July 22, 2003, 12:00 AM

Shift to customer retention from acquisition shrinks costs at Drugstore.com

Drugstore’s average customer acquisition cost has dropped from $64 to $16 in two years. Ongoing testing continues to refine targeting and offers.

 

Internet drugstore Drugstore.com has adjusted its strategic thinking from earlier days when it was primarily out to acquire as many new customers as possible. Its new approach: retain those customers, manager of customer retention Ramer Holtan tells Internet Retailer. Case in point: when Holtan joined Drugstore as a business analyst, his current title didn’t even exist at the company.

“Our marketing efforts were almost completely devoted to acquiring customers at almost any cost. But getting back to business basics dictates that you have to recover that acquisition cost to make a profit,” he says. “We’ve implemented a huge shift in our strategic and marketing focus through the years in trying to recover those costs.”

In fact, that shift in focus has helped reduce Drugstore’s average customer acquisition cost from $64 in the first quarter of 2001 to $16 in the first quarter of this year. As part of that, Drugstore has conducted extensive testing of registered customers’ reaction to various offers designed to encourage repeat purchases, in the process gleaning information that’s allowed it to further fine-tune offers and continue to whittle down average customer acquisition cost.

In one test, for example, Drugstore offered registered customers who spent $150 on merchandise (excluding prescription drugs) 5% off merchandise purchases for the rest of the year. Response fell into three segments defined by customer spending patterns. The offer had little effect on the best customers, who continued to spend at about the same level as before they reached the threshold, and no effect on customers who spent at the lowest level. However, the program did produce lift among customers whose spending fell into the middle level.

Holtan says those findings raised not only the question of whether it’s smarter to reward the customer who already contributes the most to the bottom line, or to reward other customers to encourage additional spending, but also the answer. “We are going to try to do both,” he says, “by being smart about how much we are willing to invest in different types of customers.”

 

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