Organisations nowadays are hyper focused on growth at all costs, a practice which often undermines the fundamental health of the business. This article takes an in-depth look at the importance of focusing on customer retention from day one and the practical benefits it can provide in the medium to long term.
As an organisation, you’re hyper focused on growth. This growth typically leads to the following results (in order):
1) more customers,
2) more revenue,
3) more employees…and repeat.
Yet often times, organisations approach customer growth at almost any cost. They tend to accept a high monthly burn as long as new customer acquisition is making healthy headway.
The principal reason for the above is that, at their core, startups are intended to be growth machines. “Startups,” in the more modern sense of the word, are attempts at disrupting an industry by grabbing market share as fast as possible. This obsessive focus on speed is arguably a recent phenomenon. Startups are built to grow at tremendous speed, hence the focus on growth at all costs.There seems to be too much focus on growth and too little emphasis on healthy growth.
Some break the mold and look for a lower burn, knowing that this will translate into a more realistic customer growth trajectory. Yet a commonly overlooked aspect of company health is customer retention. Getting a customer in the door is the first step, but customer turnover, or “churn rate,” can be a quiet killer of Any organisation’s potential. The above conclusion is borne out of my own personal experiences, as well as from research conducted by reputable sources.
1: Retention Increases Revenue
Keeping customers for longer can have a meaningful impact on your top line. Emphasis should be placed on this fact because it will take fortitude as an organisation to explain why so much of your team’s time is being focused on keeping existing customers, which means that your “new customer” number will take a slight hit. But this is ok! Stick with it, as you’re likely to see a payoff in the 12-24 month period, which may seem far away but really isn’t if one considers the average lifetime of a company.
The reasons why focusing on customer retention improves your long-term revenue prospects are several, but are primarily down to three phenomena:
- Focusing on retention decreases churn, which means you need fewer new customers to still increase your customer base.
- Loyal customers spend or invest more.
- Loyal customers have a much greater customer lifetime value.
Focusing on Retention Decreases Churn
The first way in which focusing on retention increases long term revenue is the most obvious, and is through its effect on churn. Churn refers to the loss of customers, or customer attrition. Since keeping existing customers is often easier than acquiring new ones, controlling one’s churn rate can be vital. Many struggle to decrease churn rates as they continue to grow their business. And this is usually down to the obsessive focus on growth rather than company health. The simple fact is that a retention-focused strategy will reduce churn over the long term. And lower churn results in more returning customers which in turn results in higher longer-term growth prospects.
Loyal Customers Spend More
Another of the principal reasons why focusing on customer retention increases long-term revenue is that loyal customers tend to spend more than those who are not (or new customers). This tells us of the importance to invest our efforts in creating more loyal customers if ever we are to see our businesses thrive. Inorder for loyalty to exist, trust must be nurtured. Each customer is not an lifeless object, they have emotions, expectations and reasoning. And they do feel when they are not valued or wanted. Now as an organization it should be our responsibility to ensure that their needs are addressed in the most suitable atmosphere and means. Once they fell important, they will always want to come back for more.
Loyal Customers Spend WAY More over Their Lifetime as a Customer
The other key reason why focusing on customer retention increases your long-term revenue has to do with customer life value.
Customer lifetime value measures the total value of a customer throughout their lifetime with your company. As mentioned above, focusing on retention results in lower churn. This in turn results in a longer lifetime per customer. This by itself leads to greater customer lifetime value. However, while the logic above may seem obvious, what isn’t so obvious is the magnitude of the difference in customer life value between a loyal customer and one who isn’t is quite impressive.
The incredible difference in lifetime value between loyal and unloyal customers is quite staggering. What it shows is that loyal customers don’t just buy more with you throughout their lifetime, they buy WAY more. In other words, as customers become more loyal, they will tend to become “addicted” to your service and their frequency will increase drastically.
2: Retention Increases Profitability
The section above was focused on showing how a retention-focused strategy helps you make more revenue over the long run. However, the other key side of the coin is that a retention-focused strategy also helps increase the profitability of your company.
There are three main reasons for the above:
- A retention-focused strategy helps keep your fixed costs under control
- Loyal customers are better at word of mouth and so your customer acquisition costs decrease
- It is easier to upsell to loyal customers than to new ones
Focusing on Retention Keeps Your Fixed Costs in Check
One of the most important ways in which retention-focused strategy helps improve profitability over the long term is the effect it has on your company’s fixed cost base. For instance: a strategy focused on growing fast by acquiring new customers often results in the need to hire a sales team quickly. But the issue is that labor is expensive! People are your best asset, but also your most expensive. In many startups, employees make up the majority of expenses. Instead of building out a large sales team, try slowing that employee growth at a pace congruent with your churn rate. The more you can avoid hiring sales people to hit the same revenue growth numbers, the better. Let’s even assume that your new sales team actually meets the metrics/goals of bringing more business in the door. However, due to churn, you’re bleeding customers and might overlook your churn rate’s significance in whether your company is being built to last.
Don’t hire a sales team just because “that’s what you do” when you want to scale. A strong suggestion would be to put a strong focus on the health of your organization, products and, of course, your immediate team in order to build a company that lasts.
Hiring people also takes a considerable toll on your time and that of your team. Slowing hiring to a rate consistent with your company’s retention success will have even further returns as your employees will be spending more time pushing the business forward.
Better Retention Lowers Your Customer Acquisition Costs
The other way in which a retention-focused strategy helps improve profitability is through its effect on customer acquisition costs. Customer acquisition cost (CAC) can be defined as the cost associated in convincing a customer to buy from you and would include all costs related to such activity, including marketing costs, sales costs, research, etc.
A retention-focused strategy can be an effective way to improve your CAC figures. One way in which it does this relates to what was discussed above about hiring. If CAC is calculated including the cost of your sales team, a retention-focused strategy helps to keep your sales force efforts under control and therefore lowers your CAC. A leaner, more efficient sales team results in more new customers for every dollar of headcount expense.
The key point to consider is that loyal customers are much more likely to talk positively about your company and your brand than those who are not. Satisfied customers on average tell nine other people about a positive experience. The reverse is also true: Dissatisfied customers are likely to tell 22 other people about a negative experience.
A retention-focused strategy is therefore possibly the most effective marketing strategy one could embark on. If loyal customers become brand ambassadors, and if referrals are the cheapest and most effective form of acquiring customers, then clearly CAC will be lower if you have a greater number of loyal and satisfied customers.
Upselling to Loyal Customers Is Much Easier Than to New Customers
The final key way in which a retention-focused strategy can improve profitability is because it is much easier to upsell new or additional products and services to loyal customers. Most business will likely tack on extra or additional product offerings to their core products. This is one of the most important ways to improve profitability. If upselling is so important, then it is vital to consider that conversion rates for loyal customers are dramatically better than for new customers. Rather than focusing on selling new products to new clients, upselling to existing customers is a much more profitable strategy. So a retention-focused approach helps improve profitability in the long run by increasing the base of loyal customers you can upsell to.
Practical Tips for Improving Retention
The bulk of this article has been focused on showing you why focusing on retention is a good idea. The natural next question would be, “Well, how can I do that?” The ways in which you can implement a retention-focused strategy are many, and are frankly beyond the scope of this article. But for now, here are a few practical tips on how you could achieve this:
- Launch loyalty programs for existing customers, having the degree of benefits directly correlated with the length they’ve been a customer.
- Convert “sales people” into relationship managers. Perhaps split your current sales team in half, increasing the number of people focused on current customers and keeping them on the platform.
- If you have to focus on acquiring new customers, instead of hiring sales people, put more money into digital marketing, which is much easier to turn on/off than it is to hire/train/fire people.
- Communicate with your investors and show a thoughtful, calculated, and monetary reward for emphasizing a retention strategy. This should be accepted by investors who are truly rooting for your success and not looking for a quick exit.
- Visit with or interact with as many customers around the country as you can.
- Retention likely isn’t an issue with not having enough sales people or not spending enough on marketing. It’s probably your product. Fix the core issues with your product and look for product/market fit.
- Implement ways to measure and analyze retention. For instance, measure customer satisfaction. There is a plethora of metrics to measure this, but a common metric is the net promoter score (NPS)
And when it comes to company health, arguably the most important driver of this is customer satisfaction and retention. A satisfied, loyal customer is worth immensely more than one who is not. As Katherine Barchetti famously said, “make a customer, not a sale.”