Aiming to end customer churn, Retention Science grabs $7M in fresh funding and lines up major retailer accounts

By Michael Carney , written on August 7, 2014

From The News Desk

Efficient use of big data in no longer a luxury for business that want to remain viable in today’s hyper-competitive, technology driven world. Corporate executives know this fact, and as a result have spent, presumably billions of dollars in the last half-decade on business intelligence and marketing automation software solutions.

In the ecommerce sector, in particular, this spending has been directed primarily toward customer acquisition. It makes sense as new customers are one of the most obvious drivers of growth for any business. But one area that’s largely been overlooked is retention and revenue optimization for existing customers. With all the money paid to acquire these individuals, it only makes sense to keep them happy and keep them around spending as long as possible.

This is where Santa Monica-based Retention Science comes in, offering a SaaS big data application to online retailers promising to tailor marketing and promotions to each individual consumer, and thereby drive sales. The company announced Tuesday that it has closed a $7 million Series A round of funding led by $5 million from Upfront Ventures, with participation from existing investors Forerunner Ventures and Mohr Davidow Ventures, as well as strategic angels, Brian Lee (co-founder of Honest Company and ShoeDazzle), Michael Dubin (founder of Dollar Shave Club), Tamim Mourad (founder of and, and Andy Dunn (founder of Bonobos). The company was also backed previously by Baroda Ventures, Double M Capital, and Mucker Lab. Retention Science added a wealth of ecommerce expertise to its board with the addition of Upfront partner Greg Bettinelli and Forerunner’s Kirsten Green.

Retention Science has spent much of the last two years productizing its big data solution, and in the process, the company completed trials with brands like Honest and NastyGal. The results evidently were good enough to land these and other marquee retailers as paying customers, and convince its new investors that the solution can be delivered in a scalable and repeatable way to customers of all sizes and in a variety of industries.

In Honest’s case, Retention Science managed to deliver a 170 percent conversion lift over a control group receiving the company’s generic email marketing campaigns, as well as an 80 percent lift in average order value. These numbers are better than a larger, more established retailer should expect, Retention Science co-founder Jerry Jao admits, but are nonetheless illustrative of the effectiveness of his company’s solution. A newly signed (but unnamed) nationwide big box retailer has seen a more realistic 15 percent lift in conversion, he offers. But at multiple billions in annual revenue, this is a meaningful impact for a software solution that costs just a fraction of that sum.

Other notable customers include Target, CafePress, Vitamin Shoppe, and Neiman Marcus, with the average contract valued in the six-figures per year range, and some approaching seven figures, depending on the number of consumers in a company’s marketing funnel. CafePress is actually the company’s biggest client by number of customers, with more than 26 million, but other more prominent brands generate more revenue, Jao says.

“I’ve known Jerry since this was just a kernel of an idea. It’s been amazing to watch him close these huge clients without much financial support or sales infrastructure,” says Upfront’s Bettinelli. “Jerry is a very opportunistic entrepreneur with a great story – people root for him.”

Bettinelli, who was formerly the CMO of Hautelook (which was acquired by Nordstrom for $270 million) adds, “I talked to lots of customers in the process of considering this investment. What I heard from each of them is that these guys are driving incremental value at relatively low cost, which translates into an immediate ROI. People have been underfunding the retention side of their business for a long time. Eventually it’s going to get so hard and so costly to acquire new customers that they will need to develop the same sophistication on the customer retention side that we have on the acquisition side. This is a big opportunity.”

The marketing automation sector has seen massive consolidation of late, with giants like IBM acquiring Silverpop, Oracle snapping up Responsys and BlueKai, and Salesforce buying Exact arget. The result is a void in the market of nimble, innovative companies that are well positioned to develop solutions for this next generation retention problem. Accordingly, Retention Science is looking out at what is largely a greenfield market. The challenge, however, is that many of its customers still don’t know that solutions to this problem exist, or don’t fully appreciate the value they can add.

Once a customer signs up with Retention Science, the company analyzes their historical and real-time marketing and customer engagement data to begin categorizing their consumers into behavioral and demographic segments, such as those that prioritze value, premium experiences, celebrity endorsements, and so-forth. The company then helps tailor unique marketing campaigns to directly address these priorities. For example, if one Honest Company customer gravitates toward video interviews with company co-founder Jessica Alba, future marketing messages will emphasize this celebrity endorsement. By contrast, if a second user gravitates toward information on the eco-friendly properties of the company’s products, marketing will be tailored to highlight these qualities.

Retention science also adjusts the timing and frequency of marketing messages based on an individual user’s level of engagement. It then tailors offers and promotions to coincide with a user’s likelihood of buying or churning at any given moment, all with a goal of increasing a customer’s lifetime value. A proprietary metric called a Retention Score helps to quantify any given customer's likelihood of churning.

“Different demographic and psychological attributes are important to different businesses,” Jao says. “We help companies preserve their margins by not offering unnecessary discounts to happy customers, but also by offering the right promotion to the right person at the right time to incentivize a desired action.”

“The WalMarts and the Amazons of the world will build their own data science teams and tackle this themselves, but everyone else is going to need a third-party like Retention Science to solve it for them,” Bettinelli says.

It’s obvious that Jao’s company is delivering real value, given that all of its beta customers have re-upped under full commercial contracts, and the founders of several of these brands elected to invest personally in this most recent funding round.

“We’ve had some customers tell our investors that we’re we could charge more given the amount of value we’re delivering,” Jao says. “It’s really rare and really nice for any client to say that, but we feel like if we’re not really helping clients, then we’re not going to have a long-lasting business. To me, the fact that some clients have invested says that they’re seeing the real value we’re delivering.”

Retention Science has managed all of its early success with almost no sales team to speak of; it’s been Jao and one other person up until this point, although the company’s first splurge after closing the new round was to hire a high priced head of sales – that and expand its office. The company has closed every deal to date over the phone, Jao says, and in all but one case never met with a client in person prior to signing a deal. It’s a remarkable and rather uncommon feat, and one that Jao knows won’t scale long term. But it also speaks to the amount of value the company offers and the evident power of its early customer case studies.

Jao’s number one focus going forward will be to elevate awareness of the Retention Science brand among potential customers, he says. The company is also dabbling in new verticals to which it can apply its existing solution. At the top of that list is the publisher category, where Jao believes he can help content creators drive engagement among fans.

But with all this momentum, Retention Science must now face the reality that LA doesn’t have nearly the depth of talent and experience in SaaS sales as the Valley does. While recruiting top engineering talent is not nearly the challenge that many have made it out to be, hiring for enterprise software sales is correspondingly more difficult. Jao believes he has his rockstar in VP of sales Scott Schnaars, who was previously employee number four and GM of badgeville. Now the challenge is building up a veteran team around Schnaars. Only Cornerstone OnDemand has done so at any scale in LA. Retention Science aims to be the second such success story.

Big data has evolved from a nice to have to a must have for any modern organization. Retention Science is applying this analytical approach to an otherwise ignored area of the customer lifecycle. By helping businesses better engage and convert their existing customers, Jao’s company is turning data into revenue. It’s a compelling pitch that should continue to capture the attention of margin-starved ecommerce merchants. If history is any guide, a few of them may even end up investing.