What is Retention Marketing, and Why You Need to Start Today

As an ecommerce business, your success hinges on your ability not just to attract new customers, but to keep them coming back again and again. While customer acquisition is often the primary focus of marketing strategies, the most successful brands know that customer retention is the true key to sustainable growth and profitability.

Consider this: studies have found that acquiring a new customer can cost 5-25X more than retaining an existing one, and increasing customer retention rates by just 5% can increase profits by 25-95%. Yet according to Forrester, 80% of companies‘ marketing budgets are still spent on acquisition, with only 20% going to retention.

In a world of rising acquisition costs and increased competition, the brands that will win are those who invest just as much in keeping customers as gaining them. That‘s where retention marketing comes in. In this comprehensive guide, we‘ll break down exactly what retention marketing is, the crucial reasons to prioritize it, the most effective retention strategies to implement, and how to get started today.

What is Retention Marketing?

At its core, retention marketing encompasses all the strategies and tactics aimed at keeping your existing customers engaged and driving repeat purchases over time. While acquisition marketing focuses on bringing in new customers, retention marketing shifts the focus to maximizing the value of the customers you already have.

For example, acquisition tactics like Google Ads, Facebook campaigns, and influencer marketing aim to reach people who have never bought from you and convince them to make a first purchase. In contrast, retention tactics like loyalty programs, lifecycle emails, and personalized recommendations focus on delivering value to existing customers to drive second, third, and tenth purchases.

The key difference is in how success is measured:

Acquisition Metrics	Retention Metrics
New customers	Repeat customers
Conversion rate	Repeat purchase rate
Cost per acquisition (CAC)	Customer lifetime value (LTV)

Ultimately, acquisition grows your customer base, while retention grows the value of each individual customer. When you increase a customer‘s lifetime value with repeat purchases, you‘re able to outweigh the acquisition costs and turn them into profitable, long-term relationships.

Here‘s a simple visual showing how small increases in retention can dramatically impact customer LTV:

Source: Smile.io

Why Retention Marketing is More Critical than Ever

You might be thinking, if retention has such a high ROI, why are the majority of brands still pumping most of their budget into acquisition? The answer largely comes down to how quickly the ecommerce landscape is shifting:

1. Skyrocketing customer acquisition costs (CACs): With so many brands competing for attention online, the costs to reach and convert new customers have shot up in recent years. According to ProfitWell, CACs have increased by nearly 50% in the past five years alone. That means if a $100 AOV customer used to cost $10 to acquire, it now costs around $15 – seriously eating into margins.

2. Intensified competition for customer loyalty: The explosion of DTC brands, the growth of Amazon, and low barriers to entry in ecommerce have given consumers more choice than ever before. Studies show that 75% of U.S. consumers have changed shopping behaviors and tried new brands during the pandemic. With so many options at their fingertips, it‘s harder than ever to retain customers.

3. Diminishing returns on acquisition channels: Brands have flocked to Facebook and Instagram to attract new customers in recent years, leading to overcrowding and saturation on those channels. At the same time, data privacy concerns and new regulations like GDPR and CCPA have reduced the effectiveness of targeted advertising. As a result, CACs on popular channels continue to rise while ROAS declines.

4. The outsized impact of retention on growth: As the cost to gain a new customer rises, it‘s becoming increasingly clear that getting the most value out of each customer is the key to profitable growth. Bain & Company found that across industries, a 5% increase in customer retention correlates with more than a 25% increase in profit.

As Corey Pierson, CEO of customer analytics platform Custora, puts it: "Customer acquisition propels a brand‘s growth, but customer retention accelerates it. Retention impacts every revenue-driving aspect of a business."

The Powerful Benefits of Focusing on Retention

Need more convincing on why retention needs to be a top priority? Let‘s dive into some of the most impactful benefits in more detail:

1. Higher ROI than acquisition. The probability of converting an existing customer is 60-70%, while for new prospects it‘s only 5-20%, according to Invesp. Plus, loyal customers tend to buy more frequently, and spend more over time. According to RJMetrics, your loyal top 10% of customers spend 3X more per order than the lower 90%, and your top 1% of customers spend 5X more than the lower 90%.

2. Increased revenue and profitability. Repeat customers are the lifeblood of most ecommerce businesses. Studies have found that on average, loyal customers are worth up to 10X as much as their first purchase. Increasing retention has a multiplier effect on revenue – as Bain & Co found, a 5% increase in retention can increase revenue by 25-95%. And since you‘ve already acquired them, most of that additional revenue drops straight to your bottom line.

3. Reliable, predictable revenue. While you‘re always having to fill your funnel with new prospects to maintain acquisition revenue, retention revenue is much more stable and predictable. According to SaaS Capital, companies with high retention (35-50% or higher) get 20% or more of their new Annual Recurring Revenue (ARR) from their install base, providing a reliable foundation to build on.

4. More referrals and word-of-mouth. Highly engaged, loyal customers are more likely to refer friends, leave positive reviews, and share your brand on social media. A study by Yotpo found that 59% of loyal customers are willing to refer a brand to their friends and family. Since referred customers‘ CAC is far lower (and they tend to spend more), this "viral" acquisition loop gets even more ROI out of your most loyal customers.

5. Valuable insights to improve offerings. Your most passionate customers are a goldmine of insights to help you improve every aspect of the customer experience. Their feedback can help you refine your products, tailor your marketing, and create better brand touchpoints at every step of the journey. Soliciting input demonstrates that you value their experience and want to deliver exactly what they need.

As popular DTC luggage brand Away‘s Sr. Director of CX Erin Gaffney put it, "Those customers that keep coming back are our most valuable—not only for their lifetime value, but because they tend to share a lot of feedback with us that helps us create better products and experiences for all customers."

The Most Effective Retention Marketing Strategies

By now, hopefully you‘re bought into why retention marketing deserves as much strategic focus as acquisition. But what does an effective retention strategy actually look like? Here are some of the most powerful tactics to turn one-off customers into loyal repeat buyers:

1. Launch a loyalty or rewards program. Whether it‘s points per dollar spent, exclusive perks for VIPs, or special discounts, a loyalty program incentivizes customers to consolidate their purchasing with your brand. For example, cosmetics brand Sephora‘s Beauty Insider program (which has 25 million members) offers points on every purchase that can be redeemed for rewards. Sephora has found that loyalty members spend 10X more than the average customer.

2. Personalize the customer experience. Use your customer data to provide individually relevant product recommendations, content, and offers. A McKinsey study found that personalization can boost revenue by 5-15% and marketing spend efficiency by 10-30%. Fashion retailer Stitch Fix is a great example – they use each customer‘s Style Profile and feedback to curate items that fit their tastes, driving over 80% of revenue from repeat buyers.

3. Invest in proactive customer service. Go above and beyond for your customers – offer 24/7 live chat support, surprise loyal customers with gifts, make returns/exchanges painless, and proactively check in post-purchase. 89% of companies with "significantly above average" customer experiences perform better financially than their competitors, according to Qualtrics XM Institute.

4. Craft lifecycle marketing campaigns. Create targeted email, push notification, and SMS campaigns to retain customers at each key stage of their journey. Examples include welcome series, post-purchase cross-sells, replenishment reminders, and win-back offers for at-risk customers. Lifecycle marketing generates 32% more revenue than standard batch-and-blast campaigns, according to Klaviyo.

5. Create a subscription offering. If you sell consumable or replenishable products, a subscription model is one of the most effective ways to boost retention. By making the purchase automatic and offering a slight discount, you remove friction and increase the LTV of each subscriber. According to McKinsey, 15% of online shoppers have subscribed to an ecommerce subscription in the past year, and 46% of consumers say they are likely to subscribe to even more brands in the future.

6. Build an engaged customer community. Foster a sense of community and connection among your customers by creating Facebook Groups, subreddits, Slack channels, or in-person events for them to interact with each other and your brand. Sephora‘s Beauty Insider Community sees 13X higher engagement than similar brand communities, with superfans eager to share tips, product reviews, and photos.

7. Re-engage with social and display ads. In addition to email and mobile push campaigns, use retargeting and lookalike ads on social media and display networks to bring back inactive customers or suggest relevant products to active ones. Facebook found that retargeting existing customers drives 3-5X higher click-through and conversion rates than acquisition-focused ads.

The most successful retention strategies use a variety of these tactics in a cohesive lifecycle marketing program tailored to different customer segments. The key is creating consistent, valuable touchpoints with customers between purchases to keep your brand top-of-mind and drive them back to your site again and again.

How to Get Started with Retention Marketing

Hopefully by now you‘re inspired to make retention just as much as a priority as acquisition. But if you‘re starting from scratch, it can be difficult to know where to begin. Here‘s a simple framework for launching and optimizing your retention strategy:

1. Analyze your customer data. The foundation of a strong retention strategy is a deep understanding of your customers‘ behavior, preferences, and lifetime value. Use your ecommerce, loyalty, and email platforms to create customer segments and identify your most valuable customers, when they typically repurchase, and what drives them to buy again. Tools like Glew, Daasity, or Lifetimely can help you measure retention metrics and identify opportunities.

2. Set clear retention goals. Based on customer insights and benchmarks for your vertical, set measurable retention KPIs to improve, such as:

• Repeat customer rate
• Repeat purchase rate
• Average orders per customer
• Customer lifetime value
• Loyal customer rate (bought 2+ times in last year)

3. Choose retention tactics to start with. Focus on one or two proven retention strategies to begin with, then expand your efforts over time. For example, start with a foundational lifecycle email program, then layer on personalized post-purchase cross-sells. Once that‘s working, expand to a loyalty program and community initiatives. Trying to do too much at once will make it difficult to execute well and measure results.

4. Secure resources and buy-in. Retention marketing won‘t succeed if it‘s an afterthought – you need dedicated people, budget, and technology to do it well. Audit your current marketing spend and make the case to leadership for shifting more budget from acquisition to retention by highlighting the impact on revenue and profitability. As retention expert Valeria Maltoni puts it, "Acquisition scales the business, retention makes it profitable."

5. Execute, measure, and optimize. Once your initial retention campaigns are live, closely track performance and gather qualitative feedback from customers. Use A/B tests and customer insights to continually refine your segmentation, offers, and creative. Invest in the tactics and channels that are most effective for your audience, and don‘t be afraid to cut what‘s not working.

The Future Belongs to Retention-Obsessed Brands

In a recent survey by Gartner, 82% of marketing leaders said they expect to compete primarily on customer experience in the future. As more brands fight for the same eyeballs in crowded acquisition channels, the brands that will win are those who invest just as much in keeping customers as acquiring them.

By focusing on delivering value to customers after the purchase, gathering insights to personalize the experience, and building emotional connections, retention-obsessed brands are able to squeeze more revenue from every customer they acquire. And with the rich first-party data retention efforts generate, they‘re able to acquire lookalike audiences even more efficiently to keep their virtuous growth loop spinning.

We predict that in the coming years, more ecommerce brands will appoint Chief Retention Officers, have teams and bonuses tied to retention KPIs, and use machine learning and personalization to engage customers in ever-more relevant ways. While acquisition will always be important, retention is the competitive battleground of the future.

So if you haven‘t started already, now is the time to build retention into your growth strategy from the ground up. Conduct a comprehensive audit of your customer retention metrics, secure executive support and resources, and start executing on the most impactful tactics outlined here. The sooner you make retention a core company focus, the bigger edge you‘ll have as more brands wake up to its untapped potential.

Your customers (and your bottom line) will thank you.