What Is Customer Retention Cost? 5 Ways To Reduce It

“Customer retention costs five times less than customer acquisition.”

Chances are, you’ve probably come across this quote before. And while it’s a good illustration of how important customer retention is for the long-term success of ecommerce stores, we’re not exactly sure that it holds true. Does retaining a customer cost five times less than acquiring one?

In this blog, we’re going to dive into customer retention. Why is focusing on customer retention so important? How do we measure customer retention costs? We’ll also cover strategies you can implement today to decrease customer retention costs.

Why is customer retention important for DTC stores?

The sentiment of the quote stays intact: retaining a customer is more valuable than acquiring customers, and usually costs less. Why? Because you already know that they face the problems your product solves.

Suppose you’re a DTC store using Google and Meta for customer acquisition. Keep in mind, you've already spent time and money on researching your target audience.

If you can’t retain your customers, acquiring new ones would be like filling up a broken bucket. You’ll keep spending thousands of dollars on marketing campaigns without boosting Customer Lifetime Value (CLTV).

The result? It’ll be too expensive to get sales. Your brand won’t survive.

So while targeting new customers will help you expand your customer base, it’s as important to use less expensive ways (we’ll get into this in a second) to entice them to repurchase. Invest in your current customers. This is where your ecommerce store will see the biggest margins and highest return on investment (ROI).

💡 CLTV, or LTV, is a measurement of a customer’s revenue at your store, usually calculated over a given period.

What is customer retention cost?

Simply put, customer retention cost is the amount you spend to retain a customer for a specific period.

Here’s what customer retention costs for an ecommerce brand can look like:

• The costs of the platforms you use: some text
  • Your email service provider (ESP). Ex.: Klaviyo or Sendlane
  • Your SMS platform. Ex.: Postscript or Attentive
  • Your subscription platform. Ex.: Skio or Recharge
  • Your loyalty program platform. Ex.: Rivo
• Repeat purchase rewards you provide in your loyalty program.
• Specialized offers you send to your email marketing list, like free shipping, limited-time deals, promo codes, etc. 

The hidden costs of retention include the salaries of the teams helping you implement these retention strategies.

Let's take a look at the customer retention cost formula.

How to calculate customer retention cost

Knowing your costs helps you achieve the following:

1. Understand how much you’re spending to retain a customer.
2. Allocate your budget efficiently based on the programs that are successful.

Let’s simplify this concept using an example.

You’re an ecommerce brand selling environmentally-friendly candles, Scents R Us. Here’s a detailed breakdown of your monthly retention marketing expenses.

Email & SMS marketing

• In-house team = $1000
• Email & SMS list building and design = $100
• Email & SMS marketing software = $300
• Total cost = $1400

Loyalty program

• Partner with a platform = $100
• Loyalty incentives or rewards* = $300
• Total cost = $400

*Your loyalty incentives and rewards will look something like this: Get a $5 coupon for completing actions like leaving a review. 

Social media activities

• Social media manager = $800
• Graphic designers = $600
• Total cost = $1400

So your total monthly spend on customer retention is $3200.

Customer Retention Cost (CRC)

Your customer retention cost is how much you’re spending to retain one customer. 

⤵️Here is the formula: 

Customer Retention Cost = Total Retention Cost / Number of Retained Customers

Now, suppose 400 customers made repeat purchases last month. The total CRC of all customers is $3200.

Your retention cost for one particular customer will be $8.

💡 Your average CRC is generally lower than your average acquisition cost.

💡 another formula you could use is: CRC per customer = Average CRC per customer * Average customer lifetime.

Repeat purchase rate

The repeat purchase rate is the percentage of customers who purchased more than once from your DTC store within a given timeframe. 

⤵️ Here’s how to calculate your repeat purchase rate.

Repeat Purchase Rate = (Number of Customers Who Made More Than One Purchase / Total Number of Customers) x 100

Let’s say you had 400 customers last month, out of which 150 made more than one purchase. Then, your repeat purchase rate for the last month would be:

(150/400) x 100 = 37.5%.

💡Read how Patchology achieved a 23.37% repeat purchase rate in 4 months. 

Wait, isn't Customer Retention Cost (CRC) a SaaS metric?

SaaS companies have long been measuring lifetime CRC. This is because of the nature of SaaS businesses: They usually have a free trial and high customer acquisition costs, and their billing is always on a recurring subscription model. Measuring retention costs is an obvious priority for businesses with these characteristics.

That being said, CRC is still incredibly important to measure for ecommerce stores. And while CRC is different to measure for SaaS, it's a crucial metric to look at when trying to increase CLTV of ecommerce customers.

How to reduce customer retention costs

To reduce your cost of customer retention, you need to increase your overall customer retention (remember the repeat purchase rate we just talked about?).

While these strategies we will talk about will help you increase your repeat customer rate (and decrease your customer retention costs), it's hard to fix negative customer satisfaction. Not only does your product have to be high-quality, but your customer service needs to also be top-notch.

Here are some ways you can increase your customer satisfaction:

• Train your customer success teams and customer service agents.
• Create helpdesk documents and chatbot agents to help your new customers navigate your product and website while your customer support team is offline.
• Train your customer service agents to deal with your customers with empathy.
• Set up a customer relationship manager so that your team is efficient.

Remember, you've spent so much money up until this point trying to acquire your customer. Don't skimp on the user experience.

Let’s dive into the strategies that will help improve your customer retention rate:

Email and SMS marketing

Email and SMS marketing are probably the first things that come to mind when you think about customer retention. And for a good reason. It’s cost-effective, and you already have all the tools you need (their email and phone numbers). Why not send your active customers a fun email and text reminder of you?

Personalize your emails and texts based on your customer’s purchase history and product views. Here’s an example of an “Early Access” email from Solawave.

💡 A great way to foster the customer relationship is by asking for customer feedback.

💡 Don't forget to create different customer segments in your e-mail flows for the best customer experience.

Test out direct mail

Here’s the thing: every ecommerce store sends emails. So you really have to work to make yours stand out. But direct mail? That’s going to be seen.

When your customers order from your store, they leave their addresses. Send your existing customers a flyer announcing your new collection (with a discount code to help push them to purchase).

Here’s an example from Carnivore Snax:

Build a mobile app for your brand 

With 60.28% of all website traffic coming from mobile devices, building an app for your ecommerce site improves the experience. With this method, you're meeting customers where they are. And sending push notifications is free.

Here’s an example push notification from Instacart, which advertised 50% off flowers for Mother’s Day!

Incentivize retention with your loyalty programs 

Loyalty programs reduce customer retention costs by incentivizing repeat purchases and building long-term relationships. Rivo’s customer loyalty programs can help you set up and distribute your rewards. Here’s how:

With the Rivo app, you’re able to set up a Points Program, where you reward your customers with points for completing different milestones. Milestones include signing up for the loyalty program, placing an order, reviewing a product, and following the brand’s social media pages (just to name a few). 

Then, once your customers have collected enough points, they can redeem them on your website. You have the ability to choose how points can be redeemed. Some options include coupons for your website, free shipping, and even a free product!

Rivo’s loyalty program will incentivize repeat purchases and increase customer engagement across your brand with increased reviews (social proof!) and followers on social media.

💡To push customers to purchase sooner, you can set your points to expire within a set time period.

The Shopify Plus brand Emi Jay used Rivo’s loyalty and rewards program to increase repeat sales. The brand introduced Sparkle Rewards, where customers can earn one sparkle for every dollar spent and redeem it later on future orders. As a result, they received +4000 to sign up for their loyalty program and generated an additional 10% sales from Rewards Members.

Ready to optimize customer retention costs?

Tracking customer retention costs is no longer an option. It’s a necessity. If your average customers spend less than your retention cost, their purchases won’t add value. The higher your retention costs, the lower your margins and profits. So, to boost your bottom-line ROI, managing your customer retention costs is critical.

Marketing costs are high and only getting higher. Don't let those new customers go to waste. Invest in your customer experience, customer success, and loyalty programs.

Want to give Rivo a try? Request a demo today!