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 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 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 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 Photo via Shutterstock
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That’s true. Cause when it comes to selling, branding is everything. So if you can increase the retention of your brand in your customer’s minds even by just 5% then they will be more likely to get more sales.
How much does it cost you to get one new customer, if you have lost one old customer?
not much, i think. because of the endorsement/word of mouth publicity you get from your satisfied old customers.
The Bain & Co study you cited was published in 2000, which makes it 14 years old at time of publication, and 16 years old now. Not to mention that the study’s methodology is based on a previous study done 10 years before that, so really we’re dealing with marketing strategies developed from studying customer behaviour in 1990. Actually, if the study was published in 1990, it’s reasonable to assume they had collected the data over a period of time before then, so you’re actually basing this on consumer behaviour from the late 1980s. At this point, do we really want to trust that consumers behave the same now as they did then?
Doug, while you’re right about old data, most of what is being quoted is simple math. More churn, lower profits; it’s unassailable. And, Fred Reichheld, the Bain source evolved the same concept into the most widely used measure of “customer success”, the Net Promoter Score methodology…which is based on this unassailable math. Now, if what you choose to say is that the way buyers communicate today is different that 20 years ago, you’re absolutely right. In fact, your promoters and detractors have an even greater influence on new buyers due to the efficiency of communication and the use of peer information by evaluators. So, while your post is 2 years old, I would imagine that my feedback applied equally two years ago as it does today. Apparently, you read and are familiar with the Loyalty Effect work, so why are you so negative about what most would think is more-or-less intuitive. If you wanted to criticize this article, I would have thought you would have leaned on the fact that it fails to deliver much in the area of new concepts or original thought and synthesis of ideas. But, to suggest that the information is invalid I suggest may be misjudging if not also misleading.
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