How Does Customer Retention Save Money on Marketing?

Stop me if this sounds familiar. You host a party. It comes alive when everyone’s gathered together, dancing, singing, and laughing.  Everything is loud and lit, but then you notice the “cool kids” are leaving. 

Apparently, someone else is throwing a party nearby – with an open bar. The not-so-cool kids start to exit, followed by the definitely-not-cool kids. Every time someone says goodnight, you feel the thrill leaving your body till it’s just you and Phil from R&D. It’s a gut punch, and it’s exactly what brands go through when customers churn.

Think of a business as a party and your customers as guests. When a customer leaves, you lose business, and that leaves a void.

Customer retention fills this void, and if you do it right, there won’t be a gap in the first place. Before we learn how let’s take a step back and root out the source of the problem.

What is customer retention, really?

Customer retention describes a company’s ability to turn one-time customers into repeat buyers and keep them from going to a competitor.

Customer retention is multidimensional. It involves boosting a customer’s lifetime value (CLV), engaging leads, and turning them into advocates. Ultimately, the goal of customer retention centers on building a community of brand ambassadors who not only stick to your brand, but also defend it against competitors and doubters.

Having said that, let’s understand why it’s a big deal and why brands are benefiting from customer retention to save money on marketing.

How do you calculate customer retention?

Source: WebEngage

At the start of a year, a business has 1,000 customers; at the end, they have 800. During the year, the business acquires 500 new customers. The customer retention rate for that year would be:

This means that 30% of the customers from the beginning of the year were still customers at the end of the year.

Beyond brand value and loyalty, the ultimate yardstick of retention comes in the form of profits. Profits keep companies alive and kicking.

80% of profits stem from 20% of your existing customers. However, to retain customers, you must first acquire them, which businesses typically do on day zero.

The role of customer acquisition

Customer acquisition is the other side of customer retention’s coin and they share the same objective of generating client revenue.

Most new businesses fight tooth and nail to acquire new customers. But they go wrong when they rely solely on acquisition to go all the way. When you squander capital on acquiring customers and use little or nothing to keep them, your cash flow suffers, and your business takes a hit. Probably more than one hit. 

Why should brands focus on customer retention?

Just like acquisition, retention is a day 0 problem. By focusing on retention, businesses can maintain healthy cash flow that results in profitability. But this is a long-term solution. You have to have the patience to wait for the tides to turn in your favor.

Revenue springs from user spending, but – more importantly – it comes from repeat users. You lose potential revenue without them. Customer acquisition, while effective, cuts into a company’s contribution margin.

Just do the math. Would you rather have five customers spend $500 once, or one customer spend $500 every month?

Benefits of customer retention

Creating the conditions for repeat customers offers a host of benefits.

• It drives acquisition and brand reputation. More customers doesn’t always mean more revenue, but getting more customers to stay gives you a better shot at repeat revenue. And loyal customers attract more leads through word of mouth and referrals, paving the way for brand reputation.

• It’s cheaper. Retaining customers is less expensive than acquiring new ones. A strong retention strategy minimizes customer churn and saves money that would otherwise be spent on replacing lost customers.

• It’s profitable. Maximizing purchases from a single customer boosts CLV and increases average order value (AOV) and share of wallet. It’s a big help to your company’s contribution margin.

• It provides stability. A loyal customer base accounts for a steady, predictable revenue stream and reduces the impact of market fluctuations. With a solid retention strategy, businesses can more accurately forecast future revenue to draw growth roadmaps.

• It leads to higher engagement. Engagement and retention work fuel each other. More engagement retains users. Retained users drive more site visits, opens, clicks, and conversions.

• It gives you data for precise marketing. Higher engagement brings in first-party data. MarTech tools that power the retention engine fetch information from data, knowledge from information, and wisdom from knowledge, all done to build a data-first culture that encourages sharp decision-making.

• It creates customer experiences.  Retention stems from great CX and great CX stems from engaging the right customers on the right channels at the right time with the right messaging.

• It gives you a competitive edge. If your customer retention strategy is successful, you’ll win out over competing brands, especially in a market where loyalty is low.

• It solidifies investor relationships. Retention has gained widespread relevance because a major chunk of new businesses is funded by investors. Simply put: happy customers lead to happy investors.
• It ensures sustainability. Businesses that invest in retention are more likely to thrive in the long run because they build an airtight base of loyal customers who support the brand through market challenges.

Industry-wide use cases

Retention works regardless of industry. Here’s how marketers can implement a range of use cases to engage users across verticals.

E-commerce and D2C

• Cart abandonment: Identify users who have added items to their cart, but have not completed the purchase. Send targeted cart recovery emails or push notifications to encourage them to return and complete their purchase.
• Restocking: Trigger automated replenishment reminders or subscription renewal notifications via Whatsapp or push notifications so users restock their favorite products before they run out.
• Recommendations: Use customer data of past purchases, preferences, and browsing behavior to upsell and cross-sell.

Banking, financial services and insurance

• Onboarding and know-your-customer (KYC): Automate reach-out and guide clients through their financial product application process.
• Credit score booster: Create a periodic challenge to help customers improve their credit scores. Provide educational resources, personalized tips, and progress-tracking tools via emails or WhatsApp. Send reminders and encouragement throughout the challenge.
• Gamification: Implement a fun loyalty program that gives customers points for completing financial tasks like paying bills online. Send real-time updates on point accrual and redemption options.

Education technology

• New course launch: Craft personalized emails that introduce new courses tailored to specific demographics and areas of interest.
• Earlybird access: Provide loyal customers with advanced access to upcoming courses or features during flash sales. This rewards returning customers and creates excitement within the community.
• Exclusive access: Create a segment of subscribers such as early adopters or top-performing students and offer VIP access to premium courses or exclusive content in order to boost activity.

Media and entertainment

• New releases: Send targeted push notifications to users with recommendations for new releases or trending content in their preferred genres.
• Resume watching: Use push notifications to encourage users to resume watching a particular show if it’s been a while since they interacted with your platform.
• Geofencing: Use geolocation to send targeted messages. For example, if a user is near the airport or railway station, you send them a push notification reminding them to download their favorite show and watch it later or buy an international roaming data pack assuming they are traveling to a different country by pulling information from their booking data.

Gaming

• Welcome rewards: Offer new users a bonus or reward when they sign up for your gaming platform or app.
• Win-back campaigns: Target inactive users with personalized offers or incentives to encourage them to return to your game. Send them automated re-engagement campaigns.
• Interactive game launch countdown: Develop a countdown timer for a highly anticipated game launch. Users can unlock exclusive content or rewards by engaging with mini-games or quizzes related to the upcoming release. Make it worth their while to get on the waitlist for new games.

Travel and hospitality

• Flash sales and limited-time offers: Create a sense of urgency by running flash sales or limited-time offers on select destinations or accommodations. Use countdown timers and exclusive discounts to drive immediate action via push notifications and emails.
• Dynamic pricing alerts: Implement dynamic pricing alerts for users who have shown interest in specific hotels. Notify them when prices drop or when there are limited-time offers available.
• Weather-based recommendations: Offer weather-based destination recommendations and travel tips via email or SMS, suggesting ideal destinations based on the user's preferred climate.

Healthcare

• Individualized content: Enhance patient engagement with informative content by creating segments of their health interests and delivering relevant content.
• Appointment abandonment: Reduce appointment no-show rates through optimized communication and reminders.
• Gamification: Encourage healthier behaviors and lifestyle changes through games and incentives via push apps or WhatsApp campaigns.

Source: WebEngage

How to improve customer retention?

Get familiar with these beginner customer retention tactics to control your returning client rates.

Identify metrics

Make a list of optimizable metrics to track and measure the performance of your marketing. These metrics are unique to each business, but some basic ones are as follows.

• Customer acquisition cost: the money you spend on acquiring new users 
• Customer lifetime value: the value of one customer to your business 
• Customer churn rate: how quickly customers cut ties with your business

Engage users

Engagement and retention are two sides of the same coin. More engagement retains users and retained users drive more site visits, opens, clicks, and conversions. Users can be engaged across the top, middle, and bottom of a marketing funnel. 

• Top of funnel (ToFU): Attract users through influencer marketing, product reviews, community building, etc.
• Middle of funnel (MoFU): Convert prospects with testimonials, product explainers, newsletters, and experiential campaigns.
• Bottom of funnel (BoFU): Turn users into paying customers with comparative guides, complimentary sessions, demos, and free trials.

And this is just the tip of the iceberg. 

Improve the customer experience

We live in a user’s world where books are very much judged by their covers. Attention comes and goes without warning, brands jockey for attention, and potential customers have near-limitless options for whatever they need.

Some notable ways to enrich CX are described here.

• Landing pages, home screens, onboarding screens: Optimizing these sections increases the percentage of users who take the desired action on your platforms.
• Customer support: Around-the-clock, reliable, and empathetic customer support can make or break your brand reputation. 
• Omnichannel engagement: Target your users across online as well as offline touchpoints with seamless and synchronized omnichannel experiences.
• Hyper-personalization: Individualize your communication and tailor it to each user. 90% of leading marketers say personalization significantly contributes to business profitability.
• Segmentation and cohort analysis: Sort your users into macro- and micro-segments and cohorts. Monitor their performance, A/B test your campaigns and tweak communications to pinpoint what works and what doesn’t.
• Copywriting: Well-positioned copies can strike a chord with your users and keep them glued to your messages.

Build a sense of community

The human need to belong comes in handy when you’re building a brand community. A tightly-knit group of members with like-minded interests and problems will create meaningful connections and deepen ties.

You can do this by hosting events, meetups, mixers, and workshops to bring people together.

How can customer retention save money on marketing?

Here's a mathematical experiment to help you understand the economics of retention and how it can save money on marketing. Our calculation is simplified. It doesn’t take into account certain externalities and is broadly indicative of its incremental impact.

Let’s build a hypothesis for XYZ company.

• CAC is $100 per new customer.
• CRC is $20 per existing customer per year.
• CLV is $500.

Scenario A: an acquisition-first approach

If a company spends $10,000 on marketing to acquire new customers, they can acquire 100 new customers. These 100 new customers will generate a total revenue of:

Scenario B: a retention-first approach

XYZ spends $6,000 on acquiring 60 new customers and $4,000 on retaining 200 existing ones. Since the retention efforts increase the $500 of average customer lifetime value by 1 year, the results are: 200 x  500 = $100,000

Cost comparison:

• Total spend on acquisition-focused strategy is $10,000.
• Total revenue from acquisition-focused strategy is $50,000.
• Total spend on retention-focused strategy is $10,000.
• Total revenue from retention-focused strategy is $130,000.

What does a customer retention toolkit look like?

To get started with retention, you’re going to need the resources listed here.

Source: WebEngage

Customer data platform (CDP)

CDP software aggregates and unifies customer data from various sources to provide a 360° view of users. This singular view, powered by first-party data, uses an easy-to-read dashboard to show you every decision-making parameter you could think of such as user attributes, website behavior, personal taste, geographical location, channel reachability, and psychological tendencies.

Segmentation engine

The success of your segmentation strategies depends on how you choose to create user segments and cohorts. A segmentation engine lets marketers develop and manage static segments, dynamic segments, and advanced machine learning segmentation like recency frequency monetary (RFM) analysis and predictive segmentation.

Personalization engine

No two users will have the same experience if you get personalization right. This engine lets you create bespoke experiences at scale.

Campaign orchestration engine

This lets you design, activate, and automate your marketing campaigns with the help of recommendation engines, user journeys, control groups, and A/B-test campaigns. Having a marketing automation platform to complement your CDP can work wonders for your business.

Analytics engine

Once you’ve activated and automated your campaigns, you need a robust analytics tool to rate their performance. With this engine, you can monitor cohorts, optimize funnels, and visualize how users interact with your brand.

AI and beyond

At this particular moment, AI is a top priority for brands. They use AI to cull content, identify the best channels and times to engage users, and predict user behavior. 

All in all

Before you plan your next marketing budget, you must make room for retention because it’s not just a buzzword anymore.

Consider your negotiables and nonnegotiables. Identify your north-star metrics and track them to define and measure success because chasing the wrong metrics can do more harm than good.

User’s preferences are volatile and subject to constant change. What works today might not work tomorrow. Whether it’s emails, copies, or your target keyword, always A/B test your campaigns to know which parts to optimize to yield better outcomes. 

Your MarTech stack is your company’s backbone and is a long-term investment. Identify the components to add to your MarTech stack and choose each component carefully after doing your homework and asking the right questions. Building a fail-proof MarTech stack that can power your customer retention efforts without any technical hiccups.

It goes without saying that by gravitating towards retention, businesses can put more money on the table without necessarily increasing the total marketing spend. 

Retention is cheaper, sustainable, and, thankfully, it just works.

Curious about how to hold onto more customers? Explore actionable tips to minimize churn with retention marketing.

Edited by Aisha West and Shanti S Nair