Picture this. You’re sitting around a boardroom table with your team. At the end of the table, there’s a whiteboard on the wall, with one objective scribbled on it that everyone is fixated on: Growth. Everything stems from this – your marketing strategy, your sales strategy, your business plan. But are you taking the right approach to get there?
Typically, the path to growth is to focus on acquiring more and more customers. Of course, there’s merit in that approach – every business should be pursuing new customers – but it speaks to a focus on growth for growth’s sake. In reality, adding new customers isn’t the only way to grow your business, nor is it necessarily the most effective way.
To understand this, we need to think about the reason we pursue growth in the first place. That reason is, almost always, increased profits and returns to shareholders – surely the desired outcome of being in business.
Believe it or not, the best approach to ensure these outcomes isn’t the single-minded pursuit of new customers. There’s a better – and more cost-effective – approach that you can take, and it’s all about customer retention. Here’s what you need to know.
The problem with the single-minded pursuit of new customers
Generally, to increase profit we can sell more (add revenue) or spend less (reduce expenses).
But selling more, in the form of new customer acquisition, isn’t a guaranteed profit maker. It tends to come with an associated growth spend. This includes sales and business development staff, marketing, and advertising – and because we can’t know exactly what will work for attracting new customers, there’s an inherent uncertainty that comes with this spending.
What we really want, then, is new revenue that comes at a cheaper cost and with more certainty.
Better yet, what if that revenue was stickier – the type that could continue for years – and could lead to additional customers (and revenue) at a much cheaper cost of acquisition than your current sales and marketing spend?
If new customers come with a hefty price tag, existing customers are the untapped potential ready to be unlocked in your business.
Focusing on and developing strategies around retention within your business is an oft-overlooked path to growth that’s sure to pay dividends.
The potential of your existing customer base
Customer retention is your direct line to growing revenue and profit.
It’s estimated that a five percent increase in customer retention produces more than a 25 percent increase in profit. Furthermore, studies have found that acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.
It’s no surprise, then, that large organisations often have whole teams focused on customer retention. But small-to-medium businesses generally overlook this pot of gold and fail to see the potential of customer retention strategies.
Here are just a few of the benefits of focusing on customer retention for your business.
Revenue expansion
Depending on the type of service or product you offer, it’s likely that there’s significant untapped revenue potential sitting in your existing customer base. Whether that’s a cross-sell, upsell, an added feature or benefit, or just providing more and more over time as they need it, there’s room for growth by selling more to the customers you already have.
If you’re doing customer retention right, your customer already knows you and likes you, so the likelihood of getting this extra revenue is extremely high with minimal sales cost.
Fill the top of your funnel
The best thing about customer retention might just be that these customers tell other people about your products and services. In other words, they generate awareness, filling the top of your marketing funnel for you.
This is an ideal B2B and B2C marketing strategy, but is often overlooked from a customer retention perspective. An added benefit of this is that it reduces your marketing spend for top-of-funnel, or awareness, marketing. It’s a win-win.
Increase the lifetime value of your customer
It’s simple – the longer a customer continues to purchase from your company, the greater their lifetime value becomes.
Of course, you’ll still want to attract new customers outside of the sphere of your existing clients. But when you’re retaining those new customers, rather than churning through them and turning them over quickly, the value of those customers increases dramatically.
In that sense, focusing on customer retention actually enhances the value of your sales and marketing spend, because the new customers your acquisition campaigns attract will be worth more to you over time. To make the most of this approach, you should reward your sales teams for acquiring customers who stick, and shift your resources towards the types of campaigns that you find attract loyal customers, rather than wasting marketing expenses on attracting customers who won’t stick around.
This is only the case, however, if the customers you’re retaining are profitable. It may seem paradoxical, but sometimes the path to growth might require you to get rid of some of your customers who aren’t adding value to your business.
Consider this your permission slip to sack the customers who are more trouble than they’re worth – the unprofitable, the ill-fitting, the overly time-consuming, the pain-in-the-a$$, staff-draining, sick-leave-creating customers.
It aligns with your purpose
A focus on customer retention is the most organic way to grow your business, as long as your business stands for anything else other than just generating income.
From our experience, successful entrepreneurs tend to lead their business with some kind of an overarching purpose or vision – and most of the time, that relates to the value you’re looking to provide to your customers.
In prioritising your efforts to keep your existing customers happy, rather than just acquiring new ones, you are not only pursuing commercial outcomes, but also delivering on your business’ reason for being.
Customer retention strategies to consider
We’re back in the boardroom. Now, written under our overarching ‘growth’ objective, we have customer retention as a specific goal.
There are many tried-and-tested customer retention strategies depending on the industry and type of business you’re in. Ever swiped your Flybuys card at the Coles checkout? That’s a customer retention strategy in action. Does your share broker email you a market update at the end of the month to tell you how your stocks are trading? That’s a customer retention strategy.
The customer retention strategy for your business could be a variation of the following, or something completely different. Get yourself in the mind of the customer and think about how you can add value and keep them coming back for more. Here are a few examples.
Reduce your churn rate
The first thing you’ll want to do is find out why your customers aren’t staying. Your NPS (net promoter score) is a good thing to have on hand for this. It measures how likely your customers would be to recommend you to a friend on a scale of 1-10. Surveying your customers this way, or undertaking more in-depth surveying, is a good way to ensure you’re not losing customers due to shortcomings on a product or service delivery. All the customer retention strategies in the world won’t help if your product or service is not up to the expectation of your customer.
Loyalty program
These are the FlyBuys, Cinebuzz and MyerOnes of the world. Loyalty programs are a classic customer retention strategy. The brand offers a reward for being chosen over their competitors, in the way of points allocations, partnerships, discounts, and more. It’s pretty straightforward, but with most brands on board with this, it’s becoming more difficult to stand out with this approach. You’ll need to ensure the types and values of rewards being offered are better and more enticing than the competition.
Value-add communications
Some brands look to address problems that their customers have in an effort to create loyalty. They might do everything they can to answer their customers’ questions, so they’re the instant go-to when their customer has a question about their category of product or service.
Consider the stock broker example above – it positions the business or broker as an authority, while providing a service that adds value for the customer. Other examples include brands that create a publication or content that adds value, such as John Deere’s The Furrow.
Exclusive access, offers or events
Offering exclusive access to new releases, offers and events is a great way to connect with your customer and keep them engaged for longer. Consider Lexus’ Lexus Encore program – the services it offers to its customer base go above and beyond the usual car product offering. Other brands opt for in-person events that give them an opportunity to reward their customer while creating a personal touchpoint or interaction.
If the lifetime value of your customer is particularly high, you might consider a combination of all three of these techniques – airlines do! Most airlines have the classic point-based loyalty program, value-add communications in the form of in-flight magazines, and exclusive access to their lounge offering. They’ve certainly clocked the value of customer retention.
So, before you go all-out in the pursuit of new customers for your business, consider first if there are opportunities to improve your customer retention before you look to attract new customers. It’s better for your bottom line – which is better for business.
If you want a hand crafting a customer retention strategy for your business, chat to the team at PieLAB.
