[I behave as if every IBM customer were on the verge of leaving and that I’d do anything to keep them from bolting. Buck Rodgers]
Given the opportunity, dissatisfied customers will tell 5 to 20 other people about the source of their service or product-related frustrations. However, if you make a prompt effort to resolve the issue, 85% of those customers are likely to remain customers (service recovery must be a key strategy).
Why, then, do most companies spend a majority of their time, energy and resources chasing new business? While it’s important to find new customers to replace lost business, to grow the enterprise and to expand into new markets, a smart company’s main objective should be to keep customers and enhance customer relationships. With the passage of time, it is getting easier, because newer and better CRM systems help you track, sort, and analyze meaningful customer data to make better marketing decisions.
Why, then, do most companies spend a majority of their time, energy and resources chasing new business? While it’s important to find new customers to replace lost business, to grow the enterprise and to expand into new markets, a smart company’s main objective should be to keep customers and enhance customer relationships. With the passage of time, it is getting easier, because newer and better CRM systems help you track, sort, and analyze meaningful customer data to make better marketing decisions.
What is your current retention rate? What is the cost of a lost customer to your business? What percentage of your marketing budget is spent on customer retention activities? Do you develop retention programs for key target markets? Is customer win-back a priority? These are some of the major questions that must be addressed if you want to maximize customer retention and minimize the amount of money you have to spend on customer acquisition. Here's my 5-point customer retention plan.
1. Measure Customer Retention It is surprising that many companies do not know the annual percentage of customers that leave (defection rate) or stay (retention rate). There are many ways to measure customer retention, including annual and targeted retention rates, weighted rates (accounts for usage differences); segmented indicators (sub-group analysis); share-of-customer; customer lifetime value (CLV); and recency, frequency, and monetary value (RFM analysis). Choosing appropriate measures provides a starting point for assessing a firm’s success in keeping customers.
2. Keep Customers from Disappearing You have to analyze the defection problem. Step two is a three-pronged attack. First, identify disloyal customers. Second, understand why they left. There are 6 types of defectors - customers seek: lower prices, higher quality products, better service, alternative technologies, market changes, or "political/social" considerations. An analysis of switching motives is insightful. Third, develop strategies to overcome non-loyal purchase behavior.
2. Keep Customers from Disappearing You have to analyze the defection problem. Step two is a three-pronged attack. First, identify disloyal customers. Second, understand why they left. There are 6 types of defectors - customers seek: lower prices, higher quality products, better service, alternative technologies, market changes, or "political/social" considerations. An analysis of switching motives is insightful. Third, develop strategies to overcome non-loyal purchase behavior.
3. Establish New Customer Retention Objectives Customer retention objectives should be based on organizational capabilities (strengths, weaknesses, resources, etc.); customer and competitive analyses; and benchmarking the industry/sector, comparable firms, and high-performing units in your company. Say that your company retains 75% of its customers. A realistic stretch goal may be to increase client retention by 3%, bringing your company to 78% next year, and to aim to keep 85% of your clients over 4 years.
4. Invest in Targeted Customer Retention Initiatives The cost (potential lifetime value) of a single lost customer can be substantial. This is magnified when we realize the overall cost of lost business. Consider the impact of a 25% defection rate for a health care center caring for 15,000 patients annually. A revenue loss of about $9.4 million [assuming $2,500 average patient revenue and a 5 percent profit margin] results in a dive of nearly $500,000 on the bottom line. A $100,000 investment in patient retention training and follow-up initiatives can dramatically improve profitability. Targeted retention means that organizations segment customers by relevant dimensions, such as geodemographics, psychographics/behavioral factors, and usage patterns.
5. Evaluate the Success of the Customer Retention Program Lexus and Subaru have the highest loyalty rates in the automotive industry by consistently providing superior ownership experiences. The final phase in building a strong customer retention plan is to ensure that it is working. Careful scrutiny is required to assess the program’s impact on keeping existing customers and, where possible, upgrading current customer relationships. Gather information to determine if your customer retention rate improved. You may need to revisit benchmarks and probe isolated causes of defection. Strategies and tactics over a short to medium-term span should be closely monitored in order to assess which methods worked best and those with little or no impact on keeping customers.
4. Invest in Targeted Customer Retention Initiatives The cost (potential lifetime value) of a single lost customer can be substantial. This is magnified when we realize the overall cost of lost business. Consider the impact of a 25% defection rate for a health care center caring for 15,000 patients annually. A revenue loss of about $9.4 million [assuming $2,500 average patient revenue and a 5 percent profit margin] results in a dive of nearly $500,000 on the bottom line. A $100,000 investment in patient retention training and follow-up initiatives can dramatically improve profitability. Targeted retention means that organizations segment customers by relevant dimensions, such as geodemographics, psychographics/behavioral factors, and usage patterns.
5. Evaluate the Success of the Customer Retention Program Lexus and Subaru have the highest loyalty rates in the automotive industry by consistently providing superior ownership experiences. The final phase in building a strong customer retention plan is to ensure that it is working. Careful scrutiny is required to assess the program’s impact on keeping existing customers and, where possible, upgrading current customer relationships. Gather information to determine if your customer retention rate improved. You may need to revisit benchmarks and probe isolated causes of defection. Strategies and tactics over a short to medium-term span should be closely monitored in order to assess which methods worked best and those with little or no impact on keeping customers.
This blog post is the 9th in a series extracted from Superior Customer Value – Finding and Keeping
Customers in the Now Economy, 4th Ed. (2019, Routledge Publishing/ Taylor & Francis). For further information contact Art Weinstein at artweinstein9@gmail.com, 954-309-0901, www.artweinstein.com
