Retail CEOs, CFOs and CMOs are more challenged than ever to answer the growing omnichannel demands of consumers while providing profitable growth for owners and shareholders. The issue often arises that with disjointed data and even more siloed organizations, the answers C-level retailers need are almost impossible to attain. They are often not asking the right questions to understand how their merchandising, marketing, operations and finance efforts should be performing and if they are truly winning the retail battle.
Through my years in working with retailers, I’ve determined that there are a key set of questions that retailer executives must be prepared to answer, and should be regularly posing to their teams in order to stay profitable and survive. The first of those questions is related to customer profitability:
How many of your new customers will become second time purchasers? What about fourth or fifth time buyers? How do you create a culture that instills customer loyalty?
Advertisement
The first-to-second time purchaser question is a powerful one to ask if you want a true indication of the quality of your end-to-end experience. If your answer is around 40% to 50%, you are doing well. Our benchmark suggests that the best in class predict that around 70% of their new customers will make their next purchase. At the other end of the spectrum, the worst can have a transition rate of less than 10%.
The timing of the second purchase can be enormously varied. It is important to understand that this is a long run transition probability. And what is considered to be long run is very different depending on the category.
For example, if you’re selling fast fashion, you should expect to have seen most subsequent purchases within three months. But if you’re selling washing machines, then the second purchase is likely to take quite a bit longer.
Many retailers judge their customer retention using the key metric of repeat customers — their question is ‘How many repeat customers do we have each week?’ However, this measurement is naturally volatile and hard to benchmark. Why? In the early stages of growth, you will expect the majority of sales to come from new customers.
But then as your business matures, as it has for many e-Commerce companies, most of your sales will come from existing customers. So the percentage you should expect from new vs. repeat customers in any given week is a rather arbitrary measure.
Land’s End has a mantra that you’re not a customer until you’ve made two purchases. Its customer acquisition team focuses on getting customers to make a second purchase, and not just that first transaction. Having this target creates a culture that drives a lot of the right behaviors toward customers.
These retailers are intent on making sure their customers receive a product they like, on time, and that the initial CRM is sufficient to get them to come back a second time. They avoid the ineffective and wasted efforts of “buying transactions” using expensive marketing that only deliver a short term, one-off purchase.
The key to success here is to take a joined-up approach to measuring the things that matter to consumers, and then taking action on disconnects in the customer experience. We have found that the retailers who focus on fixing these disconnects can see a 50% increase in their second time repurchase rate. And this is what creates the core platform for growth: a loyal, growing and engaged customer base.
Michael Ross is the Co-Founder and Chief Scientist of DynamicAction. He has spent the last 20 years in the e-Commerce world. He joined McKinsey in 1994 and spent 5 years consulting in the early days of the Internet. From 1999 to 2006, he was co-founder and CEO of figleaves.com [which was sold to N.Brown in 2010]. Since 2007, he has been the Co-founder and Chief Scientist of OrderDynamics (formerly eCommera) which delivers technology and decision analytics solutions for multichannel retailers including Neiman Marcus, ASDA, Brooks Brothers, Jaeger and many others. He is also a non-executive director of Abcam plc and Wex photographic.
