In the last two decades with the rise of social media platforms and modern online advertising, the way we advertise and view businesses have changed dramatically. It seems no one stops and tells you how great your customer service is or how loyal your customers are. Fancy terms are thrown around the table and marketing terms like ROI and Scale are all people talk about.
Your most important asset
Growth is the new king (no one cares about profits anymore). It’s always about how much revenue you make, never about the profits that you keep. Because advertising platforms have become so advanced in their capabilities, entire industries were created with complete dependence for business success on these platforms. The idea that you can create an online business that is based on a single source of traffic such as Facebook or YouTube seemed to make businesses forget the most important rule in business: The customer is always right.
With that said, let’s talk about the impact customer retention has in regards to paid advertising. Most businesses understand the value behind how important it is to make their customers happy, but some don’t understand how it impacts their online advertising. For many advertisers in different industries such as direct to consumer (dropshipping), online training, and similar trending ventures the ability to create profitable online advertising campaigns was so quick and easy that they disregarded customer experience.
At different times, it almost was too easy. Stories of startup businesses making one million dollars in sales in the first month were common. The combination of the products and services they were selling along with the explosiveness of the advertising platforms made it easy to forget about their most important asset: their customers.
Since making money online was easy for many industries, they narrowed their focus only on growth and getting as much revenue per day as possible from new customers. Thousands of dollars were invested daily in ads with massive amounts of income coming back in return. The focus of customer experience was swapped for a focus on finding the cheapest product or generating the most revenue per transaction at all costs.
Money talks and the only thing that mattered was how much of it was coming in. The dissatisfaction of users was so big that companies like Facebook started adding satisfaction scores to business advertising on their platform and banning whoever was creating a negative customer experience.
No honeymoon lasts forever and every party ends. From a logical standpoint, think of how challenging it is to win customers for your business every day. There are so many competitors, as well as so many different options for people to choose from and from all these options someone chooses your business. Add to this the fact that buying traffic is always expensive. So you have to find a way to turn that traffic into profit EVERY SINGLE DAY.
Those advertisers who were getting excellent results off of new customers and could care less about their customer experience started feeling the burden of the rising cost of online advertising. Industries became saturated and every day it became harder to win new customers. As a result, ad spend started increasing and businesses started paying advertising platforms more than what they were paying themselves and all because of what? They forgot their most important asset: Their customer experience.
Here are the reasons why customer retention is the most important asset for online business.
Lifetime Value (LTV)
This is something that is not as widely discussed as it used to be. Lifetime value is the amount your customer spends during his “lifetime” on your business. If you know what the estimated LTV of your customers is, you know how much you can invest to “acquire” them. Take for example the following scenario.
Advertiser A and advertiser B both had the same cost per acquisition, however, advertiser B had a higher lifetime value which is what ultimately created the majority of his profits. This could also mean that advertiser B could pay more than advertiser A to target and “acquire” the user as he can predict that the customer is going to buy more product on his website. If he is confident about the user experience of his store, he can also plan to create an aggressive marketing campaign in which he can outbid his competitors and break even on the first order knowing that he makes back the profit in the subsequent orders that the customer will make. This will allow him to scale his business faster and focus both on growth and profitability. The illustration above is just an example, there are, of course, cases where lifetime value is far greater than three orders or even $60. It can be a hundred or even thousands of dollars.
Better results in paid advertising
If you are an active reader of my blog, you know that every other sentence contains the word paid advertising. Same goes for your customers. Just because they purchased on your website and were happy, doesn’t guarantee that they will purchase again.
If your customers are loyal and return to purchase more, using paid advertising can enhance their lifetime value even more. The difference between showing ads to users who never heard about your brand vs showing it to your current satisfied customers is beyond massive. Customers who are already familiar with your brand are likely to purchase at much higher rates than users who have never heard about you. This translates directly into a higher conversion rate.
The higher the conversion rate, the fewer website visitors you need to generate a purchase or a conversion. The fewer visitors you need to generate a purchase means the lower cost for you. Businesses who ask me how much they should invest in targeting their existing customers are always surprised to hear my response which is “As much as possible”.
Your loyal and happy customers should be the base of your advertising campaigns as they tend to be the most profitable users to target. Don’t think it’s an added expense to target users who already purchase your products, think of the lift you can create for your brand. If you invest in an extra $1 in advertising to generate an extra $5 in revenue from each of your customers, is that worth the investment?
Recurring Organic Revenue
Paid advertising is vital and should always be the core of your business’s growth. However, by having strong retention and customers returning to purchase without having to depend directly on paid advertising is what makes the real difference in online businesses.
If your business solely depends on the cost of advertising on Facebook, Google or any other platform and any small change in ad cost, policy or demand can break you, you’re in trouble. Having a source of organic revenue that comes from customers who are returning naturally to purchase from your store is what will create the first level of revenue for your business. That will then allow you to stream some of that revenue into paid advertising as a means of bringing in new customers as well as refuelling your existing ones to generate more revenue out of them. Also, it will help you establish a loyal base that will engage with your business online and create a strong level of social proof that, in many cases, brings more reach in return.
With the evolution of social media over the past couple of decades, businesses found it easy to attract a seemingly endless stream of customers to their online store. This led to complacency in which existing customers were ignored at the expense of generating an influx of new customers. A reality check came when competition increased in the advertising space and the cost per conversion became more expensive. By focusing a majority of your advertising budget on retaining and marketing to your loyal customers will not only lower your conversion cost but also increase the Lifetime Value of your customers as well as increasing your profitability. That’s the best business practice anyone can do in advertising.