James Hurman: forget customer retention it’s all about spend

Advertising effectiveness expert James Hurman said retailers should focus less on customer retention rates and more on how much people spend over time to drive growth.

James Hurman is a marketing effectiveness expert, entrepreneur and investor.

One of marketing’s most accepted rules: that acquiring a customer costs five times as much as keeping an existing customer, is wrong, according to advertising effectiveness expert James Hurman.

An analysis of $1.2bn worth of spending data from 1.7 million customers of eCommerce retailers revealed that contrary to marketing wisdom, businesses should focus less on retention rates and more on how much customers spend over time, if they wish to drive growth.

Mr Hurman, the co-founder of brand tracking business Tracksuit, said the analysis, which used data from agencies Overdose Digital and Andzen, revealed a negative relationship between customer retention rates and total annual revenue growth.

The e-commerce retailers that retained fewer, but higher spending-customers grew at more than three times the rate of the brands that had high customer retention rates but the customer spend was flat or even declining.

“You think logically that, if you retain more customers, then surely that would mean that you are more likely to grow than if you retained fewer,” said Mr Hurman.

“Not all customers are created equal. Some are very good valuable customers, some are not, and it’s important that we understand who the best customers are and how we nurture those, as opposed to just spending time and effort nurturing a much broader group of customers, who might be somewhat or almost entirely the wrong ones.”

The report, which was conducted in partnership with CRM platform Klaviyo, also revealed that loyalty programs do not guarantee a growth advantage, with Australian brands that do not have loyalty programs growing three-times faster than brands with programs.

The research reinforces the need for businesses to invest more in data analysis to identify the most attractive and valuable customers for long term growth.

“It’s in e-commerce retailers interest to really understand who the right customers are and really nurture them even if it’s a small group of customers. In our data, we see a tonne of companies with a retention rate that is lower than average. They’re retaining quite a small number of customers, but they’re retaining the right ones, and they’re growing that spend over time. And that is highly correlated with their overall success.

“They’re creating the product that those important customers like and serving those customers really well. They’re also attracting those sorts of customers. Attracting the right new customers, keeping the right ones and nurturing the right ones is the recipe for a sustainable growth business,” he said.

It comes as marketers continue to grapple with the balance of short-term and long-term marketing objectives to prioritise and justify the marketing investment.

“Real growth and success happens over time and proper brand building is a discipline of compounding effects over time, rather than lots of little spikes. So, if you’re a marketer who’s really held to account by your business on proving the immediate ROI of everything you do. It becomes quite difficult to implement these principles and so there’s a case to be made for marketers adopting these principles for sure but then there’s a secondary need which is to educate the non-marketing stakeholders around you about how this stuff works.