep seeing an upward spiral of acquisition costs. Many stores pay north of $100 per new customer. And that's just bad business for an industry operating on razor thin margins.

Customer Retention is Key

It becomes quite obvious that for an online storefront looking to be sustainable, an acquisition-heavy model is simply untenable. Yet most ecommerce sites continue to devote north of 80% of their marketing budgets to acquisition and just about 20% to customer retention.

Now, consider this. While returning and repeat customers make up only 8% of the ecommerce traffic, they represent 41% of revenue. 

Image Courtesy - Smile.io

 Customer retention is more than just a nice-to-have. As shoppers purchase more on a site, their average order size also starts increasing. Upselling and cross selling new products is much easier once their trust is established. As an illustration, Amazon Prime members spend around $1,400 annually on the site while nonmembers average only $600 in purchases. Amazon is bullish on repeat business and specially Prime, which now boasts over 100 million members. What Amazon, and other successful ecommerce businesses do really well, is increase their retention of customers. 

Levers of Retention 

These businesses use well established approaches for customer retention. The following strategies can be treated as the core essential building blocks of a great retention strategy

• Great customer support makes the post purchase experience conducive to a lasting relationship.
• Exclusive discounts and coupons are everywhere both online and offline. The downside of this tactic is it promotes negative shopper behavior. Shoppers get smart and await discount periods for making purchases. This erodes long term profitability.
• Loyalty programs are hard to pull off but immensely rewarding when done right. Two of the most successful loyalty programs reveal many pointers on how to build a great program. Starbucks has made billions of dollars with its 'My Rewards' program. By combining an outstanding mobile experience with an ability to earn points even for non-Starbucks purchases, the coffeemaker continues to succeed in the marketplace. Amazon Prime is legendary with exclusive benefits and convenience that customers don’t mind paying a premium for.
• Personalization is a nascent area that presents possibly the greatest opportunity. Let's see this in a bit more detail. 

Personalization as differentiator

 Personalization isn't a new idea. Customers remained loyal to mom & pop stores or their neighborhood grocer because the store owner knew them on a first-name basis, enquired about their family, knew how and what they shopped and made insightful, customized recommendations.

With the massive advancements in data-collection and processing systems, we've now come a full circle. Increasingly powerful technologies make it possible to do customization and personalization at scale. There are massive opportunities here. In an ecommerce study, Salesforce analyzed 150 million shoppers and 350 million ecommerce site visits. The study concluded that while product recommendations accounted for only 7% of visits to product sites, these visits drove an astounding 24% of orders and 26% of revenue. Additionally shoppers who came from a recommendation were twice more likely to return.

Personalization programs run the gamut from basic email customization to tailored ad delivery and landing experiences to powerful real-time product recommendations. Different ecommerce experts offer multiple perspectives on what works best for them.

Segmentation

Regardless of personalization approach, the first step is to establish meaningful segments of audiences to target. Better targeting implies better user experience. Brands start by implementing a tracking or tagging solution such as Optimizely, Google or Adobe Insights on their store pages. Once the setup is done, marketers can segment inbound traffic in multiple ways. 

• Geo and Device segmentation helps determine users coming to the site from target markets or particular device classes. One thing to watch out for is the percentage of mobile purchasers and visitors. Mobile optimization can help immensely with overall success given the higher preference for mobile shopping.
• Demographic segmentation has been around for a long time and used by big box retailers as well. Knowing factors like household income, purchasing power, family status can all be powerful specially for high ticket items. However the efficacy of this segmentation has diminished lately with the pace of change and low switching costs among consumers.
• Behavioral segmentation is often considered the most important and effective way to create personalized, relevant experiences. This is an area where many philosophies exist around what method works best. One approach has withstood the test of time across industries. 

The RFM Model

 RFM stands for Recency, Frequency and Monetization. The analysis model studies user behavior along 3 axes - the recency of their engagement, the frequency with which they engage and their spending. 

Image Courtesy - Clevertap

This model has proven effective for over three decades. It's based on the Pareto principle where 20% of all customers account for over 80% of all sales. Nonprofit marketers used the model to classify and engage their donors. Catalog marketers adopted it to maximize the returns on their expensive physical mailers. The model was applied to and proven in database marketing scenarios also.

 Essentially, RFM answers the following questions -

• Who are your most valuable customers?
• Who are your most loyal customers?
• Who are the most promising ones?
• Who is at risk of churning?
• Who shouldn't be pursued? 

Putler offers a detailed guide on modeling customers and classifying them using RFM. Once customers are classified, each segment can be targeted with relevant treatments and programs. The guide also includes a key on what strategy works with which affinity group. 

Onboarding is crucial

 RFM tells us how important it is to reach customers as close as possible to their most recent experience. And as the old adage goes, first impressions last the longest. Given how much retailers spend to acquire new customers, a great onboarding experience can go a long way to create repeat purchasers and loyal shoppers. 

 As a best practice, its best to inform and educate a consumer broadly about the store's features, policies and, most importantly, how the store or their purchase can make their life easier. If the product is complex, sharing helpful instructions and getting started guides can be a big plus. Exceptional onboarding experiences include exclusive offers that are a win-win for both the consumer and the business. Take Dropbox's onboarding program for instance. Though not an ecommerce story, there's much to be learnt in how Dropbox created an exemplary referral program right into their onboarding experience. In fact, the onboarding/referral program was so successful, Dropbox got to four million users within fifteen months of launch. Best of all, the onboarding/referral helped Dropbox bypass the $233-$388 of ad spend per customer acquisition for their $99 product. Carefully served strategic offers based on customer signals can help get the customer off to a great start and boost signups. Amazon used the Prime Day in 2018 to clock their highest ever enrolment to Prime membership.

 For an easy way to test customer onboarding, the welcome email is a great place to start.

Some tips on what works well with welcome emails

• A warm opener
• Bonus points if your message is personalized based on the customer's purchase behavior. If they came from a Facebook ad, you can mimic the ad theme or content on the landing experience
• Short, visual and easy-to-understand messages about key product features
• An outline of key next steps they can take
• List of helpful resources/documentation

And what doesn’t

• Trying to upgrade them to a paid/premium plan right away (if they're on trial)
• Putting them in touch with sales reps without sharing context
• Focusing too heavily on the brand's background, successes and philosophy and not enough on the benefits for the user. As an exception, focusing on the philosophy or focus may work well in cause-based marketing, such as non-profits and socially or environmentally conscious stores serving a niche audience or product. Again the emphasis should be on the consumer, and how their purchase/involvement makes a difference.

Finally, we noted customer retention, more than acquisition, is the key to sustainability and success. We noticed standard retention tactics brands use, including customer support, discounting, loyalty programs and personalization. We delved deeper into personalization. Customer segmentation and specifically behavioral segmentation using RFM analysis are time-tested, powerful tools for defining key customer segments. Last but not the least, we looked at customer onboarding. First impressions can make or break a brand's relationship and we noted tips and guidelines to deliver a rocking first experience.

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Abhishek Ratna leads integrated campaigns, customer strategy, analytics and MarTech at Microsoft. He managed lifecycle marketing at Zulily, overseeing nearly 1.2 Mn email sends daily and delivering powerful segmentation strategies. He also brings over four years of experience running demand generation and content marketing for enterprise B2B technologies - covering both on-prem and SaaS products. He is passionate about the craft of marketing. Get in touch with him on LinkedIn, Medium or Twitter.