How to acquire and retain customers profitably

Once you discover the CVO (Customer Value Optimization) approach to customer acquisition and retention, you understand that there should never be competition between these two essential strategies in eCommerce. On the contrary, you can’t expect improvements in customer retention rates if you’re not improving the customer acquisition first. 

According to the CVO methodology, everything you need to know about improving acquisition, retention, and experiences is revealed by analyzing customer behavior. 

In this material, you’re not going to find one-size-fits-all campaign ideas. The internet is full of them. What you’re going to see instead is the fundamental business, customer, and product research you need to perform before you design your customer acquisition, onboarding, prevention, and reactivation campaigns.

It all starts with asking the right questions, using the best research techniques, and making the best decisions based on what first-party data and in-depth research reveals.

Are you spending too much acquiring new customers?

What pops into your mind when you’re thinking about the cost of customer acquisition? Your cost per conversion from paid ads campaigns? Your email marketing efforts? Customer Acquisition Cost or CAC includes more than that, and it is the most comprehensive way to calculate how much you’re spending to acquire a new customer.

To calculate customer acquisition costs, you need to do the sum of media cost, marketing tools, marketing wages, agency fees, overhead costs and divide all of these costs by the number of customers you acquired during the analyzed period.

Calculating CAC is half the way to find if you’re spending too much or too little on acquisition campaigns. You need to calculate Customer Lifetime Value (CLV) to CAC ratio.

CLV shows you how to predict the profit a customer will bring to your business during your entire relationship. The CLV to CAC ratio shows you how profitable it is to acquire customers considering your current efforts.

In general, a ratio below 2:1 means you are spending too much to acquire customers unless you’re doing it to gain market share.

A ratio equal to 2:1 means you’re spending the right amount of money on new customer acquisition.

If you’re calculating the CLV by including the Net Margin into the formula, then a good ratio is 3:1.

To learn more about what metrics you should track to improve CLV, check out our article that captures 10 KPIs with a major impact on your Customer Lifetime Value.

How do customer-centric companies reduce customer acquisition costs and churn rates?

Customer-centric eCommerce businesses know that better customer acquisition and retention start with the customer in mind, so to achieve these goals they:

• Realize that the main driver of demand is customer behavior;
• Know that customer behavior can be monitored and influenced by analyzing data;
• Define success by improvements in customer experience, customer lifetime value, and customer retention;
• Involve all departments in orchestrating a fluent buyer journey;
• Have a unique source of truth around their customers;
• Segment, monitor, understand, and nurture their customers using the latest technologies.

Customer-centricity generates sustainable growth through customer value optimization. CVO is a methodology that unites customer experience, acquisition, and retention strategies under an ongoing unified process.

According to the customer value optimization methodology, you should focus on four types of campaigns: 

1. Customer acquisition campaigns;
2. Customer onboarding campaigns;
3. Customer churn prevention campaigns;
4. Customer reactivation campaigns.

Customer Acquisition campaigns

A good customer acquisition campaign is built on qualitative and quantitative research that gives you enough insights to create better messages and relevant offers that resonate with the new customers you want to attract.

Your acquisition strategy should be based on research that includes:

• Defining Ideal customer profile; 
• Performing product assortment analysis;
• Performing cohort analysis;
• Building lookalike audiences. 

Defining Ideal customer profile 

Retention starts with the acquisition. If you acquire the right customers with the right message at the right time from the very beginning, then your retention efforts will be way more effective and the CLV higher. 

Who are the right customers? Well, those who have the highest chance of becoming repeat customers. From an RFM segmentation perspective, the most valuable customers are those with the highest RFM scores. 

Our CVO methodology names them “power customers.” They belong to four segments: Soulmates, Lovers, New Passions, and Flirting. Identifying the RFM segments is where you start from and represents your quantitative research.

When defining your ideal customer, you need qualitative research focused on the best customers – the Soulmates. Building your ideal customer profile based on real facts, not guessing, requires well-designed customer interviews. 

We successfully use the Jobs To Be Done framework for our clients. We recommend it to any eCommerce business looking for a deep understanding of why customers hire their brand to make their life easier and what makes them stay loyal in the long term.

The insights you extract from the JTBD interviews are essential in defining your ideal customer profile, understanding the customer journey, and what an excellent experience means for them. All this knowledge about your ideal customer allows you to respect the “under promise, over deliver” principle and win the trust of your newly acquired customers.

Product assortment analysis

The product assortment analysis helps you identify sticky products (the ones that generate repeat customers) and toxic products (the ones that generate churn).

Based on this analysis, you’ll be able to perform ongoing product assortment optimization for your store:

• Prioritize the sticky products

The sticky products are the ones that generate repeat purchases and brand loyalty. Many managers are tempted to focus on the best products in terms of absolute sales volume, but it doesn’t mean that these products also generate satisfied, repeat customers.

To identify the most sticky products, you need to look at the best products, brands, and categories among your power customers. These items help you increase customer lifetime value, not just better revenue for your sales campaigns. Sticky products are most likely to make new customers return and spend even more on the next purchase.

• Add new sticky products

For companies with multiple SKUs, adding new products to the catalog is one sure way to increase the customer lifetime value and overall sales.

To identify early on the possible stickiness of the new products you add to your offer, look for signals early on from your website analytics: 

• Sales volume – identify best selling products based on Google Analytics or your eCommerce platform data;
• Customer experience – identify the most appreciated products and the ones that generate promoters;
• Customer behavior – identify what happens post-purchase;
• Intent data – identify and monitor the conversion rate by product.

• Get rid of toxic products

Your goal is to decrease customer acquisition costs and reduce customer churn, and marketing a bad product would do the opposite. The tricky part about toxic products is that they might look good in sales volumes but harm your business in the long term. 

Think about all the high potential first customers and loyal customers you lose. You want to ensure you don’t invest in advertising the wrong products to the right audience. 

Product issues refer to quality, functionality, price, and brand, and product quality. Has the product passed your customer’s quality check/expectations? 

To identify the toxic products, you need to look at what first-time buyers and loyal customers purchased then never turn back. You can find valuable information about your toxic products in the customer feedback captured through NPS per product or in the complaints addressed to the customer support.

Cohort analysis

Cohort analysis is a valuable tool when evaluating past marketing efforts and preparing the next marketing strategy. It allows you to find what happens with newly acquired customers after their first purchase.

Below, you can see a report extracted from Reveal with an example of cohorts dynamic by first purchase moment. This data helps you drill further to check the 2nd-month cohort stickiness rate and see how effective are your customer retention efforts. 

In essence, the 2nd-month cohort stickiness rate is the percentage of customers or revenue or orders placed in the 2nd month after the initial purchase. In this example, you can see that the company’s acquisition campaigns in March have generated the most sticky customers. 

When you perform cohort analysis, keep in mind the seasonality, correlate the results with the campaigns you’ve launched during the analyzed period and use the insights to influence future acquisition and retention efforts.

Building lookalike audiences

RFM Segmentation comes in handy once again: this time, to help you create custom lookalike audiences based on your best RFM groups and reduce customer acquisition costs. 

Here’s how RFM segments help you define your target audience and build lookalike audiences for Facebook Ads:

1. Build the audiences based on the best customer segments – the Soulmates & the Lovers; 
2. Export the list, import it in Facebook  Business Suite, and create your campaign;
3. The Facebook algorithm finds more users that look like those customer groups;
4. The highly relevant ads attract users;
5. The users go to your shop and place their first order.

Improving your customer retention rate starts with focusing on the right audience. A lookalike audience increases the chances of generating better conversion rates when trying to acquire new customers. 

The larger the audience and the more you do this, the better the algorithm gets, as it learns from the correlations between the current customers and the new ones, making this a virtuous loop for your shop. 

Once you finish the research and generate enough insights, check how you can improve your acquisition game based on those insights – the messaging, the target audiences, the product, the offers – everything can be optimized if you start with the ideal customer in mind. 

Customer onboarding campaigns

The onboarding campaign is critical for your future relationship with new customers. They are vital, especially for startups, subscription businesses, fast-moving consumer goods, and companies selling few SKUs on their websites. 

Brainstorm how you can surprise and delight your high potential customers and then test continuously, diligently, consistently. You will end up with more happy first-time buyers that become repeat customers, and you’ll be able to improve your CLV.

In the onboarding phase, your focus isn’t on getting more money from the newly acquired customers. You need to prevent buyer’s remorse, so you need to generate positive emotions.

Usually, thank you pages are boring, and customers can see only the order number, but a well-design thank you page helps you achieve three things:

• Make the customers feel good about their purchase;
• Give them clarity over what’s next;
• Plant the seeds for a long-term relationship (invite them to the community or subscribe to your cool newsletter).

Along with the thank you page, you need to include your new customers in a post-purchase email flow designed for them, with elements like:

• Thank you and email confirmation
• Welcome to the community
• Pre-delivery NPS
• Educational content 
• Shipping confirmation
• Post-delivery NPS a couple of days after experiencing the product/service

Marketing automation will save you a lot of time in your onboarding campaigns and contribute to increasing customer satisfaction as long as it’s done correctly.

Measuring NPS pre and post-delivery is crucial for understanding first-time buyers’ expectations and experiences. NPS responses help you find if you respected the “underpromise, over deliver” promise or there’s a gap between these two moments in their journey.

An underestimated element in eCommerce is the unboxing experience, the marketing campaigns with the highest open rate.

It’s the perfect opportunity to win your customers’ hearts & memory. In a market where we’re all bombarded with offers, new product launches, and advertisements, package inserts can access their emotional memory, classifying your company as a company that cares. 

Customers are more likely to return to a brand that makes them feel appreciated, and package inserts allow you to overdeliver. Ecommerce businesses use gifts and surprises because:

• The cost of delivering the message has already been paid;
• They represent a small investment compared to the positive effect they have;
• They can be highly targeted;
• They are perfect for cross-selling;
• They are a great way to get rid of products that don’t sell; 
• The right inserts increase Customer Lifetime Value. 

Although you might be tempted to send cross-selling, upselling, or sales messages, be careful not to rush and win the second purchase by building a relevant and valuable post-purchase experience.

Your goal with the onboarding campaigns is to make a good first impression, win new customers’ trust, and set a positive sentiment regarding your brand. 

Customer churn prevention campaigns

Customer churn is natural but becomes a problem when it becomes an accelerated trend: you start losing valuable customers like Soulmates or Lovers and customers who had high chances of becoming your next loyal customers.

You need to monitor customer data and analyze how good you are at keeping power customers close in the long run. To optimize your customer retention strategies, you need to extract insights from reports like:

• Revenue vs. Margin by Customer Type;
• Revenue vs. Margin by RFM Group;
• Average Retention Rate;
• Chances to Place Next Order;
• NPS Score;
• Customer Distribution;
• Retention Curve;
• Cohort Analysis;
• Buyer Habits.

Many companies fail to keep customers loyal because a lot of effort evolved in designing an excellent customer experience. You’ll find numerous tactics to include in your loyalty program, but it all starts with knowing your customers better and being aware that customer behavior changes over time.

There are several methods to gather feedback and keep track of customer sentiment and satisfaction:

• Customer Interviews; 
• Online Surveys;
• Focus Groups;
• Jobs To Be Done Interviews;
• Live chat transcripts;
• Support tickets;
• Social media sentiment analysis;
• In-store feedback.

Using automated RFM segmentation will make it easier to keep track of customer distribution dynamics and take the necessary actions before churn becomes a problem or, even worse, transforms into a crisis. 

When asking for customer feedback, consider the RFM segment the customer belongs to and use their answers to improve your customer retention tactics. Here are some examples of questions you can ask:

1. Questions to ask your active customers:

• Why do they appreciate your brand/products?
• What would make them buy more often?
• How they’ve decided to buy from you?

2. Questions to ask your at-risk customers:

• Why did they stop visiting your shop?
• How was their previous experience?
• What would make them come back?

3. Questions to ask all your RFM segments:

• Which alternatives are they aware of? 
• What are their perceived frictions? 
• What do they consciously expect from you?
• Their demographics?

Customer research must be followed by implementation into marketing tactics and improvements in customer experience. Inevitably, you’ll find the problems made people stop buying from you, and if there’s something you can do about it to prevent churn, you need to take immediate action.

Customer reactivation campaigns

Customer reactivation campaigns that work are based on customer research for lost customer segments and are followed by an attractive incentive at the end of the research.

However, reactivating customers who have already placed your eCommerce in the oblivion folder in their minds is a long shot. 

To set realistic goals for these campaigns, you should know that the main outcome of this effort is not transactional; it’s about having a better understanding of why customers stop buying from you or why they lost their trust in you.

The first step is to identify the top causes of churn by asking the right questions:

• Why did they stop buying from you?
• How was their last experience?
• Which alternatives are they aware of? 
• What are their perceived frictions? 
• What would make them come back?

Depending on the maturity of your market, the competitive landscape, and the size of your lost customers, you might conclude that it’s worth investing resources in reactivation campaigns. If you finally decide to go after lost customers that used to have a high RFM score, use the same channels (e.g., social media or email marketing) that use to be effective for these customers.

Wrap up

CVO helps you gather the information you need to attract more new customers like your best customers and increase repeat and loyal customers through excellent customer experiences from the first order and throughout the entire relationship. 

The four campaigns we’ve presented help you drive better results for your company by focusing more on your customer data and making decisions based on accurate data and thorough research instead of guessing and copying what others are doing.

To find more about how CVO can help you improve your acquisition and retention strategies, we recommend the CVO Course, where nine international eCommerce experts show you everything you need to know about generating sustainable growth for your business.