2023 Prediction: Retail Brands Must Combat the Recession with Retention
Major retailers like Macy’s, Bed Bath & Beyond and Nordstrom are embracing a new age of retail shopping with the closure of more brick-and-mortar stores and focus on a digital-first strategy. Not to mention, there’s a 70% chance that the U.S. will enter a recession in 2023, according to a Bloomberg survey of 38 economists. Frugality will grow with consumers spending more on eggs, electricity and gas, than luxury items and services. Budget-conscious shoppers will forego massages, wear last year’s winter coat instead of splurging on a new one, and postpone their plans to remodel the kitchen.
As people respond to inflation by buckling down and living without the extras, retail brands will feel the sting. Which brands will lose share of the customer wallet? How can businesses keep afloat in economic downturn?
A Customer Saved Is a Customer Earned
It's time to focus on retaining customers . To a retail brand, loyal customers are money savers and money makers and should be prioritized over new customer acquisition. Across industries, the probability of selling to an existing customer ( 60–70% ) is much higher than the likelihood of selling to a prospect (5–20%). In fact, existing customers are 50% more likely to try new products, and they spend 31% more, compared to new customers. Just as savvy consumers prepare for a recession by adjusting their budget and reducing spend, forward-thinking brands must do the same. Increasing the customer retention rate by only 5% increases profits by 25 to 95%. Thus, the brands that successfully deliver extraordinary customer experiences (CX) will keep consumers coming back and reap the profits. How does this work?
The Equation Behind How Retention Drives Customer Lifetime Value
Customer retention is a direct driver of customer lifetime value (CLV)—a prediction of the total amount of money a customer will spend with your business over their entire relationship. You can calculate CLV by multiplying the average order value (i.e., how much a customer spends on each purchase) by the purchase frequency rate (i.e., how often a customer buys your goods/services) and then by average customer lifetime (i.e., how long the customer sticks with your brand). Obviously, the average customer's lifetime is directly connected to customer retention—keep a customer longer and their lifetime extends, and so CLV is subsequently increased.