Data Report: How Valuable Are Your Loyal Customers?

store.jpeg

Customer loyalty is essential to running a successful retail business. But attracting and retaining customers has never been more difficult for online retailers, as the expansion of eCommerce presents consumers with an unprecedented array of options for their shopping needs.

In order to better understand the value of customer loyalty in eCommerce, we turned to our dataset and analyzed over 22 million orders made by roughly 20 million unique customers with over 2,400 online retailers. We had two goals in mind:
  1. Give online retailers insights to help them decide whether they should be investing more or less in customer retention
  2. Quantify the value of customer loyalty as it pertains to today’s rapidly changing eCommerce space

 

Why is customer loyalty important?

The basic logic behind customer loyalty is that new customers are costly to acquire, and customers who have already shopped with you are less expensive to retain. Customer acquisition requires costly marketing expenditure and is difficult to track when evaluating return on investment (ROI), whereas customers already familiar with a brand can be more easily persuaded to come back through simple promotional campaigns offering marginal discounts.

Despite the clear business case in favor of customer loyalty, several important questions need to be addressed as one starts to consider how to best balance the investment between customer acquisition and retention.

Start with the following four questions:

  1. How much of my business is driven by return customers?
  2. How much does the average return customer spend on any given order?
  3. Over the course of a year, what is the average customer worth to my business?
  4. How can I attract new customers back to my online store after their first purchase

Using our dataset , we review each question in the sections that follow.


1. How much of my business is driven by return customers?

Understanding the relative significance of return customers to your current revenue stream helps to frame how important they are to your business. We found return customers account for 22.6% of a business’ revenue, and it comes as no surprise that they also only make up 11.6% of the customer base.

Take a moment to consider the implication of these figures: approximately 10% of all customers make multiple purchases, and they account for over 20% of revenue. Despite this, most businesses spend the majority of their marketing budget competing to attract the other 90% — new customers who only make one purchase. Remember, every new customer is an opportunity to create a return customer. But most businesses under-invest in customer loyalty, putting all of their eggs in the customer acquisition basket. 

revenue-01.png Questions to guide decision-making:

  • Are we attracting more or less return customers than the average for our industry?
  • If we are above or below the average, does this mean our loyalty programs are a success or failure?
  • Are we over- or under-investing in retention?

 

2. How much do return customers spend on any given order

The next step is to look at how much return customers spend compared to new customers on a typical order. This is key to balancing the investment between customer acquisition and retention.

Across all industries, we found that return customers spend 15% more than new customers on any given order. This trend is most pronounced in the Health and Personal Care and Home Furnishing industries, where the relative difference is nearly 30% in each. Clearly, these are industries where customer loyalty plays an important role, and it’s likely these numbers in and of themselves reflect that strong loyalty programs are already in action.

average_revenue-01.png

Questions to guide decision-making:

How do our return customers compare to new customers on a typical order?

Is our marketing team taking this into account when budgeting for acquisition and retention?

 

3. Over the course of a year, what is the average customer worth to my business?

The most obvious benefit of a return customer is the fact that they make more than one purchase. Couple this with their tendency to spend more on any given order, and the value of customer loyalty becomes even more substantial.

Over the course of a year, the average return customer spends over 120% more than new customers. In 2015, the typical return customer spent a cumulative total of $86.16, more than double the $38.81 spent by new customers. The relative difference was largest in Health & Personal Care (150%) and Home Furnishing (140%).

cumulative_revenue-01.png

Questions to guide decision-making:

How much does the average return customer spend at our store over the course of a year?

How much can we expect in revenue from each new customer that converts to a return customer?

Is this worth the time and cost we would need to be or are currently devoting to loyalty programs and retention?

 

4. How can I attract new customers back to my online store after their first purchase?

One of the most common methods for converting a new customer into a return customer is through exclusive targeted discounts, typically distributed via email. Return customers are far more likely to be offered or take advantage of discounts than new customers, particularly in the Health & Personal Care, Apparel & Accessories, and Home Furnishing industries.

Targeted discounts are a convenient retention strategy because you already know that your audience is interested in your brand, and the ROI can be precisely controlled — you know exactly how much a discount will affect your margins.

discount-01.png

Questions to guide decision-making:

What proportion of our new and return customers are taking advantage of discounts?

Are we over- or under-utilizing targeted discounts as a retention strategy?

 

Takeaways

Customer loyalty is critical to almost any business. Return customers contribute a substantial share of revenue across every industry, and in a typical year they spend more than twice as much as the average new customer.

That said, designing and executing a customer loyalty program is a serious task. Seasonal effects and word of mouth are just two of several factors which are challenging to incorporate when assessing the ROI of a loyalty program. One of our goals here at Stitch Labs is to make it easier for businesses to overcome these challenges by providing operational tools which eliminate the need to waste resources on repetitive tasks — freeing up time to focus on high level strategy.

 

Additional reading

For interested readers who would like to continue learning about the value of customer loyalty, consumer decision making, and the psychological principles relevant to consumer behavior, here are a few excellent resources to get started:

2015 Ecommerce Buyer Behavior Report, RJMetrics
A comprehensive year in review looking at customer lifetime value across key variables such as industry, region, and average spending level.

The consumer decision journey, Mckinsey
This is an excellent resource for dissecting the customer decision-making process. Any business decision maker should find this helpful for thinking about how customer loyalty fits within their marketing strategy.

The Power of Habit, by Charles Duhigg
Every habit has three components: a cue, a routine, and a reward. Understanding these and how they work together can help retailers design effective programs that guide consumers along the path to habitually coming back to their brand.

 

control-your-inventory.png

comments powered by Disqus

Grow Your Retail Business with Stitch

Learn How