Insurance
Retention isn’t a silver bullet for solving growth problems amidst higher CAC. What it is might be more valuable.
There’s been, of late, a lot of discussion within the brands we talk with about getting more revenue from existing customers. And for good reason.
As one person, referencing referencing recent Facebook challenges, told us recently: “If it wasn’t for that base, I don’t know if we would have made it.”
How, then, to have that business insurance?
While the common place to take that conversation is tactics, we’d argue that you you’re better off zooming out and understanding what a brand’s size means relative to overall loyalty.
From Double Jeopardy:
In “Formal Theories of Mass Behavior,” McFee wrote:
“Recall that renown was biased in favor of popular alternatives to the degree that these alternatives got the unique increments from people who did not know many other competitors as well.”
In other words, smaller comic strips suffered twice: They were less-well known and, even when known, less liked. He coined the discovery Double Jeopardy.
Since then, studies have found this extends to nearly every aspect of consumer behavior—our purchasing habits included.
From a 1990 article by Andrew Ehrenberg, Gerald Goodhardt and Patrick Barwise in the “Journal of Marketing:”
“For branded packaged goods, the less popular a brand, the less loyal its buyers tended to be. The reverse, a small brand having few but exceptionally loyal buyers, has seldom if ever been reported.”
Absurd as the following may sound, we think it can be further distilled in this way: “Big brands are big because they’re big. And because they’re big, people buy them more.”
For any emerging CPG brand, this reality means efforts to improve customer loyalty are ultimately capped by the size of your brand.
In other words, the amount of value retention efforts can drive for your business has an organic ceiling.
Circling back to our original question (how do you create a returning customer base that insures your business against major acquisition disruption?), this “law of Double Jeopardy” requires one to answer a set of questions that are both internal to the business and external.
Though not an exhaustive list, some of those questions would include:
What are our unit economics?
How do they impact cash flow for driving additional sales efforts?
Are our customers existing category buyers?
If so, who are they also buying? If not, which categories (and brands within that category) are we competing with for share of wallet?
The answers to these questions, along with cohorted projections of returning customer revenue (based on recent historicals), would likely give you the majority of the information you need to build a forecast that allows you to see what might happen if acquisition were to go sideways.
The reality is that retention isn’t a silver bullet for solving growth problems amidst higher CAC. But it can be an insurance policy that keeps a brand steady, provided the rest of the business is figured out.
In today’s environment, that may be more valuable.