October 28, 2015

Yes, Prioritize Customer Acquisition Over Customer Loyalty!

Can I show you something?

For a business, I built a model that predicted the probability of repurchasing in the next twelve months. If a customer possesses a 60% or greater chance of repurchasing in the next twelve months, the customer is deemed "loyal".

Quick Quiz: For this business, what percentage of customers who purchased in the past month are deemed "loyal"?

(a) 18%.

(b) 33%.

(c) 79%.

For the business I am analyzing, the answer is (a).

By recency (months since last purchase), here is the percentage of customers who the model deemed to be "loyal".
  • Recency = 01:    17.55%
  • Recency = 02:    15.57%
  • Recency = 03:      9.05%
  • Recency = 04:      9.00%
  • Recency = 05:      9.66%
  • Recency = 06:      8.31%
  • Recency = 07:      6.91%
  • Recency = 08:      6.24%
  • Recency = 09:      4.88%
  • Recency = 10:      3.85%
  • Recency = 11:      3.57%
  • Recency = 12:      2.92%
  • Recency = 24:      0.40%.
  • Recency = 36:      0.12%.
  • Recency = 48:      0.00%.
This is a typical catalog / e-commerce outcome, for a typical catalog / e-commerce business with a 30% annual repurchase rate among twelve-month buyers.

If you run simulations, as I've been running for the past twenty-plus years, you very quickly learn that it is terribly hard to push customers in this type of business into "loyal" status. What are you going to do? Be honest! Offer points? Free shipping? 20% off. Gift with purchase? You're already doing all of that nonsense and if anything, annual repurchase rates have declined over time, right? And everybody else is already doing all of that nonsense. Wait. Apple doesn't do any of that stuff. Oh, that's right, they have great products. Never mind.

So you and I already know and understand that you're never going to build a crop of "loyal" buyers that is large enough to "push the peanut", as a former CEO used to say to me.

But new customers?

We can always find new customers. We can always grow your customer base by finding new customers. And when you increase the number of new customers by 50% for a few years, we will almost surely increase the number of loyal buyers by 50% in several years.

We can waste money forcing a customer into loyal status - which isn't a loyal status in the first place because the customer didn't get to loyalty via love of merchandise but instead via games you played to force the customer to get there, costing you profit along the way. Or worse, the customer would have gotten there but we accomplished the same outcome while giving away points and free shipping and 20% off. Woo-hoo!

Or, we can waste money finding new customers - knowing that in time, some of the new customers will become loyal without any games or discounts or promotions whatsoever.

If I were to ask 100 of you how you felt about this, 95 of you would tell me I'm crazy. I know this, because I've watched your unsub rates from email over the past week and I've read your comments. I haven't been given any actual customer data that supports the loyalty hypothesis, but I've been given criticism.

And yet, when annual repurchase rates are under 40%, business success is almost entirely determined by a combination of merchandise productivity and low-cost / high-volume customer acquisition programs. Run the simulations to understand the dynamic for yourself.

Keep in mind that 80% or more of the catalogers / e-commerce brands I've worked with possess annual repurchase rates under 40%.

So that's what the data tell us. We really need to adjust our mindset. We need to focus our energies on finding low-customer new customers. Soon!