Effective customer retention is a strategic long-term process and it is organized and executed throughout the entire life of the customer from the very first customer engagement till the end.
In order for the customer retention program to work successfully an entire different mindset is required by the management. Instead of focusing on maximizing the profit over the short-term – such as maximizing revenue and profit with the first transaction, this type of programs require focusing on delivering maximum value for the customer and maximizing the customer lifetime value.
The customer lifetime value is driven by the customer retention rate. For example, if the average time your customers do business with you increases by 20%, your customer lifetime value will increase by 20% as well. It is important to measure these very important marketing and profitability metrics.
Actually customer retention rate, customer lifetime value and lost customer rate must be continuously monitored and managed and in addition effective strategies must be developed in order to improve these KPIs effectively.
Not only that it costs less to keep an existing customer compared to the cost of acquiring a new customer (on average it costs 5 times more to acquire new customer than to keep an existing customer), but another important fact is that your existing customers spend more money than new customers.
If you are a typical business you lose somewhere around 20%-25% of your current customers every year – this goes year after year. In other words with 25% rate of losing your existing customers, in 4 years you’ll lose all of your current customers.
This is a scary statistic if you take into consideration all of the efforts and investments you make every single day in business development and sales growth. The successful customer retention program requires allocating part of your resources from the process of acquiring new customers to the process of retaining your customers.
With a 75% customer retention rate you need to grow your current number of customers by 30% in order to achieve the same revenue next year. Keep in mind that it costs you about 5 times more to acquire new customers compared to the cost of retaining your existing customers.
This means allocating the same amount of money from new sales development into customer retention is a smart investment with higher ROI.
When focusing on customer retention in addition to measuring customer retention as your KPI you should add the KPI: lost customers. This brings a whole new meaning because while 80% customer retention may not sound like a poor performance, a 20% lost customers per year sounds more alarming.
Creating customer retention strategies requires from you to understand why your customers leave.
Here are the 2 major reasons why you lose a customer:
- they are not fully satisfied with your products and services (improve your current offering and the perceived value of your products)
- they are not satisfied with the way you do business with them (improve the relationship with your existing customers by focusing on value maximization for the customer instead of short-term profit maximization)
In order to develop successful customer retention strategies you should talk to your customers – both existing customers and customers who do not do business with your company anymore in order to learn about the specific reasons. This will give you a very important insight on how to improve your customer retention.