The leaky bucket effect.
The pandemic has caused a wave of dramatic shifts in consumer behaviour. For many businesses, this shift has meant an increase in acquisition rates and a 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.
The “leaky bucket” concept is used to describe the flow of new customers into a business and their natural attrition over time. In this analogy, the business is a bucket with holes in it, new customers are poured into the bucket and if they don’t repurchase over a period of time, they’re considered a churn and drained out the holes.
The last 18 months has exacerbated the leaky bucket problem for many businesses, and a key focus over the next year should be minimising these leaks to maintain a robust and active customer base. Here’s how to identify the source, scope and solution to your “leaky bucket”, meaning customer retention problems..
How leaky is your bucket?
A loyal customer provides substantially more value to your business than a one-off sale ever could. Every time a customer comes back to make a repeat purchase, they’re driving up their customer lifetime value (CLV) with no additional acquisition costs. In this way, CLV can be used as a partial measurement of customer loyalty to patch those holes in your bucket.
In fact, the most critical milestone for creating loyal, long-term and highly profitable relationships is the second interaction with the customer. 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. With these metrics, driving the second sale and preventing leaks in your bucket is a growth and profit strategy that can’t be ignored.
We know that humans are inherently attracted and respond positively to rewards, making the notion of a loyalty rewards program a robust tactic to enhance customer retention rates and reduce leaks. While implementing a rewards program can seem overwhelming, creating a simple, yet effective, rewards system is made much more seamless with the help of data and analytics.
For example, Australian retailer, Boody, creates sustainable and ethical bamboo clothing and underwear and has a strong cohort of loyal customers through its rewards program called The Goodness Loop. This retailer incentivises the second purchase and prevents churn by offering consumers a relevant product to them based on their prior purchases as well as coupons for up to 15 per cent off their purchase.
Plugging holes in the leaky bucket
Contrary to popular belief, it’s not the first, but the second sale that is the most critical milestone for growing your customer lifetime value (CLV) and preventing a leaky bucket problem. Take stock of how often your customers make purchases. Are the bulk of your customers buying once and then never again? If so, it’s a sign that you need to be more proactive about driving the second sale.
When we first started working with retailers, the vast majority had concerningly high one-time buyer ratios. On average, 50-80% of their customers purchased once and never again, indicators of a high churn rate leading to leaky bucket syndrome.
We know more than half of customers who make the second sale will do so within the first 90 days. This means that retailers must strategically engage new customers with personalised, targeted, timely and rewards-driven marketing messages. These tactics will help retailers maximise conversion to the second order, drive customer loyalty, increase overall CLV and help plug holes in a leaky bucket.
For example,Super Retail Group is thriving with active club members growing by more than 20 per cent to eight million members in total, revealing the power of leveraging rewards to prevent churn. By starting with a truly unified view of your customers, you’ll have the ingredients needed to establish loyalty and in turn develop stronger, longer-lasting relationships.
Creating an (almost) leak-proof bucket
Customer acquisition costs have increased 50 per cent in the last 10 years. The shift to online shopping has grown tremendously, and most consumers now prefer to shop by using digital devices. For retailers, this means that there is ample opportunity to reach new customers, but also means customer acquisition costs (CAC) are at an all-time high.
Keep in mind that potential customers can go to various online stores before deciding on a particular brand or product. So, while CAC soars and competition for new customers becomes increasingly difficult, savvy retailers must prioritise building a loyal customer base to beat the competition.
At the end of the day, retailers who don’t understand their customers can’t engage with them properly and are likely grappling with a leaky bucket problem. In today’s digitised world, the best way to engage with customers is through data. On average, only 5 to15 per cent of transactions in-store are linked to a customer profile, so a strong loyalty program uses data collection to help streamline the overall customer experience and better track customer preferences to prevent churn.
Some people like to treat the leaky bucket like it’s a crisis, but in reality every business has some leaks in its bucket. In order to grow, you’ll always need to draw in new business. While it’s impossible to have zero leaks in your bucket, you’ll need to make sure that the leaks you do have are small enough to not adversely impact growth. High churn rates can bring growth to a halt, and funnelling all of your business’ resources into replacing churned customers is far less efficient than tightening up your retention strategy in the first place.