Business

The retention paradox

Forget loyalty. Keep up with your customers.

Schaun Wheeler
April 22, 2021
7 MIN READ

Businesses need customers. That’s so obvious it hardly needs saying. Businesses grow through acquisition (new customers give you a try) and retention (past customers come back). That’s also obvious. Businesses grow most - both in terms of speed and size - when they focus most on the customers they already have. Maybe that’s a little less obvious. Smart businesses acquire most customers through retention. Hopefully that last one wasn’t obvious, because that’s what this post is about.

I saw a study from Econsultancy that found that 82% of companies agreed that retention was a cheaper way to grow than acquisition. The same study found that 85% of companies focus more on acquisition than retention. That’s a paradox: even if we assume the full 18% of companies who favored acquisition also focused most of their efforts in that area, that’s still a whopping 67% of companies who spend most of their time on the thing on what they consider the less effective growth strategy.

Let's try to understand that.

Retention is incredibly powerful

It’s not hard to understand why most companies think retention is a more effective driver of growth than acquisition. It really has a lot going for it:

  • It's less expensive. A study by Bain & Company indicated that, on average, due to advertising and other costs, a company typically doesn't break even on a new acquisition until that customer's fourth purchase. In some industries, it takes over 18 months of retaining a customer to offset acquisition costs.
  • It's more profitable. The same Bain study found that repeat customers spend 23-67% more than new customers, depending on the industry. Another Bain study found that a five percent increase in customer retention can increase a company’s profitability by 75 percent.
  • It creates acquisitions. Bain found that, on average, a customer gives 3-4 times more referrals by their tenth purchase than they do after their first purchase. McKinsey estimated that word of mouth is the primary factor behind 20-50 percent of all purchasing decisions.
  • It enables cross-selling. Depending on the industry, 63-70 percent of customers who bought one product from a company were willing to buy a completely different product from the same company.

So there are very clear benefits of retention. But most companies focus more on acquisition: I think a look at customer loyalty studies helps explain why:

  • Customers know - and like - that they have many options. According to Nielsen, 42% of consumers actively search for new brands to try, 27% of consumers stick with a brand only for lack of something new to try, and only 8% of consumers try to stick with brands they've already tried.
  • Customers will just leave rather than give feedback. Oracle found that 89 percent of consumers began doing business with a competitor following a poor customer experience, and that 50 percent of consumers gave a brand only one week to respond to a question before they took their business elsewhere.
  • Customers don't need much incentive to leave. 60% of consumers said they would gladly switch brands for no more incentive than a single coupon.

I think companies largely - and mistakenly - equate retention with loyalty: it seems like yet another obvious statement that you keep customers if they stick with you and you lose them if they don’t. This is an incredibly passive, almost fatalistic, attitude to take, but it seems to be the most common one. Everyone wants customer loyalty, but no one is going to get it, and on some level it seems that most businesses realize that.

They don’t realize that loyalty isn’t their only option. More on that later.

Acquisition-driven growth carries hidden costs

Acquisition is more about framing and positioning than products and offerings: you offer what you’ve always offered, maybe making incremental improvements along the way, and hire talented people to convince customers that the offer is the best solution they can hope for.

Businesses who drive growth primarily through acquisition constantly scramble to make their offerings fit the expectations their salespeople have set. You end up creating a mishmash of features and commitments that are hard to maintain and even harder to justify except by referencing an important customer who said they wanted something. That doesn’t lead to strong products because all of those incremental gains don’t accumulate - they build out, not up. Growth under those conditions is as fragile as it is slow. All a customer needs is a reason to leave. As soon as they face an unmet expectation, changed conditions, or a new alternative offering, they’re gone.

All that being said, acquisition, less effective in outcome, is so much easier to wrap your head around as a process. Consistent retention requires that you not only have a good idea of what your customers want (something many customers themselves don’t know) but also that you can constantly, substantially change in response to those changing wants. That’s hard - there’s no doubt it’s very hard - but growth from that kind of change is resilient. In fact, it’s better than resilient: if you’ve set up the infrastructure and practices to disrupt yourself on demand, shifts in customers just make you stronger.

That’s the reason for the paradox: to really succeed at retention, businesses need (1) a view of consumers’ wants that updates almost as frequently as the wants themselves do, and (2) the ability to update the business itself almost as frequently as the view changes.

Aampe was built to fulfill the first need, and to facilitate fulfillment of the second.

Customer communication as product development

For the sake of convenience, let’s use the term “product” to refer to the commodities, services, or platforms a company wants its customers to buy. Products have a current state - the way the thing looks right now - and have multiple future states - the ways the thing could look later, depending on where you decide to invest your resources and effort.

Customer communication is integral to figuring out which future state should become the new current state. If you talk to you customers about two different features, and a lot of customers respond favorably to the first and respond negatively or not at all the second, that teaches you to invest in building out the first feature and either leaving the second as it stands, or perhaps even removing it. So customer communication isn’t just about your product - it is the seed bed for your product’s future state, the way customers give you information about the possible future versions of your product they are mostly likely to buy.

This is, in my opinion, the most compelling and most overlooked benefit of a focus on retention. In evolving an offering to keep current customers happy - not just a couple key customers, but all customers - businesses end up developing new features. These features attract new customers, who weren’t enticed by the previous feature set. If you do retention right - if you have that dialog with your customers in a certain way and have the ability to consolidate the results of those conversations in a way that you can’t lose sight of small wins that could become big ideas - then acquisition becomes a whole different game. You no longer have to sell prospects on the idea that you’ve changed. You’ll have actually changed. Retention, done right, opens up new markets.

Your customer communication has the ability to impact all of your products, so it should be deliberately managed, just like all your other products.

Data-augmented product management

People who manage products face a lot of questions, some harder to answer than others:

  • "Build" questions. These are questions like “what products do you offer?” and “what are each product’s main features?”
  • "Measure" questions. These are questions like “which products and features are most valuable to which of your customers?” and “are some features valuable to different customers in different ways?”
  • "Learn" questions. These are questions like “which features will give us the greatest return on investment if we work to build them out?” or “to what extent do customer reactions to the feature say something about the feature itself, as opposed to how we communicated it?”

“Build” questions are easy to answer. “Measure” questions are harder, and most product managers I’ve met wish they could answer them better. I’ve met very few product managers who can consistently answer “learn” questions, even though those are the questions they are most often (and most insistently and skeptically) asked.

Aampe answers all three kinds of product questions.

  • It uses customer communication to organize your product into a coherent picture of what has been built so far. As you tag particular pieces of communication as pushing a particular value proposition, or highlighting a certain feature, or offering a certain kind of incentive, you’re building a map of your product and all of the ways it can go to various markets.
  • Because it can tie together similarly-tagged experiments, Aampe can measure the value of each part of your product, not just on average over your whole customer base, but in relation to each individual customer.
  • Most important, Aampe leverages your organic communication with your customers to teach you about your product’s future, testing out new ideas - even seemingly crazy ones, estimating return on investment, and differentiating between reactions to your product itself and the way you framed that product in a particular message.

Aampe tracks your customers’ interactions with your product and consolidates those interactions into a product “memory”. I use that term “memory” deliberately, because a memory is so much more useful than a complete transaction log. As a human, your memory doesn’t remember every single thing that happened to you. It wouldn’t be useful if it did: the amount of time it would take to sort through every past experience, separating signal from noise, would render you unable to ever act. Memory is useful because it is consolidated experience: it remembers what things you want more of, what things you want to avoid, and how to tell the difference between the two.

A product memory should do the same. Aampe records every customer’s interaction with every message related to every aspect of your product, but you don’t have to read through all those records, or even through reports summarizing all those records, to make a decision about your next communication or prioritization or feature request. Aample encodes all of those things in a condensed, coherent memory map that reflects all the lessons learned from your communication, scores all of your customers on the features, value propositions, and incentives that are directly relevant to your business, and uses those scores to make decisions about how to communicate next.

Aampe turns the build-measure-learn path into a continuous loop, where previous learnings determine what will be learned next and which customers are best positioned to help do that learning. The system can run on auto-pilot, prompting you to create messages to reflect specific aspects of the product, test customer responses to those things under different conditions, and update response models to optimize future communication. The whole thing turns your everyday communication with your customers into a product development laboratory.

Better than loyalty

It’s a mistake to think that retention comes from loyalty. Maybe it did, at one time. It doesn’t now. What companies call “disloyalty” consumers call “life”: they’re just taking advantage of the options they know they have. That’s not going to change. The whole idea of loyalty-driven retention depends on the idea that consumers will voluntarily choose to keep their behavior constant even as their environment of options changes. That’s an unrealistic expectation.

It’s also an unnecessary one. Instead of trying to get your customers to slow down, you, as a business, can speed up. At its core, that’s what Aampe does: it allows you to keep up with the rate at which your customers’ lives (and wants and needs) change. Always-on, massively parallel experimentation gives you confident agility - the ability to know what’s working, and what’s not, and which customers to approach first as you build out the things that work, and what kind of approach each customer will best respond to. Aampe creates a memory of your product that is far more detailed and readily accessible and shareable than a human memory could be.

Forget loyalty. Keep up with your customers.