Repeat Customers are Profitable and We Can Prove it!
Let’s say you noticed your business wasn’t acquiring as many new customers, and you wanted that to change. So you have spent the last few months putting together a killer Adwords campaign, setting up customer re-targeting, and promoting your social media messaging. All of that is great, but the reality is that the customers you attract from those promotions are not nearly as profitable as the customers you already have. I know it sounds harsh, but it is the truth!
Let me explain. Obviously acquisition is important because you can’t have a repeat purchaser if they never make that first purchase. The problem is that the average ecommerce store devotes more than 80% of their marketing budget to acquisition, and retention takes a back seat. This method of budgeting is odd considering 40% of an ecommerce store’s revenue is created by 8% of its customers.
This 8% is made up of your repeat customers, and they are extremely profitable! But why are they so profitable? In this post I will go over the stats that illustrate the power of repeat customers and the profits they represent. Without further ado, let’s dive into the stats!
5 Reasons Repeat Customers are Profitable
1. A Repeat Customer is More Likely to Shop With You Again and Again!
This probably seems obvious. After all, by definition a repeat customer is a site visitor that has made at least two purchases. What is interesting is that a customer becomes increasingly more likely to buy from you again as their amount of purchases increases.
After one purchase a customer has a 27% chance of returning to your store. However, if you can get that customer to come back and make a second and third purchase they have a 54% chance of making another purchase.
The more times you get a customer to return, the greater their potential lifetime value becomes! If you want to increase the profitability of your store you can start by encouraging your existing customers to come back for a second and third time. Just be careful how you entice them.
You may immediately think that giving a discount on the next order is a great way to get a customer to return, however I would caution against that. Discounts are effective at getting a customer back, but they almost always set an unwanted expectation.
Customers who receive a discount either come to expect a discount every time or wait until a discount exists to make another purchase. Instead, use retention tools like these to encourage customers to come back to your site.
2. A Repeat Customer is Easier to Sell To!
Conversion rates in ecommerce are extremely volatile, and vary by industry. But most estimate that the average conversion rate is somewhere between 1% and 3%. This is the average conversion rate, but a repeat customer is actually more likely to convert than other shoppers.
According to to Paul Farris’ book Marketing Metrics, a repeat customer has a 60% – 70% chance of converting! This is great news for your store – the more repeat customers you have, the less you will have to spend on conversion tactics like abandoned cart offers.
Adobe conducted a similar study that looked at conversion rates of repeat customers. Adobe found that a customer who has purchased with your store 2 times before is 9x more likely to convert than a first time shopper.
As you can see, that’s a big spike in conversion rates from repeat customers that you will not want to miss out on! This increase in conversion makes repeat customers much more profitable than customer you acquire through your online marketing efforts.
3. Repeat Customers Spend More On Each Purchase!
Not only do repeat customers convert more often, they have a higher average order value than first time buyers. This means that your repeat customers are buying more from your store more often!
There are two factors that impact how much a repeat customer spends. These factors are number of previous purchases and how long they have been a customer. Let’s start with the number of previous purchases.
A study by RJMetrics found that loyal customers that purchase from you frequently are much more profitable than your average customer. Research found that your loyal top 10% spend 3x more per order than the lower 90%, and your top 1% of customers spend 5x more than the lower 90%.
This study shows the relationship between repeat purchases and increased order value, but repeat purchases are only one component of increased order value. How long a customer has been shopping with your company also impacts order size.
A study by Bain & Company found a direct correlation between the amount of time a customer has been shopping with you and the amount they spend per visit. Bain found that apparel shoppers purchase 67% more per order after shopping with a company for 30 months than they spent on their initial purchase.
They found similar results in all of the categories they studied. Clearly repeat customers have a high lifetime value, which contributes to a higher value per order over time.
4. Repeat Customers Spend More at Key Times!
The majority of ecommerce merchants make the bulk of their revenue through one particularly busy season. If you sell bathing suits you might see a spike in March/April. If you sell costumes you will see a spike in October. That being said, the busy time for most merchants is between Cyber Monday and Christmas.
These key times play a huge roll in the success of your ecommerce store. The increase in sales comes from both increased demand leading to more potential shoppers and from people purchasing more due to the season. But how much more do consumers buy in the busy season?
According to Adobe, the average shopper spends 17% more per transaction during the holiday rush. This is great news, but your repeat customers spend even more! Your store’s repeat customers actually spend 25% more per transaction during the busy season. But that’s not all!
The same study found that in recessions repeat purchasers are even more important. In Europe’s recession the percentage of revenue from repeat customers increased even while times were bad. This illustrates that your repeat customers will stay loyal even through hard economic times.
5. Repeat Customers Share Your Store More!
Not only are repeat customers more valuable when shopping, they also provide you with some marketing potential. A repeat customer gives your store increased word of mouth advertising, which is almost always regarded as the best kind.
The amount of people a customer refers your site to increases with the amount of purchases they have made, according to Bain & Company. Each time a customer makes a purchase they are becoming more comfortable with you, and thus are more willing to make a positive referral.
Bain found that after 10 purchases you refer 50% more people than a one time purchaser to a store. This study demonstrates that repeat customers can actually increase their profitability by attracting more clients.
This referral process can be further amplified by encouraging referrals with points as part of a loyalty program (one of the strongest retention tools).
Repeat Customers are Important
I hope I have shown you the benefits of having a strong repeat customer base. But now you might be asking, “how do I start to get more repeat customers?” Well I would start by reading The Ultimate Guide to Customer Retention. It will show you how to craft a retention strategy to get more repeat customers.
Once you know the strategy you are going to follow, you can begin to look at tools to help. There are a ton of tools that can help your retention efforts, like dotmailer for your retention emails, Olark for providing amazing customer service, or Sweet Tooth for creating an engaging customer loyalty program.
Start aiming for a 25% repeat customer rate, and you will begin to see an increase in your store’s profitability!
The True Value of Repeat Customers
In our loyalty research paper we will show you why repeat customers are so valuable, and why most stores are not capitalizing!
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