Many e-commerce businesses prioritize getting new customers. However, existing customers are easier to sell to, and retaining only 5% of your customers can increase your profits by up to 95%.
Customer retention directly influences the Customer Lifetime Value (LTV), a crucial metric for e-commerce businesses. There are various strategies to increase LTV, the most effective of which is cohort-specific retargeting.
Here is a comprehensive guide to increasing customer retention and LTV using cohort-based remarketing.
Why Should You Care About Customer Lifetime Value?
Customer lifetime value (LTV) refers to the total worth of a customer to a business. It is one of the most critical metrics for e-commerce businesses, as it indicates the total return on investment (ROI) on the money spent on acquiring a customer. If your customer acquisition cost (CAC) is low and LTV is high, your business is growing.
The formula for measuring LTV is:
LTV = CAC – Total Customer Revenue
In e-commerce, an LTV/CAC ratio of greater than 3.0 is good. However, if you are a new business, you could aim for more than 2.0.
Some e-commerce businesses don’t measure LTV due to non-targeted marketing and inadequate reporting systems. Here is a simple, three-step process to measure LTV.
- Identify all the touchpoints where a customer creates value for your brand
- Measure revenue at every touchpoint.
- Add the revenue generated by the customer over the lifetime.
Importance of Measuring and Improving LTV
LTV is the best metric to determine business growth. If your acquisition costs increase in parallel with your revenue, your LTV remains constant. If your LTV is low, you’ll need to spend more on acquiring customers to achieve your business goals. On the other hand, if your CAC costs are low and LTV is increasing, your business is showing an uptick.
What Is Cohort-Specific Retargeting and Why Is it Important?
Increasing LTV is all about retaining customers. Since getting new customers is 5x more expensive than retaining existing customers, customer retention can reduce your CAC and increase your LTV.
Retargeting is one of the most effective techniques to bring your existing customers back and encourage them to buy more. It includes displaying online ads and marketing messages to customers who have taken prior actions on your site.
You might think: why retarget existing customers when you can send them emails? You’re right. All your customers are a part of your email list, and you can send emails to engage them.
But here’s the truth about email marketing. All your list subscribers will stop interacting with your emails at some point. They’ll stop opening emails and eventually unsubscribe, resulting in churn. The average email unsubscribe rate is 0.17%. If it’s higher for your business, it means your customers are losing interest in your brand.
The best way to reignite interest is by retargeting them using ads. Look at this example from ModCloth, a women’s clothing store.
Importance of Cohorts
Facebook and Google allow you to place a Facebook Pixel or Google tag on all your website pages and show retargeting ads to everyone who has visited your website in the past. You can segment these visitors into cohorts based on their behavior and preferences. For example, one cohort can have users who have purchased from you within two months. Another cohort can have users who have visited your site in the last seven days.
You can retarget all your past website visitors if you want without dividing them into cohorts. However, it will increase your marketing spend without increasing your revenue. By creating cohorts, you define which customers you want to target and which ones you want to exclude. You can laser-target your retargeting campaigns and increase your LTV without increasing customer retention costs.
How to Use Cohort-Specific Retargeting Campaigns to Increase LTV?
Remarketing can go a long way in increasing customer retention, and therefore, LTV. By strategically segmenting your customers based on their past behavior and interests, you can enhance your remarketing campaigns and boost retention.
Follow these techniques to streamline your retargeting campaigns and increase customer lifetime value.
Determine Which Customers You Want to Target
Cohort-specific retargeting is all about segmenting your customers instead of retargeting them all. You can segment your customers based on various factors, such as:
- Purchased in the last 90 days
- Visited a product page in the last 30 days
- Subscribed to your email list
- Communicated with you via email or social media
- Redeemed reward points
Segmenting your customers can increase your LTV in two ways. First, you can rule out customers who are less likely to convert. For example, if a past customer has unsubscribed from your email list or marked your email as spam, they are clearly not interested in buying from you.
Second, you can test multiple cohorts. Let’s say you segment your past customers into two groups:
- Visited your website in the past 30 days
- Opened your email
You can retarget the two customer types and see which converts better. This can help you make informed marketing decisions in the future.
Realize Why These Customers Stopped Shopping from You
Churn is normal and inevitable in e-commerce. The average e-commerce churn rate is 7.02%. If your churn rates are higher, something is probably bothering your customers, and that’s why they’re not buying from you.
Some common causes of churn are:
- Poor onboarding (22.9%)
- Underperforming product (19.85%)
- Ineffective relationship building (15.65%)
- Overselling (13.74%)
- Poor customer service (13.74%)
You can’t do much if a customer doesn’t need your product. But if they stopped buying from you because of reasons like poor customer service or ineffective relationship building, you can bring them back.
Conducting surveys can help you understand why your customers are unhappy. There are several survey and feedback tools that you can use to collect customer feedback. QR codes can be helpful in feedback collection. You can use a QR code generator to create a QR code and put it up on your QR code packaging. Link the code to a feedback form. Customers can scan the code and give their feedback.
Develop a Remarketing Plan
Once you know why your customers stopped shopping from you, you can create a remarketing campaign. Let’s say you sell fashion and apparel products. During your survey, you found people stopped buying because they were misinformed that your products contain animal fibers.
You can retarget these customers and highlight in your remarketing campaigns that your products are “cruelty-free” and “100% vegan.”
Your remarketing campaign will depend on why customers stop buying from you. If a confusing refund policy was the reason, you could highlight “15-day return policy” in your remarketing campaigns.
It’s important to support your retargeting ads with other modes of communication, mainly email. Using email retargeting with retargeting ads can help attract your existing customers and boost sales.
Get Seasonal and New Product Sales
Remarketing campaigns can be highly effective for targeting existing customers when you launch a new product. At the time of a product launch, find the cohort of your existing customers that would be most interested in buying it.
Suppose you have developed the following cohorts based on age:
- Gen Z: 16-24 years
- Millennials: 25-34 years
- Middle-Aged: 35-55 years
- Seniors: 56 years and more
You launch a new product—custom-printed mobile covers. Who do you think will be the most interested in buying them? Gen Z will be the most suitable target audience. You can create a remarketing campaign and choose “Gen Z” as the custom audience.
Retargeting your customers during seasonal sales can also produce positive results. E-commerce holiday sales in the US surpassed $1 trillion in 2019, with $1,536 being the average household spending. If you are coming up with a holiday sale, start running remarketing campaigns one week in advance to bring back your existing customers.
Send Cart Reminders to Reduce Cart Abandonment Rate
An underrated way to increase customer lifetime value is by sending cart reminders. It’s not uncommon for customers to add items to carts and not complete a purchase. Almost 72% of customers do that.
There are two ways to encourage customers to complete the purchase. One way is by sending transactional emails. You can set up email automation and send automatic email reminders when a customer adds items to a cart but doesn’t check out.
The second way is to run abandoned cart retargeting ads to remind customers that they need to complete their purchase. Since remarketing ads have a 10x higher click-through rate and 291.7% higher conversion rate, the chance of getting a sale is high.
E-commerce companies may see abandoned carts as a setback, but it can actually be an opportunity to increase average order value (AOV), and therefore, increase the LTV. If a customer doesn’t complete a purchase, you can give them a limited-time discount if they increase their order value to a certain amount.
Use Dynamic Retargeting to Show Similar Products
The dynamic remarketing feature in Google Ads can take your retargeting efforts a step further. It allows you to show customized ads to your existing customers based on the products they bought earlier.
Ads randomly pick products from your Merchant Center feed that best suits the products your customers have bought. This remarketing technique is more effective than picking a remarketing list and displaying ads to customers in that list.
You have done the hard work and acquired a customer. Don’t let them go after one purchase. With cohort-specific remarketing, you can encourage your existing customers to return to you. This helps in promoting customer retention, increasing customer lifetime value, and achieving greater business growth.