Flipping the growth model: Moving from acquisition to retention
The eCommerce playbook has been pretty straightforward to date: acquire new customers, grow their spend, and retain them. But historically, the focus for most of the direct-to-consumer (DTC) eCommerce revolution was just the first step of that process: acquisition. Low cost and highly targeted ads on social media platforms made it economical and profitable for brands to grow through acquisition, giving them little incentive—or need—to invest in retention efforts.
While this model worked for years, multiple factors have since made it unsustainable. Many brands are going back to business basics, heeding decades-old advice that retaining existing customers is more profitable than acquiring new ones. How? By flipping the traditional DTC growth model to prioritize retention and maximize customer lifetime value (LTV).
As a result, eCommerce brands today are making subscriptions the core of their business, inherently driving retention and generating long-term predictable customer revenue.
The End of Acquisition As We Know It
Since early 2020, the cost of acquiring customers for DTC brands has skyrocketed. At the start of the COVID-19 pandemic, eCommerce saw 10 years worth of growth in just 90 days according to McKinsey. That meant increased competition to advertise through social media channels, driving up costs dramatically. According to Revealbot, between January of 2020 and September of 2021, Instagram CPMs grew from an average of $6.48 to $10.63, a 64% increase. That’s more than enough to bust a balance sheet.
It’s not just about cost either. Acquisition based models are inherently uncertain and unpredictable. Relying primarily on acquisition investment forced companies to grapple with future financial uncertainty. eCommerce brands were not fostering customer relationships and, as a result, customers were mostly making one-time purchases, which put pressure on acquisition teams to spend more to find new customers and revenue. A convergence of multiple forces drove eCommerce brands to rethink how they grow. Cost of acquisition (CAC) was high, LTV was low and growth-stage eCommerce needed a new way to scale: focus on retention.
All Roads Lead to Subscriptions
Focusing on retention over acquisition flips the eCommerce growth model and boosts the two key metrics that were suffering for many eCommerce brands. By growing revenue through retention, companies could avoid overspending on acquisition in a volatile ad market with skyrocketing prices (lower CAC). It also helped companies increase their customer lifetime value by decreasing churn and encouraging more repeat business (increased LTV).
So, what are eCommerce companies actually doing to put retention first? Many have turned to subscriptions, a strategy that goes hand-in-hand with retention. In fact, according to Gartner, more than 75% of direct-to-consumer companies are expected to offer subscriptions by 2023.
Subscriptions help reduce CAC and increase LTV by turning customers that may have been one-time purchasers into repeat shoppers, reducing the need to find a new customer to create that revenue. Subscriptions also give companies a clearer picture of their future revenue due to the ongoing customer relationship. That means more working capital to invest in growth and product development, which can be a huge competitive advantage in eCommerce.
A New World of Ecommerce
While customer acquisition costs are not going away, companies are getting smarter about how much they spend while focusing on retention to grow revenue. Retention requires building lasting relationships with customers, and while much of the focus around relationships to date has been about customer service, eCommerce brands are realizing now that subscriptions are a largely untapped silver bullet for retention and company growth.