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:
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.
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.
