Why, then, do most companies spend a majority of their time, energy and resources chasing new business?
While it’s important to find new customers to replace lost business, to grow the enterprise and to expand into new markets, a smart company’s main objective should be to keep customers and enhance customer relationships. With the passage of time, it is getting easier, because newer and better computer software will help you track, sort and spit out data on all sorts of meaningful customer sales parameters.
“What is your current retention rate?” asks Art Weinstein, professor and chair of marketing in the Huizenga School at Nova Southeastern University. “What is the cost of a lost customer to your business? What percentage of your marketing budget is spent on customer retention activities? Do you develop retention programs for key target markets?”
These are all questions that must be addressed if you want to maximize your customer retentions and thus minimize the amount of money you have to spend on acquiring new customers.
Smart Business asked Weinstein the best ways for a company to develop an effective customer retention program.
How do you measure customer retention?
It is surprising how few companies know the percentage of customers that leave (defection rate) or stay (retention rate) annually. There are many ways to measure customer retention, including annual and targeted retention rates, weighted rates (accounts for usage differences); segmented indicators (subgroup analysis); share-of-customer; customer lifetime value; and recency, frequency and monetary value (RFM analysis).
Choosing appropriate measures provides a starting point for assessing a firm’s success in keeping customers. Harrah’s Casino knows that a 1 percent increase in retention is worth $2 million in net profits, and its Total Rewards program is the envy of the casino industry.
How do you keep customers from disappearing?
You have to analyze the defection problem. Buck Rodgers, former CEO of IBM, once said, ‘I behave as if every IBM customer were on the verge of leaving and that I’d do anything to keep them from bolting.’
Step two is a three-pronged attack. First, identify disloyal customers. Second, understand why they left analyzing switching motives can be insightful. Third, develop strategies to overcome nonloyal purchase behavior.
Is it advisable to establish a new customer-retention objective?
Customer retention objectives should be based on organizational capabilities (strengths, weaknesses, resources, etc.); customer and competitive analyses; and benchmarking the industry/sector, comparable firms and high-performing units in your company.
Say that your company retains 75 percent of its customers. A realistic goal may be to increase client retention by 3 percent, bringing your company to 78 percent next year, and to aim to keep 85 percent of your clients within five years.
Should a company’s most valued customers be treated special?
You have to invest in targeted customer retention planning. The potential lifetime value of a single lost customer can be substantial. This is magnified when we realize the overall cost of lost business.
Consider the impact of a 25 percent defection rate for a hospital caring for 15,000 patients annually. A revenue loss of more than $9 million [assuming $2,500 average patient revenue and a 5 percent profit margin] results in a dive of nearly $500,000 on the bottom line.
A $100,000 investment in patient retention training and follow-up initiatives can dramatically improve profitability. Targeted retention means that organizations segment customers by relevant dimensions, such as geodemographics, psychographics/behavioral factors and usage patterns.
How does a company determine the success of its customer retention program?
Lexus and Subaru have the highest loyalty rates in the automotive industry by consistently providing superior ownership experiences.
The final phase in building a strong customer retention plan is to ensure that it is working. Careful scrutiny is required to assess the program’s impact on keeping existing customers and, where possible, upgrading current customer relationships. Gather information to determine if your customer retention rate improved. You may need to revisit benchmarks and probe isolated causes of defection.
Strategies and tactics over a three-year span should be closely monitored in order to assess which methods worked best and those with little or no impact on keeping customers.
ART WEINSTEIN, Ph.D., is professor and chair of marketing in the Huizenga School at Nova Southeastern University. He is the author of “Handbook of Market Segmentation” (Haworth Press, 2004) and co-author with William C. Johnson of “Superior Customer Value in the New Economy” (CRC Press, 2004). Reach him at (954) 262-5097 or firstname.lastname@example.org.