Every business wants to increase their bottom line. And every company promises growth in revenue and earnings, but only one in nine companies is able to achieve sustainable, profitable growth. That explains why businesses spend a lot of money on activities to achieve profitable growth! Statista, the Statistical Portal, estimates that over 180 billion U.S. dollars was spent in advertising in the United States in 2015. And that is expected to reach $200 billion this year. Those funds are being spent basically to either acquire or retain customers. Or both.
While some companies focus on customer acquisition because they view it as a quick and effective way of increasing revenue, other companies focus on customer retention because they are marketing to customers who are already engaged with the brand, making it easier to capitalize on their experiences with the company. But which is more cost effective at driving up sales and increasing revenue? And should it be an either/or approach, or should companies focus equally on both? Given the amount of money spent on marketing, it is a question that should be carefully considered.
By The Numbers
The numbers tell the story. When it comes to retention vs. acquisition, client retention is not only faster but, on average, costs up to seven times less than customer acquisition. Selling to customers with whom a company already has a relationship is typically a more effective way of growing revenue because the company doesn’t need to attract, educate, or convert them. Companies that shift their focus to customer retention often find it to be a more efficient process. In fact, retention is a more sustainable business model, which is key to sustainable growth.
According to Harvard Business Review, “depending on what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.” Research done by Frederick Reichheld of Bian & Company, the inventor of the Net Promoter Score, shows that increasing customer retention rates by 5% increases profits by 25% to 95%, and the likelihood of converting an existing customer into a repeat customer is 60% – 70%. On the other hand, the probability at most companies of converting a new lead is 5% – 20%, at best! Basically, a company has to spend a lot more money to land a client than to keep one.
Feel the Churn
If that’s the case, then companies need to understand their “Churn Rate” to know how good a job they are doing at retaining customers. According to Harvard Business School, the customer churn rate is a metric that measures the percentage of customers who end their relationship with a company in a particular period. The Churn Rate is measured by month, quarter, or year, depending on the industry and the product or service being sold. While tracking the annual Churn Rate is the default for most companies, companies that price product on a monthly basis — like cable TV or health insurance — look at their Churn Rate monthly. It is also important to look at churn on a monthly basis for companies that have a faster Churn Rate, like cell phone companies, or for companies for whom losing customers is a big issue.
Some companies dislike the “negative” connotation of the Churn Rate. Instead, they’ll flip that on its head and track the company’s Retention Rate. For example, a company’s Churn Rate might be that it loses 12% of its customers monthly. That company might prefer to say that it has an 88% Retention Rate. Basically, it’s two sides of the same coin. For companies, the Churn Rate is a good indicator of whether the company is doing something right or wrong.
Sales and marketing departments can use churn data to better understand customer behavior and stem the flow of churn. Some companies delve deep into their churn data to see what it can learn about which customers left, when and why. When examining the Churn Rate, managers should ask several questions:
- What is the company doing to cause customer turnover?
- What are our customers doing that’s contributing to their leaving?
- How can we better manage our customer relationships to make sure it doesn’t happen?
Using that data, management can then target customers they suspect might be ready to leave and offer services that go above and beyond — like additional training or free shipping, depending on the business — to incentivize them to stay. They work to eliminate road blocks to usage and offer added value.
The Churn Rate is also becoming increasing important to others besides CEOs and marketers. Investors are also increasingly looking at a company’s Churn Rate as a sign of its underlying health. For instance, given the disruptive innovations in television programming and delivery, investors have been studying the Churn Rates for Comcast, Direct TV, Dish Network, and other cable providers to determine if services such as Hulu, Netflix and other alternative sources of programming are eating away at the customer base of the industry.
Customer Loyalty = Customer Retention
If it is better — more cost effective and sustainable — to keep existing customers than to acquire new ones, then the Churn Rate points to the heart of the issue in customer retention which is customer loyalty. On this subject, the top sales and service experts agree. According to Shep Hyken, Customer Service guru, “There is a big difference between a satisfied customer and a loyal customer.” If the reason churn is high has to do with promotions and pricing wars that is drawing customers only for “one-time deals,” then the problem is not a reflection of customer service but of a lack of customer loyalty. The customer may have been “satisfied” with what they bought or got at a promotional price, but they feel no loyalty to the company. Indeed, Rick Tate said “Merely satisfying customers will not be enough to earn their loyalty. Instead, they must experience exceptional service worthy of their repeat business and referral.” Customer loyalty is built on quality, service, integrity, added value, rewards programs, and other factors that clients appreciate about a brand rather than price. As sales expert Jeffrey Gitomer once said, “You don’t earn loyalty in a day. You earn loyalty day-by-day. Customer satisfaction is worthless. Customer loyalty is priceless.” The goal then is for businesses to do all they can to increase customer loyalty.
Of course, a business must also seek new customers. So the answer is to optimize customer retention while also cultivating new customers. It is a balancing act. The next time a business is budgeting for marketing, look at the company’s Churn Rate and then decide just how much of the budget should focus on client retention and how much should go to acquisition. The goal should be to find a happy balance that keeps churn low while also drawing in new clients.
Quote of the Week
“Every contact we have with a customer influences whether or not they’ll come back. We have to be great every time or we’ll lose them.” Kevin Stirtz
© 2016, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.