As a marketing consultant, I find that when it comes to marketing, most companies focus on getting new business and neglect marketing to their existing customers. In many cases, these customers were very expensive to obtain and they contribute significant on-going revenues to the company. In fact, it is five times more expensive to gain a new customer than it is to sell back to an existing customer. Moreover, customers are the source of seventy percent of new product ideas. In this article, I elaborate on why retaining customers is critical to businesses today and how to create a business and marketing plan that focuses on customer retention.
How we deal with customers has evolved significantly. In the eighties there was much focus on measuring and increasing customer satisfaction. Recognition such as the prestigious Malcolm Baldridge Award was given to companies that demonstrated customer satisfaction. In the nineties, in order to survive companies were forced to focus on activities and change processes that directly and positively affected profit. Studies done by major consulting firms, governmental agencies and private institutes found that documented increases in customer satisfaction did not necessarily result in increases in profitability.
What studies in the nineties did prove is that customer retention has a direct correlation with profitability. In fact, one study showed that a five percent increase in customer retention or loyalty could lead to as much as a 100% increase in profitability. Rather than focusing on product quality standards such as zero defects, successful companies began focusing on zero defections in their customer base.
In the long term, customers of a product and/or service become supporters and even advocators of the product or service. In order to better manage and keep customers for the long term, companies must gain intelligence in three areas. First, companies have to know which customers are profitable. Second, they must research and understand what their customer defection rate is and the specific reasons for defection. Third, they must also know the value of their customer in the long run.
A simple example is a franchisee of a large pizza chain that calculated that each customer generates $5,000 over a ten-year period. This information significantly affected the pizza store’s attitude toward customers and customer service. Rather than making decisions based on individual transactions (i.e. “do we provide incentives or more service for a $15 sale?”), the pizza business made marketing decisions based on a customer’s long-term value (i.e. “do we provide incentives or more service for a $5,000 customer?”). The owners had visibility into exactly how much revenue they would lose if they lost just one pizza customer.
In the words of Tom Peters in his bestseller, Thriving on Chaos, companies need to “view customers as appreciating assets.” For businesses that offer a more sophisticated product, not only do customers “appreciate” over time, but also the costs of doing business with the customer decrease. There is an initial expenditure to obtain a new customer, then each year the customer’s value increases. Long-term customers provide referrals, pay premiums to be assured of a known supplier and quality, and increase purchases as time goes on. Most industries show as much as a two-thirds decrease in customer costs in the second year (see above illustration). The reason for the decrease is that as a business works with a customer it begins to learn the most effective ways to communicate and conduct transactions. The customer’s learning curve is also reduced over time.
How can today’s organization market to retain customers? Your marketing program should be derived from and support your company’s mission and business plan. Therefore, the first step is to review your mission statement. Make sure that it is a customer needs-based mission statement, not just product- or competitive- based. For example, rather than saying that your mission is “to offer the best-quality widgets to the XYZ industry,” you could say that your mission is “to ensure the success and profitability of our customers in the XYZ industry through offering the finest quality products and services.” In other words, you are changing your focus from internal to both internal and external (or customer) quality.
Second, research your customer base to identify the most profitable customers and customer segments. There is much focus today on “one-to-one” marketing; but many small companies cannot maintain the massive amounts of data required to market to a “segment of one” (individual customer). If you can divide your customer base into several profitable customer segments, you can refine your marketing message to these “segments of several” rather than to “segments of one”.
Third, measure your company’s customer defection rates and take steps to reduce customer defections. Set a goal for customer retention and communicate that goal to the rest of the company. Making customer retention a focus may also require organizational changes. Companies that operate with separate functional departments have a hard time ensuring quality for each customer’s individual needs. Many companies have had to create customer teams – interdepartmental groups that focus on the success of one customer or a segment of customers.
Fourth, stay in front of your customers at least four to six times each year. Your contacts may be in the form of face-to-face meetings, electronic communications, or direct mail pieces informing customers of new or other products. Make sure that each communication adds value for the customer. Remember, use e-mail carefully: your customers don’t want you to be yet another source of what appears to be “spam” or junk e-mail.
Fifth, go the extra step of learning your customers’ businesses and help them become more profitable. One company saved its customers 68 million dollars in annual costs by teaching customers how to use less of its product. The approach generated so much customer loyalty, the company was able to increase its revenues and increase own profits by 16%. Provide education through seminars, newsletters, conferences, tutorials on CD ROMS and video presentations.
Sixth, create a proprietary way of communicating or servicing customers. Make sure your customers know whom to contact when they have a problem or question. Provide them with information on the Internet or in customer service manuals. Constantly survey customers for feedback, and ask for detailed responses. If one of your competitors anticipates a customer need before you do, you very well may lose one or more valuable customers or an entire market opportunity.
Armed with detailed information about your most profitable customers, you can make better strategic decisions, proactively market to customers and increase your revenues, and make sure those customers don’t jump ship. Don’t run your business by merely reacting to what your competitors do; listen to your customers and you will become the leader in your marketplace.
Author Jennifer Beever is a marketing consultant and founder of New Incite Marketing Analysis and Design. New Incite is the outsource marketing resource for growing businesses. The company provides marketing planning, implementation, results tracking and organizational development services for its clients. Contact Jennifer at 818-347-4248 or by email.
This article may be reprinted with permission of the author. Please contact Jennifer Beever at 818-347-4248 or by email for permission. Proper acknowledgement of the author, including name, company, and contact information, must be made with use.
by Jennifer Beever, Marketing Consultant
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