Growth is not about a one-time sale. In order to continuously drive growth for your business, you must focus on building and be maintaining authentic relationships: create habit-forming experiences.

In this post you’ll learn:

  • How to use the RFM segmentation to increase customer retention rate within the first 30 days of purchase
  • How to create data-driven loyalty programs that drive exponential growth 

This article is the written and edited version from the live presentation Valentin Radu, Founder & CEO at Omniconvert offered during the recent GetUplift Online Summit, organized and hosted by our awesome friend, Talia Wolf, Founder & Chief Optimizer at GetUplift. The presentation was jam packed with value and was followed by a Q&A.

Without further ado, let’s dive right in.

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Valentin: Today I’m going to speak about customer retention rate optimization and how to build an RFM score. This is available for e-commerce websites but not only for them. So today I’ll share about how to use the Recency Frequency and Monetary Model to drive Continuous Growth.
These are the topics we’re going to cover:

  1. Acquisition vs. Retention
  2. The RFM Model
  3. Retention Hacks
  4. Let’s get to action

I’ve always been looking to improve myself and to focus on growth. What I have to say from all my experience, is that e-commerce is not a one-night stand. And it is about:

  • Generating emotion
  • Habit-forming
  • Word of mouth – If you just focus on your own thing and you are not creating relations and amplification you’re not going to get there.
  • Being data-driven and not acting on old assumptions

I’m going to let you see that guy. That’s an old assumption, so let’s see it again now, he assumed that he was not going to fall. 

That’s what an old assumption is doing to your business.

So now let’s take a look at how important retention rate is. This is a graphic which is very actual from our data for e-commerce.

retention rate evolution

 

After 24 months, 50% of the revenue is generated by returning customers. So that means retention rate becomes the most important thing to focus on rather than acquisition or new customers. But that’s not the same for all types of e-commerce sites.

purchase frequency

For example, if you’re selling phone cases or appliances it’s different, because the item value is different, and the purchasing frequency is different. So, if the purchase rate is very high, like in the case of pet supplies or office supplies, or supplements or whatever electronics, then you should focus on the retention.

So depending on what vertical you are addressing, you should take into account the customer retention rate, because that is generating high growth for your business. So as you can see here, the top quadrant is generating more than 50% of revenue from repeat customers after 20 months. In the bottom quadrant, it is making less than 50% of revenue from returning visitors even after 36 months in business.

So this is the retention game, if you are in a vertical which is important, you should focus on that. Another important thing is that the top 1% of your customers are spending 30 times more than the average customers.

To get an insight about that, the lifetime value of a single customer from Starbucks is $25.000. So even if the average order value is as low as eight bucks, the total lifetime value is incredibly high. So you should also take into account the repeat customers and the ones which have a big lifetime value. 

Another important thing to know is that the average retention rate for e-commerce is around 30%.

If you have an e-commerce with a year-over-year growth of 50% for new customers, that’s how much revenue you’re going to generate after six years in business.

 

So if you have 60% retention rate, you’re going to generate five times more revenue than if you have 10% retention rate. Even though it’s not at all important after the first year and after the second year is not that important, you can see here that after three, four,  five years it’s becoming crucial to your growth

In six years, 90% of the total revenue is generated by returning customers, at a 60 % retention rate.

So let’s focus on a few 

Retention Hacks

#0 Don’t start unless it’s a priority

From my experience, after doing a lot of things into growth, after consulting a lot of big e-commerce websites which are generating more than $10 million/year, I understood that there is a roadmap to success.

You should take into account the priorities. And the first thing you should do is to monitor the right KPIs.

The second thing is to set the strategic goals; the third thing is to come up with ideas for strategic initiatives, and then to prioritize them based on the impact and the resources that you have. And last but not least, is to do that hard part which is the execution, and after that, you should repeat the whole process.

What does it mean to monitor the right KPIs?

You shouldn’t focus on vanity metrics like traffic or social or whatever. You should focus on lifetime value or retention rate or average order value, or conversion rate, or Net Promoter Score. These are the most important KPI’s to focus on because they show both the past and the future of your business.

What do I refer to when I say strategic goals?

Let’s say I want an uplift 5% lifetime value in 6 months. After that, I come up with the brainstorming and with ideas to reach this goal, not vice-versa.

This is a very important part. In order to understand how these things work, I’ll show you this table with a few examples.

So you have here the first objective, which is to increase the Net Promoter Score. And then you have the strategic initiatives, like a personalized thank-you letter after the first order.

And this is affecting the customer retention rate while the PPC hacking will be affecting only the traffic. The growth building or hiring a growth team is touching everything. So then you have a total impact score and how this initiative is affecting all the strategic objectives that you have in your business. And after that, you decide what to do.

If you want to use this e-commerce growth matrix, I’ve built it, and you can start using it for free. So despite the fact that it is a simple sheet in Google Docs, it is going to give you a lot of value if you are using it correctly. Because the trap is here to use and to spoil the resources and the opportunities that you have by not doing the right thing at the right time.

So all the things are so dynamic that you don’t want to miss the chance to do the right thing first.

#1 Use a proper methodology

retention rate optimization

 

Ok, the next thing is to use the proper methodology. So the first thing is to build your recency, frequency, and monetary model. Then, it is to run surveys and to understand the pain points of each significant segment, like the ones who have the biggest lifetime value, the highest recency, and the highest frequency. And then to do the hygienic steps, to treat the pain, so before doing the over delivery, you should do the delivery.

The cosmetic steps refer to the fact that after you’ve created the product and the services after you’ve understood why the people are not returning, maybe you discover you have a problem with the delivery. Or maybe you have a problem with the packaging or the difference between the images and the reality, so it’s about the expectations that you are selling on your website.

So after that, you do the cosmetics, which is to do the math. How much can you invest to keep a customer versus to acquire a new one? And then you start to brainstorm based on your budget. So if you want to improve the customer retention rate, you should know how much you can spend.

So another thing which is very important here is not to stop until you have like 100 ideas. So you brainstorm, and you squeeze all the opportunities. So don’t run for the first enthusiastic idea.

After that you execute, you analyze the impact in your business, like how this affected the net promoter score or the retention or the lifetime value, and of course, you restart for from the surveys part.

#2 Find out the why

So how many of your customers are placing the second order and why? Because the relation actually starts after the first order has been placed. So from the ones which are not ordering anymore, how many are not placing an order because of the products or because of your services? This is a very important route to follow. So if you find that you don’t have good quality products, you’re not going to solve these things with delivery time or thank you letters or outstanding customer support.

Because people are buying from an e-commerce because of their emotions that are being generated after buying the products on your website. So then you go deeper. Which categories are having the lowest customer satisfaction scores? Where is bad quality and where it’s about false expectations?

So to understand that, how do you do it? You use on-site surveys for returning customers, you do this with post order emails, and you can use post-order remarketing Facebook ads, with a proper capping, because you don’t want to annoy your audience.

#3 Build and RFM Model

What does it mean to create an RFM model? It means you should score your visitors according to three factors:

 

After that, you score them. In this case, you have a scale from 1 to 4. So 4 means the most frequent buyers are getting the highest grade. The most recent ones will have the highest recency score which is 4 as well. And the ones which have the biggest monetary value will also get the high score which is 4. So then you either sum-up all these things into an RFM score, you either use them as they are and you make three or four groups.

You could have something like dormant visitors but with a high revenue. Mainly you group them into these types of segments, like platinum, gold, silver, bronze and lost. Then you come up with the benefit. So after you segment your database, you might get data such as this.

rfm model retention

So from more than 120 thousand customers, from a real example, only four thousand are getting an RFM score of five-five-five. So here we used a rating from one to five.

I must warn you before building your own RFM score; you should take into account the fact that the more customers you have, the higher grades you should give. So the scale should be higher if you have a huge amount of customers. But if you don’t have too many clients, then your maximum score should be only three or four.

After that, you decide what type of benefits you provide in order to increase customer loyalty. For example personal assistant, free returns, free delivery, priority support, priority delivery, courtesy call, and discounts.

 How can we use the RFM segmentation model

So first we identify the best customers, and that means we craft different advertising and positioning because we understand to who are we selling and what type of products they are buying. And then you create a proper loyalty program. So instead of blasting everyone in your database with 10% discount because it’s weekend, you can blast only the most interested customers with the latest products or with a special treatment.

For example, it’s much cheaper for you to give free returns than to give free delivery because only 25% or 30% of your customers will return the goods. So that means, free delivery is given to all your clients, while free returns will be given only to 25% or 30% of your customers. That leads to a higher retention rate, and that leads to a higher revenue, and that maybe will lead to your happiness. I don’t know, I’m not a specialist myself, I’m still struggling to achieve that state of pure happiness.

But here we are.

If you want to get this step-by-step guide, because we don’t have enough time to get into all the details, and I want to give much more value, you can download the Growth eCommerce Matrix here.

Let’s go further now.

#4 Under promise, over-deliver

After you’ve done your hygienic stuff, after you crafted your advertisement to be relevant to your audience, you should take into account this principle: under-promise and over-deliver.

Be careful to offer a slightly over-delivery, you don’t want to surprise every time your audience, but small things are actually delivering serotonin and dopamine to the brains of your audience, and that will become a habit for them. So small stuff, like handwritten thank-you letters or a surprise gift with the first order because you value the most important customers. So let’s say you build up a procedure, and you come up with a very funny or nice gift that you can deliver, according to your data.

Surprise gift

So you do the math, before buying gifts which are 10 or 5 bucks, or whatever you need. So another thing is to deliver a gift after the second order, like a bottle of champagne.

So you can do any type of things. Another important thing is to place a courtesy call after the first order. That is also very important because that means you’re a human being who cares for the fact that someone bought a dress or whatever.

The cost of a courtesy call can be much smaller than readdressing that customer with a lot of advertisements, with Facebook ads or whatever. Because that means you care about them so that’s how we build relations.

So in order to improve the retention rate, if I can say a single thing, is that you don’t want to improve the retention rate, you don’t want to improve the KPI’s – you want to install a habit. You want to affect the way your customer, your audience is behaving. And to change the behavior…you might know from your own experience… so you want to get rid of smoking, you want to quit smoking, and you can’t-do that unless you have a strong emotion. Your brain tells you to stop smoking or don’t go to sleep after 10 p.m., so from a rational point of view you understand that, but unless you have a strong emotion you don’t change your behavior. So that’s what’s happening with your audience too.

Your brain tells you to stop smoking or don’t go to sleep after 10 p.m., so from a rational point of view, you understand that. But unless you have a strong emotion you don’t change your behavior. So that’s what’s happening with your audience too

Another nice thing can be to place a welcome-back overlay with a surprise according to the recency score. By the way, you can do this with Omniconvert.

You can segment your audience according to all the data that you have, according to their names, their lifetime value, their RFM score. You can use these, and instead of pushing those one-size-fits-all discount codes to everyone, you could get personalized ones, according to the RFM score.

#5 Free returns vs free delivery

Another thing is, as I said earlier, your extra revenue is generated by new returns – new conversions + new returning customers.

So the fewer returns you have the more revenue you are generating. So you should take into account the costs of the returns.

#6 Stand up for something more valuable

Another important thing in building an RFM score is to stand up and stand out for something that is more valuable. So the economy that we are living right now in an experience economy: is not anymore an economy of common goods, it’s not about commodity anymore.

So we are all looking for better experiences because that’s what fulfills us. We have so less time and so much money that we are looking to get a positive experience on any interaction with any human being. So that means you should take into account the values that your company has.

And I’m going to show you something regarding our own company. We stated on our website that we are not going to sell Omniconvert as a platform for conversion rate optimization to businesses that are related to guns and adult and all that stuff which we think is not valuable. So everyone can choose for themselves, but we are not going to provide the software for these types of companies.

And after that, we’ve been accused in a Reddit, by a gun company because we refused to work with them. And after 24 hours, we’ve got WWF as a customer. So mainly if we are not standing for what we value, we are not going to get the customers we are looking for. So, of course, we have a program to support charities, we offer a 70% discount for all the charities because we do believe that good companies, which are providing real value, should be supported.

And actually, that was a signal.

So that’s your homework for today.

customer retention rate

First of all, what type of emotions are you generating with your products, because emotions will build relations.

Another thing to do is that you should make someone responsible for retention. So someone in the company should be responsible, or a team should be responsible for retention. Because the principle is that what you are not monitoring, is not important.

So if you are not aware of, let’s say, how many times you are smoking in a day, and you want to quit smoking, and you’re not aware of that, if you’re not quantifying that thing, you’re not going to stop smoking. Or it’s going to be much harder to do this by accident.

Another thing is to focus on habit forming. So you need to induce positive habits in an ethical way in your customers.

Another thing is that you can’t-do retention or anything else if you don’t monitor it. So what you don’t measure, it doesn’t count.

And the fifth thing, is the to be good, to right to deliver value. So you can’t expect value if you are not providing value.

Q&A session

Talia: Wow, thank you so much! I have so much to say because I talk a lot about retention, but I like the way you frame it, I like the way you talk about the measuring of stuff. And how amazing and how much scale you can make by just focusing on retention. So many businesses focus so much on gaining the clients, getting someone and then just forgetting that they exist. And the real revenue is in the retention rates, for the returning customers. And it costs so much less to retain those people. So if you have a good system in place, you’re going to do great.

I love that this is our opening session, and we do have a few questions, but I wanted, before I actually ask them, I wanted to talk to you about the value thing, because that blew me away.

I was watching live when this was happening when this guy said: “Hey Omniconvert sucks, and we’re not going to use them, and everyone should know they refused us!”

And I was wondering what you were going to do because this is like bad publicity.

And you’ve turned it around, and this is amazing, the fact that you went out and you tweeted about it, and you wrote about it on Facebook.

So do you see this happening more and more, people complaining about this, or did you see that more people were interested, now that you were saying “Hey we just don’t deal with adult sites and gun control.”

Valentin: We had a positive impact on charities, we’ve seen more charities coming to us, because of that. That’s what we are standing for: everyone is free to choose their path but from my perception, we should support the good causes, and we should support the things which are not installing bad habits or installing fears in our brains to focus on what could go wrong. So mainly if you believe in something, you should stand for it.

Talia: I think a lot of business leaders are scared of doing that. Then you might be worried about showing your real face and maybe taking a stand, because you might get other people not to come, and people may say “Hey. Omniconvert sucks I’m not going to use you”, but that’s the thing about knowing who your customer is because not everyone is your customer and that’s the rule for everything. Not everyone is your customer, you need to know exactly who you’re talking to.

Valentin: And we don’t want any customers. Talia, this is my fourth company already, so when I’m looking back at the first companies, I’ve got nothing but money. But now I want to feel fulfilled, that I’ve actually made a difference, that’s the impact that I want to make in the world. So I don’t want to support companies which are not my kind.

Q1: Laszlo wants to know how would you find out why somebody placed a second purchase on an e-commerce, so how can you kind of track that?

Valentin: When someone places the second purchase on an e-commerce do you track it with a Google Analytics or with your CRM? Because it’s much simpler when you have a CRM or a CMS which is very capable, you can do that. But in Omniconvert we are integrated with any type of CRM like BigCommerce, Shopify, Magento whatever it is. We are grabbing all these data and then we are associating the unique ID of the customer with the cookie. And then when that cookie lands on the landing page or on the website, you change the experience on the website according to what you know about that customer.

Talia: There are some amazing platforms out there, I use Omniconvert. But being able to know what your customer is doing you can also use a tool or a CRM, to actually see how many purchases a person has made, what products they bought to personalize that. 

Q2: Amy asked what’s the one advice you think is the best advice for someone who’s starting an e-commerce site?

Valentin: So the best advice is to find out the point of difference, to differentiate themselves from the competitors, to analyze the market very well and to do the math right. So the mathematical modeling of the business is one of the most important things. Even though you have this enthusiasm and wanna build the company and you’ve identified some products which are the best in your perception, you should focus on the right customers, and you should understand how you frame yourself, how you define your audience and what’s in it for them.

So anything related to the blue ocean strategy, it might help you to understand what is the competitive advantage that you have and how can you disrupt that industry. Because if you start with just doing the good-old stuff, like placing some Facebook Ads here and there, and without building a community you’ll not go far.

Mainly you should focus on the mathematical model, you should focus on your customers and your points of difference before building your e-commerce platform.

Talia: It’s funny because it’s always about knowing who your customer is and understanding their pain. I’m going to be talking about that a bit later, but learning what pain is in the market and then going for that. Just understanding how you can solve that pain for your customer and that’s where you stand out, and you just disrupted the whole industry.

Q3: Here’s another question from Lionel. He runs a photographic portrait studio. Families return to his site usually every two to three years. So does the RFM model still work for such extended periods?

Valentin:  Yes, it can it can work but you should take into account what is your one percent. Which are the most important customers and maybe you should define your strategy according to them. So the problem with the average is that you have extremes that you’re not taking into account. But maybe 1% of your customers are not coming back every two years, maybe they are coming every six months or maybe every year. So what you should do, is to analyze first, and to do the RFM scoring and then to focus on the ones who are having the highest frequency and the highest monetary value. Then, by understanding who they are, where are they coming from, what is their age, the cycle of demographics, whatever, you change your strategy on your buyer persona.

Q4: What two emotions have you seen being used by social startups to create customer retention?

Valentin: If it’s a social startup, if it’s in the industry of attention and habit forming, and investing or wasting time, the single and most important emotion I think is this fear of missing out. So you get this instant gratification, I don’t know if you know about that incredible movie with the marshmallow test when small kids were put in front of a marshmallow, and they said, if you wait for two minutes, you’ll get another marshmallow.

So this is about self-control, but the truth is that we, we as human beings are always looking for low-hanging fruits and instant gratification. So I think that unfortunately, that’s the so-called value that we are looking for on any type of social network. If it’s a B2C, if it’s a B2B, there’s another story

Talia: I think it’s important to know that emotions work on B2B and B2C. Again I will definitely be talking about this soon, but I know that a lot of people think that emotion doesn’t work in B2B, but I have done some pretty cool stuff with B2B companies, and at the end of the day it’s about understanding your customers. So I love the marshmallow by the way because they never wait, they just eat the marshmallow!

Valentin: The good part is that the ones who are waiting are getting the most important results. So those were the outliers, those were the most successful from that group, the ones which waited for the reward.

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If you want to watch the whole presentation and the conversation between Valentin and Talia about the RFM Model here’s it is:

 

 

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