Customer Retention: The Key to Profitable Growth

When I speak to owners about their strategy for growing their businesses, most focus solely on the external marketplace—new marketing programs, advertising campaigns, and new customer acquisition strategies.

In reality, most businesses should focus with laser-like clarity on the retention of existing customers. The average business turns over half its customers in five years and the cost of this lost profit is enormous.

Calculate the Lifetime Value of a Customer

To understand the magnitude of this problem, you have to understand the Lifetime Value of a Customer. Simply stated, the LVC is the amount of money that your typical customer invests with you annually, multiplied by the number of years that you expect to be in business. The Lifetime Value of an existing Customer should be a guaranteed future sale—if you pay close attention to the customer’s needs and deliver high-quality goods or services along with great customer service. It is not hard to understand why current customers are so valuable and why retaining them should be at the heart of your strategy.

5% more retention, 80% more profits

The cost of customer turnover is one of the largest, most preventable costs in any business. Yet that lost-customer cost is hidden from all of the accounting reports. Acquiring a new customer costs six to seven times more than it costs to sell more products or services to an existing customer. Why? The reason is simple. To generate new customers the company makes expensive investments in advertising, marketing, entertaining, and so forth to break through the barriers of entry to a prospect. It is much easier and simpler to sell more to existing customers who already know your company and enjoy working with you—so long as you pay attention to their needs and deliver value in the exchange. Studies have shown that a 5 percent increase in customer retention leads to an increase in profits of between 80 and 125 percent.

Much more than your products

Value creation is the foundation for a successful business and it is the most important factor in building loyalty and customer retention. Value creation is measured in all interactions with your customers: delivery, product or service quality, correspondence, billing, responsiveness, telephone communications, pricing, etc.  Every point of contact in your customer service and delivery system is critical. When a business has high-performing customer service and delivery levels, customers receive high value in the relationship and are inclined to buy more and remain as good customers for a long time. Additionally, when value creation is very high the business can usually maintain better pricing levels and create new business via referrals from happy customers.

Seek All A’s in Your Strategy

In a customer retention strategy, the focus must be on your “A” customers. These are the customers who you would clone if you could. These customers will do more business with you because your mutually rewarding relationship contains a high level of trust. Get rid of the customers that you consider to be “D’s” (yes, I mean “fire” them!). These are the customers that you wish you did not have—the ones who constitute 5 percent of your revenue and 80 percent of your headaches. These customers waste your time and resources, but more importantly, they prevent you from spending more time attending to the needs of your top customers who value what you do and are willing to pay for it.

Mario O. Vicari can be reached at Email or 215.441.4600.