Never underestimate customer retention. The cost to attract a new customer is approximately five times greater than the cost to retain a customer. Consider this fact every time your company receives a complaint or your customer chooses to do business elsewhere. Businesses with a high customer retention rate are more profitable than businesses that rely solely on attracting new customers.
Attracting New Customers
Attracting a new customer requires time, money and considerable effort, while retaining an existing customer typically only requires an ongoing commitment to customer satisfaction. That’s not to say that customer retention is easy or inexpensive, but compared to attracting a new customer, it is surely a bargain. Customer satisfaction begins with trust, and trust is something that must be earned. It takes time for customers to trust that they will receive quality products and service, not just on their initial experience with your company, but every time they do business with your company.
Everyone knows satisfied customers purchase more overtime, but it’s easy to overlook the value in referrals. A referral, or word of mouth advertising, is a very inexpensive form of advertising, yet companies often neglect to promote customer referrals. How do you promote a referral? Anything you do to exceed a customer’s expectations will encourage them to refer your company to others. Here are a few examples:
- Gift certificates or discounts for referrals
- Liberal refund policy
- Satisfaction guarantee
- Deliver better results than promised
- Ask for testimonials
- Respond positively to customer suggestions, even the unreasonable ones
Another benefit to having long-term customers is that you get to know them better and can begin to customize your products and services to fit their needs and fulfil their desires, making it very difficult for a competitor to lure them away from your company.
Lifetime Value of a Customer
Recently, Delta Kits hired a firm to help us determine the lifetime value of our customers. This proved to be very interesting and enlightening, but you don’t need to hire someone to understand the concept. If customer A has his windshield repaired 1 time and pays you $50 the lifetime value of that customer is $50, but if customer B has a windshield repaired every other year for 10 years the lifetime value of that customer is $250.
If customer B also refers 5 other customers during that 10-year period, B’s true lifetime value is at least $500 and potentially a lot more. Now let’s say the cost to attract a new customer is $40, which is not unreasonable by the way, and the cost to retain an existing customer is $10/year. The net lifetime value of customer A is $10 ($50-$40) while the net lifetime value of customer B is $310 ($500-190).
Customer Reasons Not to Return
Once you understand the value of retaining customers, you understand the need to please them, and to please them you need to know the primary reasons a customer may not return to your company. Here are a few potential reasons:
- Price — Everyone thinks this is “the” primary reason, but it is not
- Competition — Sometimes a price issue, but most often related to quality products and/or service
- First impressions — This is a big one
- Trust — If a customer feels cheated, they will not return
- Inconvenience — Always make it easy to do business with you
- Mistakes — We all make mistakes, it’s how we handle mistakes that often determines customer satisfaction
- Fails to meet expectations — Poor quality, unresolved complaint, etc.
- Customer leaves the area — This is the only one that is out of your control
Ideas for Improving Customer Retention
1) Focus on customer satisfaction. Too often, businesses focus on short term sales goals and fail to realize the long-term benefit of customer satisfaction.
- Encourage customer feedback, both positive and negative
- Make owners or managers accessible and approachable
- Respond quickly to customer complaints
- Ask if problems were resolved to the customer’s satisfaction and listen carefully to their answers
- Be accountable for errors and mistakes, bringing them to the customer’s attention rather than having them bring problems to your attention
- Learn from errors and mistakes to continually improve your service and your level of customer satisfaction
2) Fight for your customers
- Follow up with customers to make sure they were satisfied with your service and plan to return to your business
- If a customer is not satisfied, act immediately to give them a reason to return even if you feel their complaint is unjustified
- Constantly measure the cost of losing a customer with the cost to retain them. A free windshield repair costs you $1 plus 30 minutes of your time, while an unsatisfied customer could cost you hundreds of dollars over time. Don’t forget to factor in the hidden cost of lost referrals, or worse yet, negative referrals
- Make sure your employees treat customers the way you do and empower them to be able to resolve customer conflicts immediately
We live in a world of high expectations and low loyalty. If you want your business to be successful, you have to work hard to attract new customers. Never stop striving to retain them. Assessing the lifetime value of your customers and then focusing on retaining them. This will help your business to grow year after year.