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The rewards of customer retention in e-commerce

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Mannu Mathew
Mannu Mathew
With over four years of experience, Mannu Mathew specializes in business journalism with a focus on technology, the retail sector, D2C, and E-commerce brands. He is working as the Assistant Editor for India Retailing and Images Retail Magazine.

Here’s why experts favour customer retention over acquisition in online commerce

New Delhi: A report by customer engagement platform MoEngage found that over 62% of customers uninstalled their e-commerce applications within the first week of downloading them.

Retention is increasingly becoming more challenging for businesses considering the current competitive environment and the fickle nature of consumers.

Why focus on customer retention

Being the proverbial low-hanging fruit, experts say focusing on retention rather than acquisition, makes more business sense as the cost of acquisition is often higher compared to that of retention.

Done right, retention helps reduce customer acquisition cost (CAC), which can result in better allocation of overall funds, said Rohit Nandwani, Founder and Chief Operating Officer of Hammer, a D2C fast-moving electronic goods (FMEG) brand.

“The loyal customer base often translates to word-of-mouth marketing,” said Nandwani adding Hammer’s current retention rate is 1%, which he expects to change with the launch of new categories.

Giving a different perspective on why retention is important, Abhishek Lodhaa, Co-founder, Inner Sense, a lingerie and maternity care brand said, “Retention is good because it gives us an idea of how much sales we are going to do in the coming months.”

The cart-retention connection

Cart abandonment is an important red flag, alluding to the customer’s indecisiveness and in consequence his chances of getting retained.

According to MoEngage, the longer a product stays in the cart, the lesser the chances that the customer will purchase it.

It found that of the new users who installed an e-commerce app and then added a product to their carts, only over 13% seemed to complete the purchase within a week. By week 3, only 7% completed the transaction and the trend continues to move down south.

Cart abandonment rates after one week of installing the apps are around 80%. This increases to 90% within the sixth week of using the app.

E-commerce platform Tata CliQ’s CEO Gopal Asthana said that the upward trend in cart abandonment rates is a sign of a growing and maturing industry.

“This could be largely attributed to an increase in purchase avenues and matured e-commerce shoppers,” added Asthana.

“With a dynamic consumer electronics industry, it is difficult to pursue consumers to a single brand,” said Rohit Nandwani of Hammer.

However, he adds that measures like offering competitive pricing, best-in-class product features and unique designs ensure that customers have a reason to stick to the cart end to end.

Customer retention across sectors

Whereas retention rates can differ depending on the industry, inc42 adds that the banking and insurance sectors have high customer retention rates, between 70-80%.

Competitive sectors like hospitality tend to have a significantly lower rate. Data from Exploding Topics, a data analysis website reveals that the retail industry on average has one of the lowest customer retention rates at 63%, whereas the media and professional services have the the highest retention rate of over 80%.

Shopping marketplaces have a retention rate of 33.7% on the first day which reduces to 8.7% on the 30th day. E-commerce has a retention rate of 24.5% on the first day which
reduces to 5.6% on the 30th day.

Factors that affect retention rate

High cart abandonment, add-to-cart vs actual purchase and uninstall rates of e-commerce applications are all enemies of retention. There are five crucial factors that drive retention.

1. Customer behavior

According to experts, a customer’s loyalty to a single platform is not permanent. Customers change decisions, habits, and lifestyles. Companies have to be cognizant of how long they expect a customer to transact with them. Continuously gathering customer feedback to understand the preferences and whether they are changing helps increase the retention rate, added experts.

2. Product variety

Customers are always on the lookout for variety and choice. However, sometimes a product catches the eye by its unique application for instance unique AI-based product and so on. In such cases, retention happens as there is demand for the product’s uniqueness. However, variety is critical for e-commerce businesses that do not have a differentiated offering for instance an online marketplace.

3. Ease of use

Quality of interface can impact retention, said Nandwani. People today care about the features and functionality of a website or application. Platforms should focus on easing the selection to purchase journey as every individual has a different tech maturity level.

4. Price war

“Competitive pricing is inevitable in a free market, offline or online,” said Gopal Asthana. The time-tested ways to deal with this are superior customer experience and loyalty programmes that reward repeat customers and encourage them to stick with the brand, added Asthana.

5. Speed of grievance resolution

“First contact resolution is an important factor that drives retention rate,” said Abhishek Elango, Co-Founder of underwear brand Tailor & Circus. Companies should ensure that the customer only has to interact once to get their complaint resolved added Elango.

This practice creates a good perception of them. It is also important because people don’t want to come back to a brand that they have had a bad service experience with.

The cost factor

Acquisition costs for companies can be as high as 35% of the selling price, as per Inc42 data. In recent years, brands across the world have reported an increase in customer acquisition costs according to marketing software as a service provider Optimove. One of the culprits behind the high costs is digital marketing platforms, according to Optimove.

These platforms make it difficult for brands to collect consumer data because of privacy elements, driving up data acquisition costs. However, easier access to data can bring down the acquisition-related cost and time.

Acquisition costs for companies can be as high as 35% of the selling price | Image Credit: Pixabay

Balancing acquisition and retention

While retention is crucial, acquiring new customers is equally important and since both need an investment of time, effort and capital, it is critical to maintain a balance between the two.

According to Mahek Mody, CEO and co-founder, upliance.ai, a large part of the acquisition is driven by positive word-of-mouth, both from trials and existing owners. For instance, when existing product owners help resolve queries of prospective buyers on a community platform, they are in a way facilitating acquisition.

Retention of users is tied to the usage of the product, referrals and how a company builds new features and offers great ownership and customer service, added Mody.

“New customers are important for growth. However, retaining existing customers can lead to higher lifetime value and reduced customer acquisition costs. Using targeted ads, social media posts, offline marketing, and targeted emails pave a path for the right balance between both,” said Nandwani of Hammer.

Asthana from Tata CliQ said that companies need to consider growth ambitions, customer segmentation and optimising acquisition for retention to strike the right balance.

How choice impacts retention

Asthana from Tata CliQ said that providing choices to customers can have positive and negative effects on retention. Choices can empower customers, but too many choices can overwhelm them, leading to decision fatigue and lower retention rates.

In addition to this, Asthana highlights that factors like curated recommendations, simplified navigation, customisation and feedback loop could be an effective way to come out of this problem.

However, on the bright side, companies can benefit when the product they offer is entirely different not in terms of variety and uniqueness, but innovation. Upliance’s Mody said that it is hard for consumers to find differentiated products in the home appliance segment.

Upliance.ai believes that truly differentiated products, backed by a fantastic customer experience will be able to retain customers and turn them into brand ambassadors. In the case of upliance.ai, the USP they operate has helped them choose customers more defined.

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