First Time Buyer Retention: Why it is so important and how to improve it

Improving retention rate of your new customers can have a huge sales impact; I’ll even share a program that has improved new customer retention at both B-to-B and B-to-C companies.

Each year your acquisition efforts need to bring in customers sufficient to replace those that are lost.  If you want your sales to grow, then the number of new customer should exceed the number lost.  So if you’re losing large numbers of customers you are even more dependent on acquiring more customers just to stay even.  Understanding your retention issues becomes obvious when you think about it. 

When you analyze the customers who were lost you will probably find what I have, the single largest cohort group is the new customers acquired in the prior year.  This loss of new buyers can be quantified by utilizing the Buyer Matrix process outlined in an earlier post. Obviously the fewer new buyers lost each year can ultimately translate into a sales increase, as opposed to a sales decline.

From the Buyer Matrix article I want to focus on just the 100 customers that were acquired in 1999.  In 2000, 50 of the 100 customers returned to purchase, the retention rate for first time buyers was 50%.  (see the first table below)  What would the impact be on sales if you were able to improve the retention rate from 50% to 55%, 60% or 65%?  The analysis below shows the impact of improving retention by these increments in terms of the cumulative 4 years of customer sales for the total 100 customers acquired in 1999.  The incremental sales are only from the additional customers retained in 2000.  The second table below documents just the 65% returning rate and the summary figures are below that.

Buyer Matrix Forecast
		Buyers who placed an Order
Year of First Order							Forecast
		1999	2000	2001	2002	2003	2004
	1999	100	50	40	32	24.992	19.49376
	Returning Pct.		50.00%	80.00%	80.00%	78.10%	78.00%
		Orders Per Buyer
		1999	2000	2001	2002	2003	2004
	1999	1.2	1.5	1.5	1.6	1.7	1.7
		Average Order Value
		1999	2000	2001	2002	2003	2004
	1999	$90	$100	$101	$102	$103	$104	Total
		Sales						Sales
								2000 to
		1999	2000	2001	2002	2003	2004	2004
	1999	$10,800	$7,500	$6,060	$5,222	$4,376	$3,446	$26,605

Forecast based on 65% Retention
		Buyers who placed an Order
							Forecast
		1999	2000	2001	2002	2003	2004
	1999	100	65	52	42	32	25
	Returning Pct.		65.00%	80.00%	80.00%	78%	78%
		Orders Per Buyer
		1999	2000	2001	2002	2003	2004
	1999	1.2	1.5	1.5	1.6	1.7	1.7
		Average Order Value
		1999	2000	2001	2002	2003	2004
	1999	$90	$100	$101	$102	$103	$104	Total
								Sales
		Sales						2000 to
		1999	2000	2001	2002	2003	2004	2004
	1999	$10,800	$9,750	$7,878	$6,789	$5,689	$4,480	$34,586
						Incremental
				2nd Year	Total 2000	Sales per
				Retention	to 2004	Customer
				Rate	Sales	Promoted
				50%	$26,606	N/A
				55%	$29,265	$53.18
				60%	$31,926	$106.39
				65%	$34,586	$159.60

Thus if a retention program were to improve the retention rate from 50% to 65% the sales from the group would increase from $26,606 to $34,586, a thirty percent increase across 4 years.  The incremental sales per customer promoted figure is only for the customers who purchased in 2000 that would not have unless the retention program was implemented.  The total 2000 to 2004 sales from those additionally retained customer is divided by 50 (the number of customers included in the retention program who had not purchased a second time yet).  The analysis indicates there is a significant upside to sales as the retention rate increases.  The COGS should also be considered to understand the gross margin generated.  The next key question is what programs could a company implement to increase the new buyer retention rate?

Over the last twenty years I have implemented programs to improve the new buyer retention rate and the most successful is to call customers who have not yet placed a second order yet.  The call should be timed to happen within three months of the first purchase so that the chance of remembering the order is improved.  The calls should be prioritized to the largest spenders first as these buyers have shown to have the greatest future value.  The call should be scripted along the lines of customer service representative checking in to make sure the customer’s experience, both in terms of the service provided and the product received, lived up to their expectations.   Most calls will result in the customer indicating their experience was great, and that comment should be followed-up with an offer to place another order with some form of a time-limited incentive.  

On those calls where the customer feels you did not meet their expectation, you now have the chance to make it right.  This can be critical to saving the customer and should be done quickly, preferably while you have the customer on the phone.  I have done follow-up analysis of customers who had an issue resolved by customer service and found the retention rate and overall future activity was better than customers who did not report any problem.  Over the years this program described above has improved new buyer retention from 10% to 30% with a cost per customer contacted of about $10.  The return of about $160 (assuming the 30% improvement) on the $10 cost provides a respectable ROI!

When running such a program you will need to create test and control groups to obtain the appropriate measurement of retention improvement.  Refer to my article on Horizontal Measurement for more details.

This program, when consistently rolled out across time, can deliver substantial sales with a very high ROI.  When considering the amount invested to acquire new customers, the ROI becomes even more attractive.  Having the dialog with your customers will also provide qualitative insights as to what is important and how those preferences may be shifting with customers.  It is also a great method to find their contact preferences in terms of Email, mail and outbound.  

All this activity will go a long way to maximizing the Long Term Value of your customer file and ultimately improving sales and profits.