Do you need more new customers or repeat customers? That is the question. No matter what stage of business you’re at it can be a fine line between bleeding your existing customers dry and or spending all your money on acquiring new ones. I’m giving you the tools to figure out exactly what will be most valuable to your business right now and how to identify when you need to lean one way or the other.
Disclaimer: you are not going to find any hard and fast rules but I am going to walk you through some concepts so you can start thinking about your business through this lens and figure out where you should be spending the majority of your time.
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If you run your entire business on newly acquired customers, you’ll likely go broke very quickly.
This is one of my biggest gripes with a lot of the eCommerce information out there. So much of it is geared towards spending a lot of money on advertising and the idea that dumping a lot of money into social ads will produce a million-dollar business, which is not how it works. This is especially true because there is a distinct difference between revenue and profit.
If you’re generating $1,000 per day but if it’s costing you $500 a day in ads and manpower, you’re not going to get very far.
Customer retention is important, and I stand behind that 100%. I think you should be focused on customer retention in the very beginning of your business. But if we’re talking about which one is more important, the real answer is, it depends. Acquisition and retention are not mutually exclusive. It’s not one or the other. The real question is, how much of one versus how much of the other? So are you spending your time 50/50 on each? Are you leaning a little bit more heavily into one, maybe 60%?
How to analyze your own business and determine where you should be focusing
This is going to depend on a few different factors.
What stage of business are you at?
A retention strategy should be part of your setup. If you’re just starting out then acquisition needs to be 99% of your focus because you need customers. If you don’t get one customer, you won’t have repeat customers. The caveat here is if you have no retention strategy in place from the beginning, how will you ever get the repeat customer?
When you think about everything you have to do to launch your eCommerce business, the first step is to setup a website and an automated email sequence. The second step is to get some retention strategies in place. I go much deeper into automated email sequences in Episode 3 on how to make money on autopilot. If you skipped that step or you are just getting started, definitely go back to that episode and do an audit of what you have to make sure everything is in place.
What is the average frequency of purchase for a product like yours?
Let’s use supplements as an example. Your customers are probably consuming your product every day and are likely to purchase that on a monthly basis assuming that the bottle they buy lasts 30 days.
Cleaning products, on the other hand, might be purchased every three to six months because you don’t necessarily use one cleaning product all over your home. The lifecycle of your product matters too. Not just in consumption but how long does it last? Does it expire? Does it go bad? Does it stop performing? Is it something that needs to be replaced after a certain amount of time, like your toothbrush or makeup? Even bras because those bitches stretch out and I bet none of us actually replace these as often as we should. There’s so much stuff that should be replaced on a regular basis but we keep it longer than we should.
What is the price point of your product?
Generally, the bigger investment something is, the longer the product lifecycle. For example, you’re going to have your couch for years. We’re probably keeping those for longer than we should but that’s why people fix them, like getting the cushions re-stuffed so that they’re more supportive again. So you’re not running out and buying a new couch every year.
Fine jewelry is another good example of this because it’s likely you’ll hold onto this for a long time and potentially even pass it down. Often you’ll have a few pieces you really love and you’re not going to keep buying those.
The Frequency Model
So take those three questions and think about all your answers, download this week’s freebie and let’s draw a little picture together.
The vertical y-axis is going to be your product price from low to high, and the horizontal x-axis is your purchase frequency.
The top left quadrant is high value, low frequency. Automobiles and houses belong in this category. The top right quadrant is high value and high frequency. This includes high-end clothing or shoes or handbags because even though they’re expensive, you’re probably still buying them pretty often.
The bottom left quadrant is low value, low frequency, and the bottom right quadrant is low value, high frequency. This is where our example of supplements fall.
High purchase frequency = focus on retention
Think about how much any one customer spends with you over the lifetime of them buying from you. Someone in that upper right quadrant is going to provide you with the most value and requires a strong retention strategy.
They’re more likely to spend and you make more profit off of them because you’re not continuing to spend to acquire them. You paid for them upfront, however, if you get them into your little ecosystem and they keep coming back, then it’s cheaper and cheaper every time.
Having that retention strategy is going to be really valuable.
Low purchase frequency = focus on acquisition
What this really comes down to is low frequency will focus more on acquisition and high frequency will focus more on retention, however, most of you will probably fall somewhere towards the middle. In that case, you probably want to split things more 60/40, depending upon which side you fall.
If you are high frequency, then you want to do 60% retention and 40% acquisition. If you’re low frequency then you’ll want 60% acquisition and 40% retention. It’s a sliding scale.
You also have to take into consideration what stage of business you’re at. The earlier you are in your business, the more you should focus on acquisition. The more established you are, the more you should focus on retention.
You never want to drop your acquisition focus completely, you need to keep bringing in new people otherwise you’re going to bleed your current customers dry. People are also going to naturally fall off eventually.
Always fill the funnel with new people but never drive acquisition to less than 30% to 40% of your focus.
What if you’re already established?
The more established you are, the harder it can be to figure out where you should focus your time. At what point do you start to make the switch?
The metric that can help you figure this out is the customer return rate. If you’re on Shopify, this number will be on your dashboard as a percentage.
To calculate this number, find a specific amount of time (eg.a year, a quarter, a month) and find the number of customers who made a repeat purchase in that timeframe and then find the number of first time purchasers during that timeframe, Then divide your new customers into your total customers.
Eg. 100 customers ÷ 20 repeat customers = return customer rate of 20%.
It’s not super complicated. The average customer return rate is between 20 to 30% across all industries, so if you fall somewhere in between there, you’re doing pretty good.
If you’re a subscription business this number is naturally going to be higher, and it should be. If you’re not a subscription business, and your repeat rate is significantly higher than that, around 50% – 60% that’s a sign that you probably need to focus a bit more on your acquisition initiatives. On the flip side, if you are an established business but your repeat rate is much lower than that, then you definitely need to look at your retention strategy.
Remember, there are no hard and fast rules to where you should be focusing because it is really very specific to your business. Where are you spending most of your time now? So many of you feel like you need to be acquiring, acquiring, acquiring more customers and that’s not always the case. We get caught up in what everyone else is doing and what we feel we’re supposed to be doing when we really just need to take a step back and look at our business and figure out what is right for us and where we are today. So that’s what I want to encourage you guys to do.