How to Patch the Holes in Your Leaky Bucket
The pandemic has caused significant changes in consumer behavior. For many brands, these changes meant an increase in acquisition rates and a dramatic reduction in retention rates. If your active customer volume is not keeping pace with your new customer acquisition, then your business is experiencing the dreaded “Leaky Bucket” problem. Here’s how to identify the source, scope, and solution to your customer retention problem.
The “Leaky Bucket” concept is used to describe the flow of new customers into a business and their natural attrition over time. In the analogy, the business is a bucket with holes in it, new customers are poured into the bucket as water, and if these customers don’t repurchase over a period of time, they are considered as churned and drain out the holes.
The COVID-19 pandemic has exacerbated the leaky bucket problem for many businesses, and a key focus over the next year should be on minimizing these leaks to maintain a robust and active customer base.
Some people like to treat the leaky bucket like it’s a crisis, but it’s natural for every brand to have some leaks in its bucket. All customers will churn at some point in time—even if it’s years or decades after their first purchase—and you’ll always need to draw in new business to continue your growth. It’s impossible to have zero leaks in your bucket, but you need to make sure that the leaks you do have are small enough that your business is still growing.
High churn rates can bring your growth to a halt, and funneling all of your business’s resources into replacing churned customers is far less efficient than tightening up your retention strategy in the first place. If you’re losing customers faster than you can acquire them, then you’re missing out on massive amounts of revenue.
In fact, cultivating a new customer relationship can cost up to 16x more than developing the loyalty of an existing customer—and repeat customers can provide as much as 10x the value to your company than one-time buyers ever will. Increasing your customer retention rate, therefore, will have a direct and material impact on your profit.
But before you can begin plugging the holes in your bucket, you first need to know where those holes are and what impact they’re having on your business.
How leaky is your bucket? (Hint: Probably leakier than you think)
For the vast majority of brands we’ve worked with, an average of 50–80% of customers purchase once and never again. That level of churn makes for incredibly leaky buckets and provides little in recurring revenue to grow the business.
However, assessing the leakiness of your bucket is difficult without the right tools and tactics. If you’re not paying close attention, you could end up with a situation like the one depicted in the graphs below. As you can see, customer acquisition seems to be increasing year-over-year, but customer retention rates are falling flat:
That’s a significant problem because the longer you can retain, up-sell, and cross-sell a customer, the greater their customer lifetime value (CLV).
As you can see in the graphs below, the customers who do remain loyal through their second and third years nearly double their average spend—but less than 1% of this business’s customers remain active for that long:
So how do you track this information and ensure that your customer acquisition and retention strategies are sustainable year-over-year?
Recency, Frequency, and Monetary Value (RFM) segmentation is a tried-and-true model that can help you assess the scope of your leaky bucket problem and understand how to address it appropriately. It measures:
- The recency of purchases: For most businesses, customers who bought products within the past 12 months would be considered “active” customers. If the majority of your customers haven’t purchased in over a year, then you probably have retention challenges that you need to address.
- The frequency of purchases: How often do your customers purchase your products? If the majority of your customers buy once and never again, that’s a sign that you need to be doing more to drive the second sale.
- The monetary value of purchases: When a customer does buy from you, how much do they typically spend? High-value customers should be the primary focus of your retention strategy, whereas low-value customers will require a much lighter touch.
Ultimately, RFM segmentation helps you understand the quality, value, and behaviors of specific customer segments, as well as their potential for long-term engagement. Segmenting customers by their specific behavioral patterns helps you understand why customers are likely to churn, which customers to re-engage, and how to re-engage them for the best results.
Traditionally, RFM segmentation has been an extremely time- and labor-intensive endeavor. Today, though, you have the option of implementing a customer data platform (CDP) to dramatically increase the efficiency and accuracy of your RFM analysis. By unifying your customer data within a CDP, creating granular RFM segments to understand why and when customers are lapsing, and activating those segments across all channels, you can seamlessly re-engage lapsed customers and plug the holes in your leaky bucket.
5 strategies for plugging the holes in your leaky bucket
Make no mistake: The solution to your Leaky Bucket problem is not to accelerate the rate at which you acquire new customers but rather to strengthen the loyalty of your existing customer base. In turn, your most loyal customers will continue to add value to your business without the initial expense and time-suck associated with acquiring new customers.
Once you’ve unified your data and achieved a clear and comprehensive view of your customers’ behavior, you can develop informed solutions to your leaky bucket problem. Here are some proven tactics for slowing attrition rates by strengthening the loyalty of your existing customer base.
1. Track early leading indicators of churn and interfere as needed.
Customers churn for a variety of reasons. With unified customer data and predictive models, you’ll be able to identify customers with a high likelihood of churn ahead of time and step in to re-engage these customers before they’ve lapsed for good.
Although leading indicators of churn will vary for different businesses with different target customers, common churn indicators include:
- Lack of email engagement.
- Service-related complaints.
- Negative product reviews.
- Irregular buying patterns.
- A decrease in overall spend.
Keep a pulse on these signs and symptoms of churning customers, and set up workflows to re-engage and satisfy customers at each stage. For example, if a particular segment of your customers hasn’t opened your emails in a while, you could try targeting them with social ads instead. Or, if you notice a negative review of your products, your customer service team can step in and handle that complaint as gracefully as possible, hopefully repairing that customer relationship.
A CDP can help marketers, managers, and customer service team members monitor and respond to these indicators from a single, easy-to-use hub.
2. Refine your customer acquisition strategy to focus on high-quality prospects.
What if you do your RFM segmentation and you notice a huge segment of low-value, one-time buyers? That should tell you that you’re attracting customers who are a poor fit for your products and your brand.
In that case, it’s your customer acquisition strategy that needs optimization. Instead of taking a spray-and-pray approach to marketing, refocus your customer acquisition strategy to attract only people with a high likelihood of becoming high-value, long-term customers.
First, determine which product categories have an above-average volume of first-time purchases and an above-average customer lifetime value. These are your “hero” products, and they’re the ones you should emphasize in your acquisition campaigns.
Next, analyze the segment of customers who’ve purchased these products and build lookalike audiences that mirror them. For example, if your highest-value customer segment happens to be middle-aged women who live in coastal areas, then you’ll want to target non-customers with similar traits in your marketing. If that segment also tends to buy shoes as their first purchase, then your first-touch marketing campaigns should present them with messages, images, and promotions centered around shoes.
Analyzing, segmenting, and activating audiences that are this granular can be difficult with siloed retail systems. A CDP can help you tackle this process with ease.
3. Double-down on personalization tactics.
Ninety-one percent of consumers said they are “more likely to shop with brands who recognize, remember, and provide relevant offers and recommendations.” No wonder that personalization has become one of the highest priorities for marketing teams in recent years; it’s a highly effective tool for acquiring, retaining, and upselling customers.
And the first step to enhancing your personalization—and, consequently, improving your customer retention rate—is achieving a single, 360-degree customer view.
With unified customer data, you can gain deep insights into what your customers need, want, and prefer from their favorite brands. Informed by these insights, you can not only humanize your retargeting campaigns to better connect with your customers, but also improve your end-to-end customer service.
Remember, effective personalization goes beyond just using a customer’s first name in an email; everything from the timing of communications to the channel through which you deliver those communications can be tailored to fit the specific audiences you’re trying to reach.
4. Build a loyalty program to reward high-value shoppers.
In study after study, research has shown that humans are hard-wired to respond positively to even the tiniest of rewards. This fact makes offering loyalty programs a powerful method for increasing retention rates.
Although implementing a loyalty program can seem like a massive undertaking—especially for small, emerging brands with limited resources—it’s entirely possible to create a simple, effective rewards program with the right data and tools. Instead of trying to implement a complex rewards program all at once, you can start small with a few tiers based on customer lifetime value and automated reward triggers. When done successfully, this easily-managed rewards strategy based on customer data can drive incredible results.
Don’t believe us? Here are a few statistics demonstrating the value of a loyalty program:
- 50% of consumers are willing to change their behavior to reach higher tiers in loyalty programs, and more than 75% of consumers consider loyalty programs to be a key component of their relationships with brands.
- 85% of American consumers are interested in having details of their activity and behavior tracked in order to receive personalized rewards and brand experiences.
- On average, loyalty program members spend 5–20% more money and make purchases 5–20% more frequently than non-members.
- Increasing customer retention rates by just 5% can boost profit by a whopping 25–95%.
Clearly, a loyalty program can extend the lifetime of your average customer and boost the value they offer to your brand. Not only that, but it also provides you with zero-party and first-party data which can strengthen your personalization efforts across the board.
5. Survey customers to find out why they leave—and what would make them stay.
Sometimes, the most genuine and effective way to deal with high churn rates is to get personal: Ask your churned customers why they left.
Understanding how your customers think, what they value, and why they make purchasing decisions is the first step to providing truly personalized and satisfactory brand experiences. That’s why businesses collect customer data, after all—because the more you know about your customers, the better you can cater to them.
If you have gaps in your customer data or you’re struggling to draw actionable insights from the data you do have, the best way to fill those gaps is by speaking with the customer directly. Strategically-designed surveys can point you to the leaks in your business’s bucket, and they can inform customer win-back campaigns as well.
Of course, a CDP can help you manage these surveys and compile them with the rest of your data to develop holistic customer profiles. By collecting customer insights directly from the source and then enriching those insights with second-party and third-party data, you can develop hyper-personalized acquisition and retention campaigns that make your customers feel heard and valued by your brand.
Patch the holes in your leaky bucket by stitching together your customer data
Effective customer retention begins with unified data.
By combining your data into an enriched single customer view, you can get to know your customers better: which products they like, where they prefer to shop, how much money they tend to spend, which marketing messages resonate with them, and more. Granular customer insights help you provide your customers with the elevated experiences they need to keep coming back for more.
After all, your most loyal customers are your most valuable customers. If you’re looking for more tips on improving your customer retention rates and turning one-time buyers into two-time buyers and beyond, READ THIS NEXT.
If you’re curious about the profit, insight, and efficiency you can gain by implementing a CDP, click the link below to contact a member of our team. We’d love to chat with you about how Lexer’s CDP can help you patch—and prevent—holes in your business’s leaky bucket.