Kevin Hillstrom: MineThatData

Mt. Loyalty

Oh, it's quite a climb.

I don't know what you've learned about Mt. Loyalty, but that mountain is full of challenges. Did you know that most climbers never even make it to the base camp at 1,000 feet on fictional Mt. Loyalty?

A few years ago I was connected somehow to an EVP of Marketing. This guy was fascinating. He believed he could do the entire marketing function by himself ... no employees. He said his goal was to outsource every function of marketing. His job? Create the discounts and promotions that would be used. He told me that is the only aspect of marketing that adds value. He then said something interesting (paraphrased below).

"I can sell anything. It does not matter what my company sells a customer. All I need to know is where in the customer lifecycle the customer is and then I create an appropriate promotion to convert the buyer. Merchandise is meaningless."

As you might expect, I believe in the exact opposite thesis.

It is not easy to climb Mt. Loyalty. What the customer previously purchased and is likely to purchase again in the future, coupled with key inflection points, dictate whether the customer ever becomes loyal.

It's January. You'd think those Cyber Monday customers would be busting down the door to buy from you right now. They're not. That's a timing issue, it's an issue of what the customer previously purchased and is likely to purchase again in the future. The Cyber Monday customer is an out-of-shape customer unable to make the climb up Mt. Loyalty.

Customer Loyalty

Customer Retention and Customer Loyalty are cousins.

You can have low retention rates and high loyalty ... if you buy a product that you only need every 3-4 years, you might come back and buy from the company every 3-4 years but you'll come back to the company immediately because you love/trust their products (the iPhone comes to mind).
You can have high retention rates and low loyalty ... you might get gas at the local Chevron but also get gas at three other area gas stations.

Most of the ecommerce brands you support have customers with a +/- 25% to 35% annual retention rate. For you, it's terribly hard to generate loyal buyers, and worse, creating a silly loyalty program doesn't move the needle because your merchandise assortment is too limited (small) to foster the number of purchases required to harvest loyal buyers.

If you had the data to graph the relationship, you'd see that loyal buyers grow exponentially as rebuy/retention rates increase linearly. By having an assortment that fosters multiple purchases per year, you accelerate the number of customers who become "loyal".

For my clients, I use a predicted 60% rebuy rate as my level for a customer being "loyal". At that point, the customer prints money for your brand ... the customer is very profitable!

On average, it takes about five (5) purchases before a customer becomes "loyal" across my e-commerce clients. Generate 100 new customers and after 2-3 years you might be lucky to have five of the cohort become loyal ... and most of 'em won't stay loyal.

As I've previously stated, if you want loyal customers, acquire a lot of customers. After you acquire a lot of customers, develop the customers in the first three months following a first purchase. The three-month window after a first purchase is far more important at generating loyal buyers than trying to get a 60% loyal rebuy-rate buyer to increase to 65%.

Money is wasted on loyalty efforts (at low rebuy rate brands) when the money could easily be spent on acquisition and the first three months following a first purchase. But you already knew that.

Customer Retention

You've heard me say this many times before ... Customer Retention is a function of your Merchandise Assortment.

This doesn't mean you cannot impact rebuy rates ... you can!

But you can only do so much.

In the early 90s at Lands' End we retained about 55% of prior year twelve-month buyers. That's a very high rate. We sold mens/womens casual, mens/womens tailored, kids, home merchandise.

In the late 90s at Eddie Bauer we retained about 45% of prior year twelve-month buyers, even though we had catalogs and e-commerce and stores. Our customers didn't really like us, even though we were a direct competitor to Lands' End.

In other words, similar companies had 45% - 55% rebuy rates. The difference was due to marketing effectiveness and customer trust.

In the first half of the 00s at Nordstrom we retained about 74% of prior year twelve-month buyers. Not only did our customers trust us, but with more skus than people living in Milwaukee we had a breadth of merchandise to allow customers to continually purchase all year long.

I have gift-centric clients with rebuy rates around, say, 20%. Those brands might be brilliant marketers, but with a limited assortment for nine months of the year rebuy rates will be suppressed.

Starbucks operates a whole 'nuther business model. When you sell a product that can be purchased daily (or more often), you'll retain even more customers on an annual basis ... maybe 90%. Thought Leaders will tell you to emulate what Starbucks does in an effort to create your own loyal customer base, but unless you sell an addictive product that can be purchased daily, nothing that Starbucks does applies to your business. Nothing.

If you sell products that are needed often (like Starbucks), your retention rates will be high.

If you sell products that are not needed often (i.e. a Lexus SUV), your retention rates are incredibly low.

Customer Retention is a function of what you sell. There is no right/wrong rebuy rate, given that rates are dependent on how often customers need what you sell and the depth of your merchandise assortment. Rates can vary based on marketing effectiveness ... +/- 5% off of a baseline is common ... if a company has a 30% rebuy rate, the good marketer will hit 35%, the bad marketer will hit 25%.

Unlocking Customer Value: Merchandise

Much of the "unlocking customer value" thesis surrounds customer service and discounts / promotions / loyalty programs.

The concept behind a marketplace or a mall is to aggregate all merchandise interests in one place, thereby capturing more customer spend.

Your business isn't fundamentally different. Smaller, sure. A much more limited assortment? Yes. But the concepts are similar. Zappos sells socks. If you buy shoes, you might need socks. If you convince the customer to buy socks, you get multiple benefits. Cash you wouldn't have otherwise generated. Multiple-category purchases that increase long-term customer value. The possibility of between-cycle purchases that wouldn't otherwise exist. Yes, you just unlocked customer value.

In one of my hobbies (headphones), there is an iem guru named Crinacle. He reviewed iems, he sold iems, then he began to sell his own iems (no small endeavor). He began with a limited run (something like a thousand) of his own creation, called Project Meta. That thing sold out in an hour.

Lesson: Unlock customer value by offering something that won't be available later today.

From there, he released his next model, the Daybreak. V-shaped to Neutral sounding, good value.

Recently, he released his Diablo and Divine iems, planar drivers. The Diablo is bassy!

And then? He released a headphone "dongle", a device that works between your iPhone and your iem, a portable dac/amp, the Protocol Max. There we go ... a new category ... he's unlocking customer value, isn't he? Now the customer can spend additional money not otherwise generated via iems.

It's an old playbook.

Back in the early 90s at Lands' End we sprung up specialty businesses like weeds! A $70,000,000 specialty business was generally (on average) 70% incremental ... meaning $49,000,000 was "unlocked customer value" and $21,000,000 was cannibalized from the core business.

And that's where things get tricky. You have to run a p&l not on the $70,000,000 but instead on on the $49,000,000 of unlocked customer value. The expense structure for a $70,000,000 business is matched up with just $49,000,000 of revenue. If the p&l works, you've truly unlocked customer value. If it doesn't work? Try something else.

Yeah, I know, that's a lot of hard work.

There's a reason people default to loyalty points and customer service topics ... they're infinitely easier to implement. The problem, of course, is that you are selling the same merchandise assortment, so your ability to leverage these tools is limited. But there are tools. For example, Headphones.com offers 365 day returns on your headphone purchases. I mean, if you can't figure out if you like your headphones after 365 days, well, that's not the fault of the brand now is it? They're taking on enormous expenses, but they are also taking away all customer risk ... that unlocks customer value, it's hard to say how much, obviously.

When somebody suggests that Sears didn't "unlock customer value", woo-boy, that's a whopper. What were Sears Craftsman Tools? Tax preparation services? Sears Automotive? They went out of their way to find ways to serve their customers. You might not have liked the presentation of merchandise in stores, you might have thought their stores were dingy and old-fashioned, you might have found their departments under-staffed. Likely all true. All of those topics are operational in nature, obviously, those are all things we should be doing every single day to keep the wheels on the bus.

Unlocking customer value is something very different.

Which brings us to tomorrow's topic: Customer Retention.

Unlocking Customer Value, It Is INCREDIBLY HARD And Likely Doesn't Work

Have you ever walked the vendor hall at a trade show? You get an immediate view into the mindset of trade journalists and vendors when it comes to unlocking customer value.

"Connect with us on LinkedIn and you get a free pen!"
"Download our white paper on customer relationship marketing and we'll enter you into a drawing for a free iPad."
"Spin the wheel to discover the discount you earn on our AI-based email segmentation solution."

Yes, technically those are all elements of the "unlocking customer value" playbook. They're mindless and ineffective methods. But they are in the playbook.

It is INCREDIBLY HARD to unlock customer value ... which is why vendors and trade organizations default to free pens and drawings for a free iPad.

I recently analyzed a brand that had the following dynamics:

2015:

35% rebuy rate, $200 spend per repurchaser, $70.00 customer value. Average price per item purchased = $40.00.

2025:

35% rebuy rate, $265 spend per repurchaser, $92.75 customer value. Average price per item purchased = $53.00.

Did this brand "unlock customer value"? On the surface, yes! In reality, no. This company just raised prices by 2.9% per year for ten years ... approximately at the rate of inflation. The company discontinued old items, then introduced "new" items that were comparable but were more expensive.

Just for kicks and giggles, I asked Google to share with me what it means to "unlock customer value".

My goodness, is this a tired list. Relevant and efficient personalized shopping experiences? Reducing friction? Offering exclusive discounts? BOPIS? That's what Sears should have focused on?

Google AI continues.

Optimizing inventory is unlocking customer value? Is it any wonder we're in trouble?

AI wouldn't come up with this nonsense unless is scraped the internet to learn from Thought Leaders.

A brand that did a reasonably good job of unlocking customer value over time was Nordstrom. They were taken private last year. What happened to their stock price prior to being taken private?

Look at the 2015 - 2025 timeframe ... this is a retail brand that unlocked customer value as well as anybody ... they lost 69% of their market value over that time ... if you adjust for inflation the story is much worse.

So ... it's clear we really don't know what we're talking about when we talk about Unlocking Customer Value.

Tomorrow, we'll start exploring ideas for increasing retention, potentially loyalty, and profitability.