Why retention is the new acquisition

Keep Acquisition Grow Retention

One of our customers recently told me they had more than halved their customer churn rate in under 8 weeks using Customer Thermometer. Whilst I was delighted we’d had this impact, it was only when I started doing the math that I realized what an epic change this is, so I thought I’d share some of our findings here.

If you’re not doing everything in your power to keep every customer you have, this will change your focus! We passionately believe that customer retention is the new acquisition, and here’s why.

This is a simple example calculation (not related to our specific customer) but it outlines the expense of customer churn:

Current number of customers 400
Customer revenue per month each $250
Annual value of total customer base $1,200,000
Annual cost of churn before CT (5%) $43,120
Annual cost of churn after CT (2%) $19,927
Annual savings $23,193
Return on investment in CT 3,855%

(So for a $49 monthly investment in CT, this company can save $23,193 per year! Just had to get that in there…;-)

But it’s not just the savings that stack up. That seemingly-innocuous 5% monthly customer churn rate can bite! Here’s how it will decimate your customer base by a half, in just 12 short months:

Month Total customers
1 400
2 380
3 361
4 343
5 326
6 310
7 294
8 279
9 265
10 252
11 239
12 228

So just a 5% monthly churn rate over one year will reduce your customer numbers by nearly 50% – leaving you with only 228 customers. Is churn killing your growth?

Grow by keeping every customer

Every business wants to grow. But so often we turn to costly sales and marketing activity to do it. It’s a bit like putting money in a savings account earning 1% when your credit card balance is costing you 19%!

Churn kills growth every time.

When it comes to growth, so many companies focus solely on the top line and forget that the gap between the customers you win and the customers you lose is what matters. Growth can only be attained through mastery of BOTH of these lines, not just one.

customer churn rate

Source: I pinched this slide from Kevin Hale and changed the words a bit

So there are 2 ways to grow…

The first is to relentlessly chase new business, and aim to always have that new business outstrip your churn rate. It can be done. But this is expensive, time-consuming and gets harder and harder if you’re not fixing your leaky bucket. And new customers often leave quickly if you and they are not the right fit. Add to that Chet Holmes‘ belief that only 3% of any given market are actively looking for a new supplier at any one time, and it’s a risky strategy.

The second way is to relentlessly drive down churn. It’s my strongly-held belief that doing this has several wonderful by-products, not least of which is that you will acquire new customers anyway.

Here’s a fascinating statement from Wufoo’s founder Kevin Hale, who was speaking at Stanford recently, where he showed a chart similar to the one above. He said:”My feeling is marketing and sales is a tax you pay because you haven’t made your product remarkable. Word-of-mouth is the easiest kind of growth, and it’s how a lot of the great companies grow. Figure out how to have a story that people want to tell about your product where they are the most interesting one at the dinner table. And then that person is your sales person. That person is your sales force for you.” Kevin Hale

It’s a punchy statement but real food for thought. Are too many companies propping up their customer retention issues with sales and marketing spend? What if you couldn’t spend money on customer acquisition this month but instead had to keep every single customer you currently have? What would you do differently?

Many of the world’s best companies use sales and marketing to reinforce and supercharge the word-of-mouth message that’s already strongly-held amongst their customer base, rather than to project a message that doesn’t align with reality. I’d put Harley, Nike, Apple, Virgin and others in that category. Would it change the way you sold yourself if you had amazing word-of -mouth?

I believe that customer retention should be a major focus in any growth strategy.

It has a number of other benefits that all contribute to a high-margin, high-quality company. If you want to grow your business, start at home.

Here are my 3 major reasons why:

  1. In order to keep your customers, your product/service has to be awesome. So in order to keep them you’ll have to ask them how they feel a lot, and fix issues as soon as they occur. You’ll be closer to your customers, and therefore build/offer stuff that they really want and that they will keep buying because it fits their needs better than anything else. If you listen hard enough you can even add in features to your offer that they are actually asking for. This provides great “lock in”.
  2. Keeping customers is cheaper and easier than getting new ones. Losing a customer can feel “free” as there is no inherent upfront cost in the same way there is when you hire a salesperson or place an ad. But it is far from “free” and that monthly revenue, once gone, is gone forever. See the 24 month chart above if you still need convincing. The customers you have now have been “trained” by you to operate in your way and so they are cheaper and more speedy to deal with that new ones too.
  3. If you’re keeping your customers you’re delighting them, so they will tell their friends. A customer told me on Friday that their “customer delight” strategy is one of the most significant parts of their new business strategy because it brings so many referrals. What’s more those referrals bring similar high-quality customers to those already in their base. And then they refer their friends, and so on…

So if your business relies on repeat custom (or even if it should rely on repeat custom but you don’t know how) start by measuring your customer churn rate and taking active steps to reduce it. And start asking your customers how you are doing as often as you can. If you’re able to reach out to a customer the minute they have a problem and fix it – how much is that worth to you? (More than $49 per month I’d imagine.)

There’s only so long you can sell yourself out of customer churn. Remember, when the number of customers coming in your door is exactly equal to the number leaving through it, growth is impossible.

About the author

Lindsay Willott is the CEO of Customer Thermometer, the micro-survey customers can’t resist. She’s also written these posts you might like to read:

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ps. Many thanks to Randy Carson of Lisa’s Cleaning Services, NC, the inspiration behind this post.