Companies appreciate new customers, but repeat buyers generate more profit and incur lower service costs. Customers need a reason to return. This could be achieved through marketing, outstanding service, or superior product quality. Regardless, the long-term viability of most e-commerce shops requires customers to make more than one purchase. Here’s why:
Higher Lifetime Value
A repeat customer has a higher lifetime value than someone who makes a single purchase.
Assuming the average order value in an online shop is $75, a customer who buys once and never returns generates $75 compared to $225 for a three-time buyer.
Now, let’s say the online shop has 100 customers per quarter with a transaction value of $75. If only 10 customers buy a second time at $75 each, the total revenue is $8,250, averaging $82.50 per customer. If 20 customers return, revenue is $9,000, averaging $90 per customer.
Better Advertising
The Return on Advertising Spend (ROAS) measures the effectiveness of a campaign. To calculate it, divide the revenue generated from ads by the cost. This measure is often expressed as a ratio, such as 4:1.
A business generating $4 in sales for every ad dollar has a 4:1 ROAS. Therefore, a business with a customer lifetime value of $75 aiming for a 4:1 ROAS could invest $18.75 in advertising to get a single sale.
However, $18.75 would attract few customers if competitors spend $21.
That’s when customer retention and CLV come into play. If the store could get 15% of its customers to buy a second time at $75 per purchase, CLV would increase from $75 to $86. An average CLV of $86 with a 4:1 ROAS target means the shop can invest $22 to acquire a customer. The shop is now competitive in an industry with an average acquisition cost of $21, and it can keep new customers rolling in.
Lower Customer Acquisition Cost (CAC)
The cost of customer acquisition results from various factors, including competition and the quality of ads and channels.
A new business typically relies on established ad platforms like Meta, Google, Pinterest, X, and TikTok. Lowering CACs on these platforms requires above-average conversion rates from, for example, excellent ad creative or seamless checkout flows.
The scenario differs for a merchant with loyal and engaged customers. These businesses have other options to drive profit, such as word-of-mouth, social proof, events, and contest marketing. All of these could have significantly lower CACs.
Reduced Customer Service Effort
Repeat shoppers usually have fewer queries and service interactions. People who have purchased a t-shirt, for example, are confident about fit, quality, and washing instructions.
These repeat buyers are less likely to return an item or contact customer service through chat, email, or phone.
Higher Profit
Imagine three e-commerce businesses. Each acquires 100 customers per month at an average order value of $75. However, each has a different customer retention rate.
Shop A retains 10% of its customers each month — 100 total customers in month one and 110 in month two. Shops B and C have 15% and 20% monthly retention rates, respectively.
Twelve months out, Shop A will have $21,398.38 in sales from 285 shoppers — 100 are new, and 185 are repeat.
In contrast, Shop B will have 465 shoppers in month 12 — 100 new and 365 repeat — for $34,892.94 in sales.
Shop C is the big winner. Retaining 20% of its customers monthly would result in 743 customers in a year and $55,725.63 in sales.
Certainly, retaining 20% of new shoppers is an ambitious goal. Nonetheless, the example shows the cumulative effects of customer retention on profit.