REPEAT COMMERCE: 02 - Run The Math Before You Raise The Ad Budget

0:00You've probably heard this statistic at least 100 times. improved customer retention by 5 % and profit jumps 25 to 95%. It probably is one of the most repeated numbers in retention marketing. It's on every software landing page, every agency pitch deck, and I'm pretty sure it's legally required to appear on any article with the word retention in the title. But it also comes from a 1990 study of banks, insurance brokers, and auto service companies, not Shopify stores. Not a brand paying meta$40 to acquire someone who used a 15 % off welcome code, ordered once, and then disappeared forever. Now, I still believe the argument behind the stat.

0:42Retention is worth more than almost anyone budgets for. But a 36-year-old banking study can't tell you what it's worth for your Shopify store. So today, we actually calculate it properly with Shopify numbers. and before you raise your ad budget again, I think you need to run this math. Welcome back to Shopify 1%. I'm Jay Myers and every episode gives you one specific thing you can do to make your store at least 1 % better. Now, this is episode two of the Repeat Commerce series. Last episode, I asked you to pull two numbers, your returning customer rate and the share of your revenue coming from your repeat customers.

1:26Now, if you did it, they should be written down somewhere. Mine would be on a sticky note immediately beside my computer, but I would probably lose that. So then I would put it in an Apple note on my Mac somewhere. But I trust you're more organized than me. Just make sure you have them written down somewhere because that sticky note is graduating. Now, over this series, we're going to be turning that into a proper scorecard, a running retention audit of your store. Because every episode is going to add one number or one action. And by the end, you'll have done a full retention teardown on your store without ever blocking off an afternoon.

2:09It'll just take one episode. And each episode is going to give you one or two lines. Today is actually going to add three. By the end of this episode, you'll run one calculation. It's going to take maybe 90 seconds. and it's going to turn your we should work on retention into an actual dollar amount that you can say out loud in a marketing meeting. And then we'll compare that number against buying the exact same growth through ads. And that comparison is the part that will change the conversation. Two strategies can produce identical revenue, but actually do opposite things to your bank account.

2:54OmniSend just shipped something that I've always wanted. You can now connect OmniSend to ChatGPT or Claude and just say, where can my email and SMS campaigns be making more money? And it actually figures it out. It reads your store data, all your campaign details, your store history, and it tells you, and the insights are legit good. And even better, you can then say, okay, let's fix that. Or build that campaign. And it actually does it right from your chat. It's wild. Now, if you're one of our listeners, you can get 30 % off for three months on OmniSend. Just go to the show notes. There's a link there.

3:25Or you can just use the code J30, J-A-Y-3-0 when you sign up. Now, if you're using another email and SMS platform and you want to switch to OmniSend, which is a great idea, they will do the migration for you. Just give them five days and then you show up with everything set, ready to go. Now, they've migrated thousands of stores from Klaviyo. And on average, they're saving 35 % on their email and SMS bills. If you're listening to this show, you clearly care about your Shopify business. If your store isn't backed up and protected, it could all be for nothing. That's why I tell every store owner I know who cares about their business, you 100 % need Rewind installed.

4:01It's a non-negotiable for me. One bad CSV import, one app that edits your store the wrong way, which has happened to basically everyone I know. One bulk edit gone wrong, and now AI making changes for you. Listen, Shopify does not have an undo button. Rewind is the undo button. Go to shopify1percent.com slash rewind for 30 days free on us. Links in the show notes too. Last year, I went to Commerce Roundtable in San Diego and it was so good. I'm going back again this year. It's September 21st and 22nd. And honestly, you should come too. It's the one e-commerce event that I recommend to everybody without blinking.

4:41It's not a trade show. There's no booth demos. it's really just operators on stage sharing what's actually working in their stores right now and it's basically a room full of all founders i was actually scrolling through my camera roll from last year and i have over a hundred pictures of slides from people's talks it's i learned so much it's that kind of an event now i have five passes to give away for a 30 off ticket it's first come first serve so if you're interested email me jay at shopify one percent dot com and i will hook you up. They will go fast. So email if you're interested. And if you're going, come say hi, let's grab a coffee or a drink during happy hour.

5:19I'd love to meet you. First, the famous number. So that 25 to 95 % claim, it traces back to a 1990 Harvard Business Review paper by Frederick Reicheld and Earl Sasser. And the paper was called Zero Defections. Now, Reicheld actually later invented the net promoter score. You know, those scores that you get, how likely are you to recommend us to a friend on a scale of one to 10 and then all the data and science behind it. So, I mean, this wasn't some random guy making up numbers for a webinar. This research was real, but it studied service businesses and the results actually varied wildly by industry.

6:03So cutting defections, 5%, generated about 85 % more profit for banks and bank branch systems. It was around 50 % for insurance companies, and it was around 30 % for auto service companies. So what you already tell you one important thing. There's no universal formula. A coffee company doesn't have a furniture's brand economics. A supplement subscription doesn't behave like a wedding dress. So, but the core argument has held up, I would say for three and a half decades. The longer a customer stays, the more valuable they get. You already paid to acquire them. They already trust you. And the second purchase is almost always cheaper to generate than the first.

6:50That much we know is true. Reicheld, he actually even used a leaky bucket analogy to explain it, which is super interesting because that's everyone's favorite retention metaphor. We've got a leaky bucket. And fun fact, that's where that metaphor actually comes from. The leaky bucket analogy came from that same study. Fun fact. But the bottom line is quoting a 1990 banking study to your CFO isn't a good analysis. Your store has its own numbers. So let's build on that and let's actually run an experiment ourselves. so we're going to build a store together right now and the numbers are going to be round on purpose so you can follow along while you're driving or at the gym you'll still understand this even if you're not sitting there with a pen and paper okay we're going to call this the whiteboard store it's going to be a coffee brand i picked coffee because the repeat opportunity is obvious people We'll drink it.

7:54It runs out. And if someone likes it, there is no reason on earth they should only buy it once. OK, here's the numbers. 15 ,000 new customers acquired over the past year. Fifty dollar average order value and a first to second repurchase rate of 25 percent, meaning out of every hundred first time buyers, 25 eventually come back for a second order. The other 75%, they buy once and they're gone. And I'm going to give you two more inputs and I'm saying them out loud now because they matter. Contribution margin, which we'll get into the details if you don't know what contribution margin is. I'll explain that shortly, but contribution margin, which is your margin before marketing in a nutshell, it's going to be 40%.

8:47So each$50 order leaves 20 bucks after product shipping and fulfillment and then blended CAC of$35. Okay. And then real quick blended CAC is all of your ad spend and marketing spend to acquire a customer. Customer acquisition cost is CAC. So not just ad spend, but if you're paying a person to run your ads or an ad agency, that would be your blended CAC. Okay. So we've got contribution margin, 40 % and blended CAC of $35. So those are going to be all, all the numbers we need now. Now your margin might not look like 40 % and that's fine. And your CAC might make 35 bucks sound like a fairy tale. I know a lot of people are spending hundreds of dollars to acquire a customer, but I just pick these numbers to make the math round, not because they're gospel, but the entire point of today is that you'll rerun these numbers for your store.

9:44And those are the only numbers that actually matter. So let's start with the experiment. We're going to move the second purchase rate from 25 to 30%. Okay. Now, one clarification before someone corrects me and aggressively in the comments on YouTube, And it's worth a quick second to note this, that 5 % point lift, some people say 5 % lift. Well, going from 25 % to 30 % repeat customers is not the same as improving 25 % by 5%, which would literally move you to about 26 % and barely register. So when we say we're improving 5%, it's in the net total. Percentage points and percentage are different animals.

10:33And half the retention case studies you'll ever read completely blur those numbers. So I just want to clarify that right off the stat. So five points. We're going from 25 % retention to 30 % retention on 15 ,000 customers gets you 750 new people, new customers. Now, that's the whole intervention. 750 people who bought once now buy twice. Okay. We don't need all 15 ,000 to become loyal super fans. We're not starting a cult. We need five more people out of every 100 to think, that coffee was good. I'll grab it again. Now that's a much more manageable problem. Now I'm going to take that. We're going to multiply those 750 new people by our$50 AOV, average order value.

11:28And when you do that, you get$500 in new revenue. Okay. So all we've done is we've taken our total customers, increased it by 5%. So 5 % more are reordering, multiplied by our AOV, and we get$37 ,500 new revenue. And notice how deliberately conservative this is because this assumes each of them come back exactly once and nobody orders a third time. Nobody subscribes. Nobody sizes up to a bigger bag, adds on another product. This isn't lifetime value. This is just the first year for. So this is as conservative as possible. And then one detail before you run this on your own store is use a mature window because someone who placed their first order like last Tuesday hasn't failed to repeat yet.

12:25They just haven't had time. If your average gap between first and second order is 30 days or 60 days, don't judge the customers acquired in the last 60 days as churned. They just haven't had time to repeat yet. So the trailing 12 months is a fine default for you to get your customers. Just know that the newest customers are still in progress. We'll go much deeper on cohorts later in the series. But if you're pulling the number of your one-time customers or your new customers from Shopify in the last 12 months, just know it's also a conservative number. Okay, step two. Now, this is where the e-commerce math usually gets a little sloppy because revenue is not profit.

13:12So a$50 order does not put$50 in your pocket. Out of that order comes product packaging, pick and pack, payment processing fees, shipping, customer service, returns, discounts, and a few expenses that only will reveal themselves after your best months ever. So what's left is your contribution margin. So our coffee brand that we're working with here keeps 40 % after variable costs and before advertising and overhead. Okay, so contribution margin is what's left after the cost of the product, the shipping, and any fees to get it to the customer. So we have a 40 % contribution margin. So we have 20 bucks on a$50 order.

14:03So our 750 extra repeat orders created 37 ,500 revenue and at a 40 % contribution margin,$15 ,000 in contribution profit. So if you do the math, 37 ,500 total revenue, 40 % contribution margin works out to 15 ,000 contribution profit. Now, here's the beautiful part. We already paid to acquire these 750 people. Remember, they're not new customers. They're customers who are buying for a second time who didn't buy before. So there's no CAC on a second order. The 15 grand comes in clean. Now, that's the number I'd bring to a budget conversation, not their revenue, what's actually left over. And so I guess kind of a quick honesty break here is a surprising number of brands, they don't actually know what their contribution margin is.

15:01They know revenue, they know ROAS, they maybe know gross margin. But if you ask what's left from an average order after every variable cost, suddenly everyone kind of gets a little bit interested in looking away in a meeting. But if that's you, it's fairly easy. Start with gross margin as a rough stand-in. It's not perfect, but it beats treating revenue as profit. And you can sharpen it later. That's fine. And I just want to say a quick callback to the last episode, the Simplicity DX research. Just a reminder, the average new customer arrives at your store at a$29 loss. The average repeat customer generates$39 in revenue for new merchants.

15:46So it's a different way of looking at it, different data set, but the same kind of shape. First order is the toll. The second order keeps you your money. Go back and listen to that episode. It's worth it. At the beginning of the show, I told you why everyone serious about their Shopify business should have their store backed up and protected with Rewind. There is no excuse not to. They're literally is no undo button for Shopify. Shopify's own terms actually say that your data is 100 % your responsibility, your products, your theme, your customizations, your settings, everything. They don't back up any of it.

16:26And no, a CSV export does not cover it. With CSV exports, there's no images, no meta fields, no themes, settings, et cetera, nothing. I was talking to the people at Rewind about a brand where one team member actually ran a bulk update and accidentally overwrote 11 ,000 products, orders, customers, contacts, all of it gone in a single action. Luckily though, with Rewind, it was a simple one-click rollback. It could be anything, a bad CSV import, a random app you just installed that messes everything up, or all of these AI tools that everyone's using to manage their store. Now, I have heard so many horror stories.

17:04Rewind just gives you peace of mind no matter what. If you don't have Rewind installed. You absolutely should have it. Go now and get it. Shopify1percent.com slash rewind. You'll get an exclusive 30 days free on me. The link is also in the show notes. At the top of the show, I mentioned OmniSend can now talk to ChachiBT and Claude. And I want to tell you why that's even bigger than it sounds. So if you missed it, quick catch up. OmniSend is what I use for email and SMS on every Shopify store I work with plus for this show as well. And you can now connect your AI Cloud Chat GPT straight to your OmniSend account.

17:41Your data, your campaigns, your flows, everything. You open a chat and you ask, what should I focus on this week to make more money? And it will come back with real answers about your store, which flow is underperforming, which automation needs improvement, which customers are going quiet, what's missing, everything. My favorite part though is AI segments. I used to build these by hand, clicking through filters forever. Now I just type something like customers who bought twice but ignored my last campaign and it just builds it. And anything it writes already sounds exactly like your brand because it pulls from all your previous emails, from your website, your logo, your color, your voice, everything.

18:21I've been doing this for 15 years and this is the closest I've ever felt to having a full-time marketer sitting right beside me. I have a link for you in the show notes that will give you 30 % off for your first three months or you can just use code J30 when you sign up. J-A-Y-3-0. If you're ready to migrate from Klaviyo to OmniSend like thousands of others, they will do everything for you. You just show up and all your campaigns and automations from Klaviyo will be set up and running in OmniSend, ready to go. And usually at 35 % less what you were paying Klaviyo.

18:53Okay, now the comparison that this episode was built for. So say the founder skips all of this and buys the same$37 ,500 of growth the normal way through ads. At a$50 average order value, that's going to be 750 brand new customers. Now, their orders carry the same 40 % contribution margin. So they generate the same$15 ,000 of contribution before marketing, But acquiring those customers costs$35 CAC, customer acquisition costs per customer. So what does that equal? 750 new customers times$35 is$26 ,250. So$15 ,000 contribution margin in,$26 ,000 and I call it a quarter out. And what does that equal?

19:48it's an$11 ,250 loss. And if you put the two paths side by side, same store, same$37 ,500 of new revenue, but retention as$15 ,000 of profit and putting it towards acquisition actually loses you $11 ,000. Same top line, but the opposite sign in front of the number. And both of them look identical in your Shopify reports. Both add$37 ,000 to your revenue. Both create 750 orders. Both make the graph go up and to the right. But one put$15 ,000 into your business and one took $11 ,000 out. And the revenue chart cannot tell you which one is which. A dollar of revenue is not always worth a dollar. Where it comes from changes what's left over.

20:44Now, the obvious objection, and it's completely fair, is you can't retain a customer you never acquired. And that is 100 % true. I just want to be very clear. Acquisition and retention are not enemies. A great retention strategy with no new customers, guess what? It doesn't work. It's just a slowly shrinking club of very loyal people. And I have seen brands like this. They are not acquiring any new customers and their current customer base is just slowly getting smaller and smaller and smaller. You have to acquire new customers and your acquisition economics might not be excellent. That's okay.

21:22Maybe your CAC is$55 and your first orders aren't profitable. That's okay. It's part of the equation. But also maybe your CAC is cheap and your first orders are profitable on day one and customers repeat on their own. And that's a great business. The point of this math isn't to rig it so retention always wins. It's to force a comparison that most people don't run. Because most brands compare marketing options like this. Should we put 20 ,000 into Meta or Google? Should we hire an influencer? Should we try TikTok Shop? Every option on the table is an acquisition channel racing against other acquisition channels.

22:02And what almost never makes a list is what happens if we invest the same amount of money or time in getting existing customers to order number two. And what does that even look like? And here's a taste because each of these is a future episode that we're going to dive deep into how to actually get these customers to come back and return. But just a hint is, you know, maybe you focus on rebuilding that post-purchase experience so the relationship doesn't end at the shipping confirmation. Maybe you send replenishment nudges timed when the product actually runs out instead of when the calendar says time to send a campaign.

22:38Maybe you cut reordering from 12 clicks to two, making reordering easier. Maybe you build a real win back program instead of just blasting every customer with the same promotion. Or maybe you discover people who love your product but literally can't remember what variation of it they ordered last time so they don't reorder. So the right lever is different for every brand and finding yours is actually going to be what the rest of this series is about. So keep listening to the episodes. We're going to go deep into that. But today, I just want retention to earn a seat at your budget meeting. That's my goal.

23:13That's my goal for today. Not because it sounds responsible, because it actually has a real dollar value to your business. Now, I have seen this pattern personally more times than I can count at my decade and a half here at Bold. Looking inside, geez, I don't know where we're at now, close to 800 ,000 Shopify stores. Every merchant, they'll have some incredible month. Revenue is up. ROAS, return on ad spend is strong and new customers are pouring in and everyone feels like the business is booming or turned a corner and growing. But then all of a sudden ad costs rise or, you know, a creative just burns out and isn't working anymore or like the iOS update happens and suddenly the whole business looks broken.

24:01Now, the ads hadn't stopped working. It was that the ads were the only thing working. New customers were coming in the front door and just leaving right out the back before anyone even learned their names. And the company had to buy a whole new crowd of customers every month just to stand still. That's the leaky bucket that was invented in 1990. That's the leaky bucket. And the natural reaction is always the same. Well, let's find a bigger hose. Now, I just want to be very clear. Retention isn't about turning off the hose. It's about making the holes smaller so some of the water actually stays in your bucket.

24:44Okay, so let's run this in your store. So two versions. The quick one will tell you the size of the opportunity. And then I'm going to do what I call the adult version, which tells you whether you actually move budget to this or not. So two inputs from your Shopify admin that we need. New customers acquired over a mature 12-month window. So looking back, maybe excluding the last two months, let's say. So it's a mature or even three months. So total new customers acquired over a mature 12-month window. To get this, you can actually just go to your analytics in Shopify, go to reports, and there's a report called new customers over time.

25:24You can pull it from there. You need that number, so get that number. And then you need your average order value. And that's actually your AOV. It's right on your main analytics dashboard. So if you just go to your analytics page, you'll see AOV listed right there. So get your new customers acquired over a mature 12-month window, average order value. And then the only other customer you need is, sorry, the only other number you need is 0.05. So what we're going to take is we're going to take your new customers multiplied by 0.05. So let's say you have a thousand new customers over a 12 month mature window times 0.05 times AOV average order value.

26:04Okay. Write that number down. Now it doesn't matter. Bigger store. It's going to be the same, same scene machine. Say you acquire 40 ,000 new customers at a$70 AOV 40 ,000 times 0.05 is 2000 extra repeat customers. times 70 is$140 ,000 a year. So the math scales, no matter what size your store is, it doesn't matter. Make sure you write that number down. Now, the add all version is we're going to multiply that revenue by your contribution margin. So on, let's say that 140 grand that we just mentioned there, say it's 35 % contribution margin. So that would actually work out to, I did the math,$49 ,000 in contribution profit.

26:56Okay. Then price the other math. How many new customers would you need for that same revenue times your actual CAC, customer acquisition costs, subtracted from first order contribution? So don't use my$35 CAC. Use yours. And don't use the coffee store's 40 % margin. Use yours. The power of this exercise isn't from my examples. It's from seeing what your business actually says. And Shopify's cohort reports, actually, if you go in there, look for customer cohort analysis. And under customers, it will show you what your real repeat customer spend is and how often they return. So you can actually replace my conservative numbers and assumptions entirely.

27:45And when you actually see that a repeat customer actually returns 3.2 times, 5.6 times, you'll see that the numbers that we're doing here are very conservative. Okay, so here's your 1 % win for today. You're going to run the, what I call the 90 second version, new customers times 0.05 times AOV. Write that dollar figure on your scorecard and under the two numbers that you wrote from last episode. And then if you have three more minutes, really simple, you're going to run the adult version and you're going to add both profit numbers to the contribution margin from the lift and your first order contribution after CAC.

28:27So you're doing the same thing. I just want to clarify on that first order contribution is you calculate all the revenue from your customers who only order one time. You take your total CAC average per customer to acquire it and total blended CAC is ad spend plus if you are hiring an agency or having an employee run it or what is the total cost to acquire that customer. And that is your the second number there. OK, so now you should have five lines on your scorecard now. It's starting to actually become a little bit of a real picture of your retention economics. Just wait, this is going to keep building out.

29:06and it's maybe what cost you 20 minutes and you've listened to two episodes and you're starting to build this out. Now, here's what I want you to do. I want you to take that number to your next marketing meeting with it, whether that's with your partner, a team, whatever. Now don't pitch a big 12 month retention strategy. Don't ask for software budget. Just, just state it. Say you did the math and a five point lift in our repeat rate is worth roughly 140 grand a year or$49 ,000 of profit. Just knowing it, that sentence alone will get attention in a way and it'll make people think, you know, we should focus more on retention.