Focus on Existing Customers for Better Profitability

JUNE 9, 2016 • MARCIA KAPLANINSHARE

The ideal lifecycle of a customer progresses from awareness of a company, to knowledge of it, to consideration of buying from it, to selection and purchase of its products and services, and, finally, to returning to it and advocating for it. Source: Salesforce.

Should ecommerce merchants direct their resources to finding new customers or marketing to existing ones?

The answer, according to most experts, is that companies achieve better return on investment by nurturing their existing customers rather than constantly seeking new ones.

According to consulting firm Bain and Company it costs a business six times as much to nab a new customer as it does to keep an existing one. According to Marketing Metrics Solutions, a consulting and training company, the probability of a sale to a new customer is only five to 20 percent while the probability of a sale to an existing customer is between 60 to 70 percent.

Furthermore, existing customers tend to spend more each time they shop. A successful ecommerce business will have balanced revenue growth coming from both sources but the emphasis should be on cultivating shoppers with a high lifetime value. Obtaining more sales from existing high-quality customers is the best way to increase profits.

Companies can easily overspend to acquire new, often less profitable, customers, while neglecting existing profitable ones. It may appear logical to increase the number of customers but it often costs more to acquire new customers than what they spend — they may be one-time purchasers. If businesses neglect their loyal active customers in favor of seeking out new ones, they may lose the more lucrative higher spending customer and decrease their margins in the process.

Businesses often use the wrong metrics to measure success, focusing on things that are easy to track and quantify, but may not provide the whole picture of acquisition costs vs. purchases over time. Customer lifecycle metrics offer a more complete picture of what constitutes success.

Customer Lifecycle Management

The goal of customer lifecycle management is to create and keep long-term, profitable customers. Converting first-time buyers into loyal, continuing customers is an arduous process.

First-time buyers will typically come back only if they have a good user experience. Only by monitoring the shopping habits of customers can ecommerce merchants effectively change one-time buyers into long-term customers. The first objective is to get customers to feel a connection between themselves and the products and the seller. This bonding does not happen immediately; it occurs after the accrual of several positive purchasing and customer service experiences. As the bond increases, these satisfied customers tend to increase their spending during each purchase experience.

The post-purchase customer experience is typically just as important as the actual purchase and many merchants neglect this phase. Sending an email message asking if the customer was satisfied with the product and the purchase process is an effective tactic in cementing the bond. Offering incentives that reward customer loyalty is also effective.

The post-purchase customer experience is typically just as important as the actual purchase and many merchants neglect this phase.

The next step is to convert satisfied customers into advocates. These are the people who give you excellent reviews, recommend your products and services to their family and friends, and write about you on social media sites. They are your highest value customers and keeping them happy should be your priority.

Many customer lifecycle management software tools are available and most now incorporate both descriptive (past behavior) and predictive analytics. The descriptive component looks at a customer’s prior behavior including browsing, purchasing, abandonment, and returns. The predictive component determines future behavior and preferences based on past behavior. Predictive analytics can help merchants personalize marketing efforts, which enhances the relationship and provides an opportunity for up-selling.

Managing the Customer via Email

Customers require different messages at different stages in their relationship with merchants. No matter what the message, email is a reliable way to stay in contact.

New customers require nurturing to make them become repeat purchasers. Solicit their feedback via email after their first purchase and stay engaged via email and social media. They need encouragement to make it a habit to visit your website.

Sometimes, for no particular reason, loyal customers’ purchase frequency wanes. A good way to lure them back is to send periodic emails offering discounts on their next purchase.

Lapsed customers are more difficult to handle because merchants often do not have enough information to know why they stopped buying. Still, it is easier to get back a lapsed customer than to acquire a new one. To reactivate a lapsed user, try sending an email asking why they have not visited your site lately. Offer an incentive to get them to come back.

Active customers may comprise a smaller percentage of a merchant’s customer base, but they usually buy more and contribute more to profitability than new or occasional customers.

In short, paying more attention to existing customers increases profitability.