Time to Shift the Focus to Retention
According to Forrester Research, Cambridge, MA, traditional manufacturers spend 40 percent of their marketing budgets on customer retention, while multichannel companies spend 30 percent and dot-coms spend 20 percent. But by 2005, Forrester predicts Internet companies will spend 35 percent of their marketing budgets on retention. E-marketers must focus on what our offline cousins already know -- acquiring new customers can be five to 12 times more expensive than retaining current customers.
But how exactly do we build retention? First, we need to understand who our best customers are and how much to spend to convert and retain them. Next, we must look at our businesses and understand what it takes to make loyal customers.
Offline companies can tell you exactly what the lifetime value of their customers are, how much they spend on acquisition of new customers and how much to spend on retention. They know the life span of a customer, average purchase size and the ROI of their marketing activities.
E-businesses need to focus on acquisition costs compared to the lifetime value of customers, on segmenting customers based on long-term value and on retaining the most valuable customers. Marketing activities must be analyzed for their return on investment and focus on building interaction with prospects and customers to build retention and loyalty. As the offline world knows, profitability comes from focusing on both acquisition and retention of current customers, and refining the business to ensure every activity contributes to drive business.
So how do we make this paradigm shift, and how do we do it intelligently?
We need to move from awareness to brand loyalty campaigns, from eyeballs to interaction, from customer collection to customer retention. Brand awareness will always be part of your mix of marketing activities, but brand loyalty needs to take at least 30 percent to 40 percent of your time, effort and budget.
Loyalty is more than a points and rewards program. Loyalty and retention have more to do with building ongoing relationships with our customers, understanding their needs and listening and communicating with them consistently over time. Loyalty points can be one dimension of building loyalty, but many other important elements are involved.
We must focus on getting our customers to interact with us and on generating customer response rather than just awareness. The more we get customers to interact with us on our sites, the more we learn about their needs, buying habits, perceptions of our sites and our products' strengths and weaknesses. By understanding our customers, we can better develop the sites, content and programs that meet customers' needs and build loyalty.
The ideal Web experience should mimic a visit to an offline establishment. E-businesses must provide the same type of experience as customers receive when they walk in the door of a retail store. Offline businesses work to ensure that customers have a positive experience and will return. E-businesses can use technology to provide the same type of experience online.
In a retail store, the focus is on turning every visitor into a customer. People greet customers as they come through the door (personalization). The store has been designed to make it easy to find items (site design and navigation) and to ask for help (FAQs, instant chat). Appropriate merchandise is presented (product selection, targeted offers). The store may have in-store offers and salespeople focused on cross-selling and upselling (online promotions). Purchasing is effortless (shopping cart, order fulfillment). Stores often gather customer names and information through sweepstakes, surveys or mailing lists and use the data to understand their customers better (online surveys, sweepstakes, data mining). The store may reward frequent customers or large purchasers with discounts or rewards (rewards programs).
Offline stores go beyond their physical site to publicize and offer merchandise through catalogs, sponsorships, cross-promotions with other vendors and Web sites (sponsorship deals, in-context promotions, cross-site promotion). Offline establishments focus on presenting the right merchandise to the right target at the right price. The right price does not necessarily mean the lowest price, however. In fact, many companies differentiate on product selection, service, or uniqueness rather than price. Online vendors must follow suit.
So let's review what we have learned. There are many dimensions to building loyalty. First, take away any inhibitors to using your site by ensuring it loads quickly and is easy to navigate. Next, make sure you carry the right selection of products or services for your target audience. Look into personalization technology to provide customers with a more customized experience. Think about providing promotional offerings that encourage customers to act. Use online surveys to gather feedback and knowledge about your customers. Gather prospect names through lead generation and start a conversation with people coming to your site. Do consider a loyalty program but offer better service and information, as well as rewards to your frequent customers.
Finally, do not forget in-context selling. The Boston Consulting Group, Boston, found that 43 percent of time on the Web is spent communicating, 27 percent gathering information, and 13 percent of time is spent at entertainment sites. Only 8 percent of a Web user's time is spent shopping. As these findings point out, you better reach out to your target audience beyond your site and interact with that audience at other sites or through e-mail.
Loyalty comes from understanding your customers. By understanding that loyalty is a result of improving many aspects of your e-business, you will start to move visitors through the customer life cycle from awareness to interest, preference to purchase and, last but not least, to continued loyalty.