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Did You Know: A 5% Increase in Retention Increases Profits by Up to 95%

increase in customer retention

You can’t overestimate the importance of customer retention. Loyal customers are likely to buy more often from you and spend more money on each purchase. Plus, keeping customers costs less than continually acquiring new ones.

So what does all this mean for your business? The more loyal customers you have – the higher your profits.

In fact, studies by Bain & Company, along with Earl Sasser of the Harvard Business School, have shown [1] that even a 5 percent increase in customer retention can lead to an increase in profits of between 25 and 95 percent.

There are several reasons why this small increase in retention can have such a large impact on profits. First, customers are likely to spend more with companies they’ve already done business with. Particularly with small businesses that don’t have a lot of brand recognition, a customer’s first purchase or two can be considered somewhat of a risk. So they are likely to keep the cost relatively small, and then increase spending as the relationship grows.

In addition, repeat customers are more likely to refer others. Bain & Company’s research showed [2] that after just one purchase from an online apparel retailer, an average shopper was likely to refer three other people to the site. But a customer that made ten purchases from an online apparel retailer was likely to refer seven different people to the site.

Companies that focus more on new customer acquisition can still grow. But the cost of acquiring new customers is high. So, if you want to recoup all of the marketing investment it takes to get those new customers, they need to stick around and become repeat customers.

Bain & Company also found that most businesses need to retain customers for at least 12 to 18 months to break even on their investment. Only in the case of extremely large items can retailers break even on their investment if a customer makes just one purchase. And even then, it’s rare to break even from a single purchase.

For that reason, it can take a long time for companies to really see the benefits of customer retention. That’s likely why some marketers don’t focus on it as much as they should.

So How Can You Attain That All-Important 5% Increase in Customer Retention?

There are a few different strategies businesses can employ.

First, in order to improve retention rates, you need to know what those rates are. To measure your retention, survey your customers [3] to find out which of them are repeat versus one-time buyers. Then find out which factors are the most important to your repeat customers and make those areas a priority for improvement.

For instance, your repeat customers might be more likely to care about customer service or order fulfillment, while one-time customers could be more focused on prices.

You can also learn a lot about what you need to improve upon by asking the customers you failed to retain. You can use targeted emails to find out why these customers chose to take their business elsewhere, then improve on the areas that caused them to leave.

Overall, it’s important to focus on keeping your customers happy. Try to offer the best possible service, most reasonable prices, and easiest shopping experience for them. But by focusing on the areas that are most important to your loyal customers, you can see a big return on your investment in the long run.

Customer [4] Photo via Shutterstock