Analyzing The Link Between Customer Retention and Profitability
In the business world, there’s always another hurdle to cross, another mountain to climb, and another boundary to break. Globalization has made a crowded marketplace even more competitive. Consumers have more choices than ever, and businesses have to work incredibly hard to attract – and keep – paying customers. Appealing to the consumer is one thing, but keeping them coming back again and again? That’s another challenge entirely.
Thankfully, years of research, studies, and market reports can help us better understand the challenge and profitability of retaining customers. Here is why customer retention and profitability are so inextricably connected, and some strategies you can use to court consumers time and time again.
Retaining Customers is Easier Than Cutting Costs
When times are tight, many businesses look to cost-cutting to make up for a bad quarter. While this method is certainly tried and true for a reason, there may be a better way: studies show that a mere two percent increase in customer retention can have the same impact as cutting 10 percent of costs. It’s perhaps the biggest benefit of retaining loyal customers.
Loyal customers don’t need a ton of nurturing. To revisit your brand, they need to feel important. Thankfully, this can be accomplished without spending a fortune. It’s much more affordable, after all, to show your appreciation for loyal customers than it is to appeal to new ones. With the right strategy, you can reward loyalty while encouraging customers to spend more in-house.
Need inspiration? Look to your favorite brands for guidance. The companies that we rely upon for our daily needs, like grocery stores, often have a rewards system in place for repeat customers. While you might not have the infrastructure set up to manage a large program that rewards clientele every time they do business with you, even the most minor of acknowledgement of their loyalty can keep them coming back.
Word of Mouth vs. Traditional Marketing Strategies
In their 1993 book “Raving Fans: A Revolutionary Approach to Customer Service,” authors Ken Blanchard and Sheldon Bowles argued that word of mouth marketing is more valuable than more traditional strategies. The seminal tome forever changed the way many entrepreneurs looked at their customer service approach. While traditional marketing efforts are certainly effective, Bowles and Blanchard made it clear: loyal customers who become raving fans will have more of an impact on the perception of a brand than any slick promotional campaign.
Consider the last truly great meal you had at a restaurant. Whether the experience stuck out in your mind because of the flavors, the service, or the atmosphere, chances are good that you shared your thoughts with a friend. Raving customers are more likely to return than customers who are ambivalent, but they’re also more likely to turn others on to their discovery. This style of guerrilla marketing isn’t difficult to achieve, either. By delighting customers in exciting and unexpected ways, you’ll earn their patronage for years to come.
Acquisition Costs Outweigh Customer Retention Efforts
Creating raving fans is no easy task. Still, retaining customers is far less expensive or time-consuming than acquiring new ones. Depending on your industry, the cost of acquiring a new customer may be between five and 25 times as expensive as nurturing existing relationships with loyal customers. Understanding your churn rate can help you better understand whether you’re retaining customers.
This metric weighs the percentage of clients who end relationships with your company versus how many come back for more. Annual churn rates can provide big picture perspective, but zooming in on the data, month-by-month, can be equally revealing. Generally speaking, high churn rates spell bad news for businesses large and small. The figure shouldn’t make or break your spirit, though – after all, to know where you’re going, you’ve got to understand where you’ve been.
Before you invest any chunk of change into acquisition costs, look to the data to understand the impact it’s having on your bottom line. If it ain’t broke, as they say, don’t fix it. While there’s certainly some truth to the old aphorism, compromises can be made. Even if you’re satisfied with your customer acquisition costs, it may be worth experimenting with retention strategies.
Customer Retention Increases Profitability
It’s easy to get caught up in the latest customer acquisition strategies. Exciting thought leaders have a way of inspiring us to try out new concepts. After all, novelty captures our attention in ways that tried-and-true methods typically do not. Customer retention has spelled success for generations of business owners, but it’s not flashy or trendy, though the results often are: A mere five percent increase in retention can lead to a 25 to 95 percent uptick in profits.
With such a clear impact on the average business, customer retention should be the number one goal of any company. There is beauty in the act of doing a job well and having your customers come back for more. There’s even more satisfaction in knowing that those repeat customers will help you grow in the long term. While customer retention strategies may appear simple, they’re incredibly powerful.
That power needs harnessing. Before you deploy any new retention strategies, it’s worth spending some time understanding your goals and the metrics by which your progress should be measured. This will look different for every organization, but ultimately, you’ll want to gauge the effectiveness of your retention strategies and their impact on your bottom line.
Investing in the customer experience can pay off in a major way. By finding ways to inspire, delight, and exceed customer expectations, you’ll see a major boost to your profit and your reputation in the community. Invest time and money in customer retention, then be ready to deliver on your promises. While the results may not be immediate, nor are they likely to be flashy, you’ll build a base of loyal fans who will return to your company time and time again.
Author Bio:
Andrew Tillery is the Marketing Director at MAP Communications. MAP is an employee-owned company that provides live answering services and call center solutions for some of America’s finest businesses.
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