Australian retailers could be missing out on up to $2 billion in potential revenue by focusing on the wrong type of customers, according to a new study by advertising effectiveness expert James Hurman and CRM platform Klaviyo.
Presented at Klaviyo’s recent K:SYD event, the study, It’s What You Do With Them, analysed $1.2 billion in spending data across 1.7 million ecommerce customers in Australia and New Zealand.
The findings challenge conventional marketing wisdom that customer retention is always more cost-effective than acquisition and that loyalty programs reliably fuel growth.
The data, collected with help from agency partners Overdose Digital and Andzen, revealed that high customer retention rates do not necessarily correlate with better business outcomes.
Rather, brands with lower retention but increasing customer spend grew more than three times faster than those with high retention but stagnant or declining spend.
“There’s a piece of advice we’ve all heard so often that it’s almost a law of nature. That is, acquiring a new customer costs a business five times as much as keeping an existing customer,” said Hurman.
“What we found in the Klaviyo retailer data turns that old wisdom on its head. It’s not how many customers you retain, but rather what you do with them that really matters.”
Hurman estimates that, based on the region’s $58 billion ecommerce market and an average 24% retention rate, retailers could be forgoing $2 billion in untapped revenue by focusing on retaining low-value customers.
The study tracked customer spending over two years to differentiate high-value from low-value retained customers. One retailer with a 39% retention rate saw spending per retained customer drop by 46% year-on-year, contributing to a 14% revenue decline.
In contrast, another with just 14% retention recorded a 14% increase in customer spend and a 130% revenue surge over the same period.
“Retention rate is too blunt a metric. What matters is whether the customers you keep are worth keeping,” said Hurman.
“Retailers should focus less on retention rate, which is likely to be a factor of their category and their relative size in their category, and more on changes in customer spending over time, which can be impacted by marketing and customer experience.”
The report also examined loyalty programs and found that while they boosted retention (30% vs. 20%), they were linked to slower growth — just 14% revenue growth on average compared to 48% among retailers without such programs.
“While this is not an outright damnation of loyalty programs, the data tells us that there are more effective ways to increase the spend of retained customer,” Hurman said.
In a consumer survey conducted alongside the study, customer service emerged as the strongest driver of emotional brand connection, a key factor in customer loyalty and spending.
Poor service experiences, including long waits, lack of human interaction, or being ignored, were found to be especially damaging.
“While a high-quality product, a strong brand and advertising are important for positive emotional connection, the data shows they pale in comparison to delivering a great customer service,” said Vicky Skipp, Klaviyo’s director of mid-market and enterprise for ANZ.
“More importantly, neglecting customer service leading to poor experiences is the fastest way to destroy positive emotional connections you’ve cultivated with your product and brand.”