Why is everybody talking about customer counts — the number of customers coming into the database, buying for the first time, buying again, fading away and leaving — these days? Digital advertising metrics say that our campaigns are working. Our metrics suggest the same is true for our direct marketing efforts. Yet, the company reports a flat or shrinking top line. This dilemma has retail CEOs and marketers rethinking how they let profit and loss (P&L) statements guide their marketing and their customer relationships. It’s a dated, inflexible approach that is costing many retailers dearly at a time when they can least afford it.
Think of a brand’s portfolio of customers as an expandable balloon. The goal is to grow the size of active customers in the balloon making purchases and contributing revenue. What is an active customer? Most brands say it’s anyone who has purchased in the last 12 months, a benchmark they use to report progress to stakeholders and shareholders every year. But the balloon isn’t getting bigger as they continue pumping it with new customers; in many cases, it is shrinking.
There are leaks in this balloon, particularly from too many lapsed —but rescuable — customers that escape without being noticed.
Here’s how to patch the leaks and pump up the balloon with incremental revenue:
First, the challenge:
P&L sheets, with their focus on revenue by business lines, product categories and channel, along with related operating costs, gross margin and overhead, have been calling the shots in business for a long time. Nowhere in that financial view, though, is there mention of customer metrics. We use customer metrics to measure and optimize our digital advertising and direct marketing efforts, but there is no visible connection to the P&L. This disconnect allows the leaks to exist. Most marketers are putting money into acquisition tools like advertising, digital ads, paid search and Facebook ads. They are focused on filling the balloon and again, the metrics state that it’s working.
They spend less money on direct marketing and CRM to engage existing customers. And because of constrained budgets, direct marketers are forced into a narrow focus related to the customers they market to. They spend the least amount of money and attention on growth and reactivation of customers already in the balloon. Customers that fail to purchase within 12 months are soon after dropped from marketing lists and simply fade away. Retaining those customers is the critical patch for the leaky balloon.
Part of the problem is traditional direct marketing metrics such as Return on Ad Spend (ROAS). If they focus on optimizing ROAS, the balloon never gets bigger. ROAS drives the marketer to focus on the cream of the crop: buyers who are already most likely to buy again. They are just preaching to the choir, when they really need to go deeper into the house file.
What if we adjust our metrics to emphasize incremental revenue and growing active customer counts across the buying lifecycle? Combined with incremental revenue metrics, ROAS can still be helpful in terms of keeping marketing efforts profitable.
Let’s say we know that anything better than 3X ROAS is profitable. To fix the leaks and expand the balloon, marketers can reset their ROAS number, test going deeper into the inactive house file, aim for a 5X instead of 8X ROAS. Testing these so called inactive customer segments will help grow that balloon.
Does the customer feel any responsibility to the board or shareholders to buy every 12 months? Of course not. Let’s move this arbitrary line in the sand to market to more customers who have bought from us before.
Bottom line: it’s cheaper to keep customers you already know in the balloon by driving repeat purchase behavior than it is to continuously acquire new customers in a leaky balloon. This is especially true now that marketers can look at metrics to let them literally understand what it means to move someone through the lifecycle and retain them.
Retail marketers are starting to smarten up though, getting their hands on metrics that make them step back from their spiraling acquisition costs.
Take acquisition through paid search. One brand thought they were mostly reaching new customers, but when they matched back to their database, 65% were existing customers.
Because the house file is not linked to the digital side, the brand treats existing customers the same as prospective customers, targeting them with digital advertising and retargeting, chasing them around the digital landscape. Since 90% of retail purchases are still in brick-and-mortar stores, many of these customers have already purchased in the store anyway, which the brand cannot see with their myopic digital view. More money wasted, more customers alienated and the balloon grows no larger.
You want existing customers to keep buying, but you must spend the right amount of money and right amount of budget to do it well. Right now, marketers are spending the least amount on people who have bought before, and spending most on prospects.
We are electing to give up on customers too soon because of ancient accounting rules.
Metrics That Pump Incremental Growth
We really haven’t changed the underlying behavior that starts at the top. Executives demand more revenue and marketers respond by banging away harder to “sell more, do more,” etc., etc.
These marketers don’t have the right tools. Without the right metrics, the problem is not yet in focus. They’re scratching their heads because they have campaign-level metrics like response and conversion rates, and that’s great — the tests are all working. But the CEO is still saying there’s no revenue gain.
Reversing this trend demands that retail marketers focus on incrementality to expand the balloon. They need to focus on metrics like active customer counts, revenue per customer, average order value, lag time — dynamic information gleaned from expanded customer journeys and lifecycle campaigns. For instance, they need to create bigger reactivation “win-back” programs that don’t stop soon after a customer’s purchase anniversary.
Time For A Change
It’s time to challenge the conventional wisdom and stop giving up on customers. If someone bought in 2016, but not 2017, try to get them back in 2018. With the right data and customer profile, you can see if the culprit was life changes, different patterns, college tuition or a host of other factors.
The good news is that it’s possible. The bad news is that if retailers aren’t looking carefully at the data, they can spend a lot of money on techniques that won’t help. The only way to pump up the customer “balloon” and keep it growing is to expand how we define active customers, then use a single customer view of them all to better fit retail marketing to their timing and motivation. Which is a lot different than forgetting about folks because they went beyond 12 months without purchasing, as dictated by the revenue model. That balloon is running out of air fast.
Augie MacCurrach is the CEO of Boston-based Customer Portfolios, a marketing technology leader that uses insight and analytics to increase customer value. You can follow Customer Portfolios at @CustPortfolios on Twitter.