September 05, 2006

Is Email Really A Customer Retention Tool?

Had you asked me this question prior to today, I would have said "NO"!

But I was reading an article about open rates, click-through rates, and conversion rates in this month's Internet Retailer magazine, and the article caused me to do some thinking.

Let's mine that data! Here are the assumptions:
  • Assume you have an email subscriber list of 10,000 addresses.
  • Assume that fifty percent of these addresses will purchase again in the next twelve months. In other words, your company retains fifty percent of these customers.
  • Assume you send one email campaign per week to each of these 10,000 addresses.
  • Assume that half of these email addresses either unsubscribe or become invalid, distributed evenly during the year.
  • Assume that the average email campaign has a ten percent click-through rate. In other words, ten percent of recipients click-through the email to your website.
  • Assume that the average email campaign has a three percent conversion rate. In other words, three percent of recipients purchase something on your website because they received the email.
  • Assume that the average person who purchased because of an email campaign purchases twice a year. In other words, each order does not come from a unique customer. Some customers respond multiple times per month/year to email, purchasing multiple times per year.
  • Assume that half of the customers who purchased due to email would have also purchased during some other time of the year, and therefore, email cannot take credit for causing the repurchase.
For just one campaign, you can expect 10,000 * 0.10 (click-through rate) * 0.03 (conversion rate) = 30 purchasers. You send 10,000 emails, and you get 30 customers to purchase something.

Remember, of the 10,000 emails, half will unsubscribe or become invalid during the course of the year. We will assume these email addresses receive 26 campaigns per year.

The other half receive every one of 52 campaigns per year.

The total number of orders is then calculated as 5,000*0.10*0.03*26 + 5,000*0.10*0.03*52 = 390 + 780 = 1,170 orders per year.

Remember, I stated an assumption that the average email responder purchased twice per year due to email campaigns. Therefore, 1,170 / 2 = 585 customers purchase because of email campaigns.

Lastly, remember that half of the customers would have responded during other times of the year when email campaigns were not happening. This means email did not drive the response. Therefore, 585 / 2 = 293 customers repurchased because of email campaigns.

I stated that there is a fifty percent annual retention rate. Among the 10,000 email addresses in the list, 293 / 10,000 = 2.93% repurchased due to email.

In other words, the annual retention rate increased from 50.00% to 52.93% due to email.

This analysis is based on a huge number of assumptions. It is very important for companies to actually quantify each assumption, and plug in real numbers measured by analytical folks.

This example illustrates that email can have a marginal impact as a customer retention tool. It is not easy to move annual retention rates by three points. With a different set of assumptions, and multiple email campaigns per week, retention rates could improve even more.

So, I am not convinced that email is a powerful retention tool. But the math indicates that executing email campaigns can improve retention. Making significant incremental changes to an email campaign, like creative, promotional offers, subject line testing and merchandise offering, are likely to have a very, very small impact on customer retention.

3 comments:

  1. Well done. But remember that in addition to retention, email is also an acquisition strategy. Although pass-along rates aren't huge for most newsletters, each of us can probably think of an instance where we said something like this in a "tell-a-friend" form: "I say this and thought of you. It's a good company, and here's a product you've mentioned wanting to buy."

    It's another small way that opt-in email can move the needle for an online retailer.

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  2. I meant "saw," not "say," in the above post. I'm going to bed ...

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  3. Kevin Hillstrom9:21 PM

    Yup, my wife and I sure have passed along an email that featured the music video from Ok-Go, proving your point!

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