Customer Retention

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Our guide to the
power of improving
Customer Retention
in your business

Customer Retention

Our guide to understanding how retention can help you keep your customers.

We help you monitor their happiness, empowering you to retain more satisfied customers.

1. What is customer retention?

Customer retention is the sum total of activity that company carries out in order to reduce customer churn.

The goal of a retention program is therefore to help businesses keep as many customers as possible. Often, these programs are focused on the highest value/highest margin or most valuable customers. We’ll go into more detail throughout this article but retaining customers can take many forms, ranging from customer loyalty schemes, marketing activities, comms programs and brand loyalty tactics.

One of the best introductions to the spirit of keeping a customer I’ve seen – a kind of manifesto – is attributed to a US company in the early part of the 20th century:

  • A Customer is the most important person ever in this office—in person or by mail.

  • A Customer is not dependent on us—we are dependent on him.

  • A Customer is not an interruption of our work—he is the purpose of it. We are not doing him a favor by serving him—he is doing us a favor by giving us the opportunity to do so.

  • A Customer is not an outsider to our business—he is part of it.

  • A Customer is not a cold statistic—he is a flesh-and-blood human being with feelings and emotions like your own, and with biases and prejudices.

  • A Customer is not someone to argue or match wits with. Nobody ever won an argument with a customer.

  • A Customer is a person who brings us his wants. It is our job to handle them profitably to him and to ourselves.

The ultimate customer satisfaction survey playbook

2. When should customer retention activity start?

Retaining customers begins almost before the first ‘real’ contact a customer has with a company. Retention can be strongly influenced by the way its existing customers talk about the business – meaning that the pre-reputation of a company can influence preferability and favorability in potential new buyers, even before they have bought.

As Warren Buffet has said, “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.

This phenomenon has given rise to “word of mouth” marketing and other terminology. Fundamentally, many commentators argue that a company’s brand is basically its reputation, and that early positive word of mouth and general positive sentiment surrounding a company can very much affect interest and favorability to buy, even before a first official contact between potential customer and company has happened.

Once first contact between a customer and a company has taken place, good customer service companies will continue to plan the customer life-cycle throughout the entire lifetime of the relationship, encouraging the newly-won customer to perpetuate the word of mouth.

3. Does retaining your customers give a competitive advantage?

In a 2015 Accenture study, 46% of U.S. consumers said they were more likely to switch providers than they were 10 years ago. With such a dramatic shift in loyalty, and such a big swing in the numbers, it’s clear that one of the key differentiators available to businesses today is to deliver a very high standard of customer service.

Many statistics claim to show that getting an existing customer to buy again is significantly more profitable than having to go out and win a new customer. Gartner has gone as far as to say that 80% of a company’s future revenues will come from just 20% of their existing customers.

As a result, many businesses have embraced the concept customer retention, using tools like CRM (customer relationship management) to manage ongoing customer relationships in an attempt to control, plan and profit from them.

Customer-Retention-Advantage
Customer-Retention-Profit

4. Does retaining customers have a proven impact on profit?

The generally accepted view is that selling more to an existing customer is both cheaper in terms of marketing outlay, and more profitable in terms of sale, than selling to a new one.

Most businesses want to be as profitable as possible and to grow as much as possible. However, customer churn kills that growth dead. When it comes to growth, so many companies focus solely on the top line (acquiring new customers) 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 factors, not just one. Customer retention is a critical part of profit and profit growth.

Wikipedia’s entry on retention cites research by John Fleming and Jim Asplund which highlights that “engaged customers generate 1.7 times more revenue than normal customers, while having engaged employees and engaged customers return a revenue gain of 3.4 times the norm.

This article in CMO magazine is very useful, and outlines the case for why retaining a customer should outweigh customer acquisition.

5. How do different companies measure the customers they have kept?

It’s important to track retaining customers in the long term, as often the early years of a relationship with a customer can show poor or negative profitability, but over time, it has a very significant upside:

“We showed that in industry after industry, the high cost of acquiring customers renders many customer relationships unprofitable during their early years. Only in later years, when the cost of serving loyal customers falls and the volume of their purchases rises, do relationships generate big returns. The bottom line: Increasing retention rates by 5% increases profits by 25% to 95%.” Bain & Company/Harvard Business School

Inc.com suggests the following formula is a good catch-all for calculating retaining customers:

Retention Rate = ((CE-CN)/CS)) X 100

CE = number of customers at end of period

CN = number of new customers acquired during period

CS = number of customers at start of period

You start the (week/month/year/other period you choose) with 500 customers. You lose 50 customers, but you gain 100 customers. At the end of the period you have 550 customers.

Now do the math:

550–100 = 450; 450/500 = .9; .9 x 100 = 90. Your retention rate for the period was 90 percent.

engaged customers generate 1.7 times more revenue than normal customers, while having engaged employees and engaged customers return a revenue gain of 3.4 times the norm.

Customer-Retention-Happy-Customers

6. Do companies who are good at retaining customers also have good customer satisfaction?

Customer satisfaction plays a big part here, but how is not always as clear. Research shows that customer satisfaction is a definitely a driver for keeping customers. There does appear to be an association between customer satisfaction and retention, although how much effect one has on the other varies greatly depending on the industry, the customer themselves, the product involved, the market and so on.

In a 2015 study by Accenture, 56% of U.S. consumers said the number of brands they consider for a given product or service has increased significantly over the past 10 years. This highlights the importance of good customer retention since the internet has given consumers access to hundreds or thousands more products and suppliers than they may have had even just a few years before.

Chiming with our point 7 below, McKinsey agrees that satisfaction does have an impact on retention, highlighting in their research that inconsistency of satisfaction with an experience is a critical improvement point for businesses:

“Our research indicates that since 2009, customers are valuing an “average” experience less and have even less patience for variability in delivery. In addition, companies that experience inconsistency challenges often expend unnecessary resources without actually improving the customer journey. Making additional investments to improve the customer experience without tightening the consistency of experience is just throwing good money after bad.

7. Do you have to achieve “customer delight” to have good customer retention?

A number of books and blog posts have argued that in today’s competitive market, satisfying customers isn’t enough and that businesses should really wow their customers with amazing, over the top service. At the same time, there’s recent research to suggest that the customer doesn’t actually want to be wowed, they want to have an effortless experience.

Companies devote a huge amount of people and money trying to knock customers off their feet from a service perspective. But many now argue that customer retention has more to do with how companies deliver on basic hygiene factors, than on how astonishing their service feats might be.

Research from Nottingham university backs this up saying “Despite the desirability of customer satisfaction, managers must also realize the impossibility of always delivering a perfect service… This makes it important for firms to understand not only how to increase their customer satisfaction levels but also manage service failures and ultimately customer dissatisfaction in order to minimize their potential adverse effects. Certainly, service recovery and responses to customer dissatisfaction, especially through effective complaint handling – a key element in service recovery – can result not just in improved satisfaction rates but also repurchase intentions and the spread of positive word-of-mouth.”

Customer-Retention-Wow

If you want to calculate the customer lifetime value for your business, try our useful calculator.

8. How does retention and customer lifetime value relate to each other?

Customer lifetime value is a calculation a company can undertake, based on their own internal data, to calculate the likely value of the profit they will make from a customer over the lifetime of that customer’s loyalty to/usage of them. In determining how much it is worth spending on keeping a customer, it is highly worthwhile calculating the customer lifetime value.

9. What are some examples of activities for keeping customers?

  • loyalty programs (Nectar, British Airways, Hilton Honors)

  • reward programs

  • frequent communications and company news

  • customer birthday communications

  • referral vouchers where the giver and recipient receive money off their next purchases

  • frequent buyer points programs (Boots)

  • courtesy systems

  • customer winback program

  • adding new and complementary product and/or service lines to a business’ offerings

  • corporate hospitality

  • key account management and account based communication

  • purchase reinforcement

Customer-Retention-Loyalty

10. Keeping customers and customer surveys. How can I stop my customers leaving?

Quite simply, asking them is a good start!

Sending a long, annual customer survey isn’t going to cut it in this environment where choice is huge and change is rapid. Many online surveys now get a sub 2% response rate, making them a poor choice to support a retention program.

Consider implementing a transactional survey, whereby customers are asked for very “light touch” feedback at the point of interaction.

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