Updated: Sep 16, 2020
Do you want to understand the impact your customers have on your company’s bottom line?
Many organisations are missing the boat on a golden opportunity to increase their profits. Instead, they are increasing their costs with an inefficient approach to getting and keeping customers.
We have all heard the facts and understand that customers are cheaper to keep than to acquire. Long-term customers are typically more profitable than new customers, and a focus on retention can exponentially expand your customer base without any increase in your sales efforts.
However approximately only 18% of companies focus or prioritise customer retention over acquisition.
89% of companies see customer experience as a key factor in driving customer loyalty and retention. However approx only 18% of companies focus or prioritise customer retention over acquisition.
76% of companies see Customer Lifetime Value as an important concept for their organisation. But only 42% of companies are able to measure Customer Lifetime Value accurately.
Allocating resources to increase customer retention by just 2% you can decrease your expenses by 10%. The profitability of selling to an existing customer is 60% -70%, while the profitability of selling to a new prospect is 5% - 20%. Existing customers are 50% more likely to try new products and spend 31% more, when compared to new customers.
Rather than focusing on these stats and facts, let’s look at these numbers in more detail and help you be able to make them relatable to your business:
Lesson One: Did you know a 10% growth target is actually more like a 30% gap to fill?
When you are tasked with achieving a 10% growth, did you know you’re really expecting a growth of 30%.
Let’s assume for the last few years, your target growth goal has been 8%. Let’s pretend your goal for 2021 is a 10% growth goal. So you need to bump up your growth by just a couple more percentage from 8% to 10%?
So lets say, you have been tasked with increasing your 100,000 customer base to 110,000 customers in 2021.
Sounds reasonable, doesn't it?
Let’s look at the hidden maths.
· Of the 100,000 customers how many are still your customers rather than line numbers in your database?
· The first step should really be to look at your customer retention. Growth isn’t just based on adding new customers to those your company already has.
· How many of you’re customers that were here are the beginning of the year, are still here now?
· Let’s say you know that number is 85%. In other words, out of 100,000 customers, 85,000 remain at the end of the year.
· You start 2021 with actually only 85,000 active customers and now need to increase it to 110,000.
· So that means your actual growth rate needs to be closer to 30% not 10%.
This demonstrates why you need to understand you organisations retention rate.
If a company has 100,000 customers at the beginning of the year, and 110,000 at the end of the year, the apparent growth rate is assumed to be 10%. But let’s face it no company has 100% retention rate.
If a company with an 85% retention rate is growing at 10%, it really means the company must be acquiring an additional 30% new customers during the year.
Now, for the even harder pill to swallow, these new customers cost between 5-10 times more than it would cost to keep existing customers.
That means Marketing & Sales teams are responsible for acquiring approximately a third of the customers every year. At the very least, this demonstrates that the Marketing and Sales Directors’ jobs are tougher than even they assumed.
Lesson Two: Increasing your retention rate by 5% has an exponential economic impact
When your marketplace environment is growing, it often seems that acquiring new customers is easy. When you need more customers, you just invest a little more in marketing and turn the sales volume knob up.
Meanwhile, customers are wandering out the back door, shaking their heads, never to return. But the company didn’t even notice. The total number of customers continues to increase, because there is more flowing in the front door than are exiting through the back.
What if the market turns soft or through technological or other advances, the nature of your product or services must change and you must adapt.
Suddenly you have a problem.
You must spend more and more time and money to acquire new customers. It’s a huge challenge.
Let’s look at the hidden maths.
· Let’s say that you currently have a retention rate of 84%. Remember, that means for every 1000 customers that were around at the beginning of the year, you now have 840 left.
· What if you put your efforts into the slow leak of the 16% churn.
· Imagine that you could increase and then hold your retention rate to 89%, not a world changing challenge.
· Just tweak your customer experience, your process and programmes to entice 5% more of your customers to stay on top of your existing acquisition rate.
· In the second year, you have 5% more customers on top of your current growth rate. Good but not great.
· Then the following year, you maintain the 89% retention rate. Same with the next year.
· You are piling those additional 5% of customers in the second & third year of top of the 5% from the year before.
· In the first and second year the additional customers you retain begin to create a positive impact on the total number of customers. But look at the growing and dramatic difference in the number of customers through years three to ten.
Customers at current retention rate of 84%
Year 1: 11,990
Year 3: 14,245
Year 5: 16,925
Year 10: 26,041
Customers at new retention rate 89%
Year 1: 12,540 (550 additional customers)
Year 3: 16,297 (2,052 additional customers)
Year 5: 21,180 (4,255 additional customers)
Year 10: 40,779 (14,738 additional customers)
By bumping retention up a few points and then maintaining that retention rate, you can take advantage of cumulative growth of your customer base.
Hopefully you are seeing the benefits to your business, in terms of the current marketplace, the efficiencies, and the sheer profit potential, of concentrating on retention of existing customers, at least in conjunction with the more general acquisition of new customers.