The rule of customer retention is that you must be willing to spend as much to keep a customer as you did to acquire them. Leaky buckets don’t fill up quickly. ~Des Traynor
Customer retention, repeat sales, referrals… are imperatives. These are the activities that a selling organization undertakes in order to reduce customer defections, grow, and increase profitability. Successful customer retention starts with the first contact, an organization makes with a customer, and continues throughout the entire lifetime of a relationship. Retaining customers (reducing customer turnover) is critical for profitability and business success.
According to ‘Emmet C. Murphy and Mark A. Murphy’ they write: Acquiring new customers can cost as much as five times more than satisfying and retaining current customers. A 2% increase in customer retention has the same effect as decreasing costs by 10%. Depending on the industry, reducing your customer defection rate by 5% can increase your profitability by 25 to 125%. Customer profitability tends to increase over the life of a retained customer.
In the article “Return on Happiness, Customer Retention, Customer Loyalty” by JoAnna Brandi writes: After 21 years in the business of Customer Retention and Customer Loyalty , I’ve got just 6 words of advice for you: ‘Get Real. Be Real. Stay Real’. There is a power shift in business. The customers are in charge, and they know it. They’ve got the power. They don’t give a hoot about your carefully crafted marketing message.
They want to know that you’re honest and have their best interests at heart. They want the truth. Trust has been broken so often that customers are wary and even cynical about buying. So if you want to create and sustain your competitive advantage, you need a new approach to customer relationships.
- Get Real: Customer satisfaction isn’t enough anymore. Less than half of your satisfied customers will come back. You need to cross the bridge from customer satisfaction over to customer loyalty.
- Be Real: Bridge between customer satisfaction and customer loyalty is built with positive emotion. Emotion is a far more powerful business tool than most people realize, incorporating feelings of being; special, appreciated, valued, important, validated, welcomed, heard, secure, respected, and/or even loved.
- Stay Real: Sustainable, authentic, customer-focused companies create ways to keep their passion for the customer alive. Leaders stay connected to the customers. They routinely challenge assumptions and listen with reverence to what employees who deal directly with customers have to say.
In the article “The Impact of Customer Satisfaction and Relationship Quality on Customer Retention” by Thorsten Hennig-Thurau and Alexander Klee write: During the past two decades, more than 1200 articles published in area of customer satisfaction research. In numerous publications, satisfaction has been treated as necessary premise for the retention of customers, and therefore has moved to the forefront of relational marketing approaches.
‘Kotler’ sums this up when he states: The key to customer retention is customer satisfaction. Consequently, customer satisfaction has developed extensively as a basic construct for monitoring and controlling activities in relationship marketing concept. According to ‘LaBarbera and Mazursky’: “The assumption that satisfaction meaningfully influences repurchase behavior underlies most of the research in this area of inquiry”.
Consequently, only a few researchers have investigated the nature and extent of the relation between satisfaction and retention itself. In an experimental study by ‘Bolton’ they found; overall satisfaction explained 7% of the variance of the length of the company– customer relationship. She even found no significant relationship between the transaction-specific satisfaction appraisal and the length of the relationship.
In addition, studies that compare the satisfaction level of migrated customers with those of loyal customers show similar results. For example, ‘Kordick’ reports that in a study of car buyers; only 40% of the surveyed buyers who said they were satisfied with the brand and the service engaged in repeat purchase behavior. Furthermore, ‘Kordick’ notes that 15% of the unsatisfied customers returned to the same dealers despite their dissatisfaction. In a study by ‘Gierl’, they found; between 40% and 62% of the interviewed customers stated that they had changed the brand even though they were satisfied.
Amazingly, in eight of nine examined product classes, the percentage of these satisfied brand switchers even exceeded the percentage of customers who defected due to a dissatisfactory state. According to Reichheld; the percentage of satisfied migrants is even higher… that between 65% and 85% of customers who defect say they were satisfied or very satisfied with their former supplier. Condensing the results from these studies, ‘skepticism’ seems to be well-founded as to the widespread conceptual view of a strong ‘satisfaction & retention’ relationship.
The ‘U.S. Chamber of Commerce’ and the ‘U.S. Small Business Administration’ conducted a study and according to the results; businesses could greatly improve their customer base if they focused more on retaining customers than spending marketing budget funds to get new customers. Marketing studies have shown it takes more money to acquire a new customer than it does to retain a current client. Statistics show:
- Average U.S. business loses 50% of its customers every five years.
- Costs 6-7 times more to find new clients than it does to keep an existing client.
- Bain Co. states; a 10% increase in customer retention is equal to a 30% increase in company value.
- You are 4 times more likely to do business with an existing customer vs. a new customer.
- Probability of selling to an existing customer is 60-70% vs. 5-20% to a new customer.
In the article “The Economics of Customer Retention” by Brian Koma writes: Winning new customers while losing a significant share of existing customers is like filling a bathtub with the drain open. Here is an example that shows the difference between a 74% customer retention rate and a 90% customer retention rate: At a 74% customer retention rate, a $30 million business will lose $7.8 million in revenue year-over-year and will need to sell almost $17 million in new business to reach $40 million in sales.
At a 90% customer retention rate, a business will reduce its year-over-year revenue loss to $3 million and will only need to sell an additional $12 million to reach $40 million in sales. Loyal customers can make a dramatic difference in an organization’s overall financial health and dramatically reduce the cost of growth, even in a challenging economy. Compound your retention rate over the years and you have a dramatic impact on your corporation’s profits.
In the article “One Number You Need to Grow“ by Fred Reichheld; he introduced the concept of the ‘Net Promoter Score’ (NPS). The NPS is a customer loyalty metric, and most important proposed benefits of this method is derived from simplifying and communicating the objective of creating more ‘Promoters’ and fewer ‘Detractors’. The concept claims to be far simpler for employees to understand and to-act-on, than more complicated, obscure or hard-to-understand satisfaction metrics or indices.
In addition, proponents claim the NPS method can reduce the complexity of implementation and analysis, frequently associated with measures of customer satisfaction. The basics of the method boiled down to one magic question: “How likely is it that you [customer] would recommend [enter the name of your company] to a friend or colleague?”
Customers respond to the ‘Net Promoter Score Survey’ by choosing a number between 0 and 10; ‘0’ being the lowest possible rating (not likely to recommend your company) and ‘10’ being the highest possible rating (most likely to recommend your company). To calculate your company’s NPS, take the percentage of customers who are promoters and subtract the percentage who are detractors. To give you an idea of some (very high) NPS scores, here are a few scores from some familiar brands: USAA– 87%; Costco– 77%; Apple– 72%.
Average companies usually score between 5 and 10%. Stellar companies operate at NPS efficiency ratings of 50 to 80%. However, “Just because customers say they will recommend your company doesn’t mean, necessarily, that they do”. Proponents of the NPS approach claim the score can be used to motivate an organization to become more focused on improving products and services for customers. They further claim that a company’s NPS correlates with revenue growth. Independent research confirms the fundamental claim of a relationship between relative competitive NPS and competitive growth rates.
Despite its popularity among business executives, the NPS concept has attracted some controversy from academic and market research circles. Research by ‘Keiningham, Cooil, Andreassen, Aksoy’ disputes that the NPS metric is best predictor of company growth. Furthermore, ‘Hayes’ claimed there was no scientific evidence that the ‘likelihood to recommend’ question is a better predictor of business growth compared to other customer-loyalty questions.
‘Daniel Schneider, Jon Krosnick, et al.’ found that out of four scales tested, the 11-point scale advocated by Reicheld had the lowest predictive validity of the scales tested. Others have taken issue with the calculation methodology, claiming that by collapsing an 11-point scale to three components (e.g., Promoters, Passives, Detractors), significant information is lost and statistical variability of the result increases. Also, the validity that NPS scales across industries and cultures has also been questioned…
The average business loses around 20% of its customers annually simply by failing to attend to customer relationships. In some industries this leakage is as high as 80%. The cost, in either case, is staggering, but few businesses truly understand the implications. Imagine two businesses, one that retains 90% of its customers, the other retaining 80%.
If both add new customers at the rate of 20% per year, the first will have a 10% net growth in customers per year, while the other will have none. Over seven years, the first firm will virtually double, while the second will have no real growth. Everything else being equal, that 10-percent advantage in customer retention will result in a doubling of customers every seven years without doing anything else.
Even a tiny change in customer retention can cascade through a business system and multiply over time. Customer retention validates the soul of the company. In order to serve the customer, you must think like the customer and the employee. Customer retention reflects ‘the state of mind that customers have about a company and its products or services…’
If you don’t give your customers some good reasons to stay, your competitors will give them a reason to leave. Customer retention drives profits. It’s far less expensive to cultivate your existing customer base, than it is to seek new single-transaction customers…
Finding a new customer costs from three to seven times more than keeping an existing one, and for many companies, up to 95% of profits come from long-term customers. ~PriceWaterhouse Coopers.