Customer Retention Is King: Four Steps to Secure the Throne

This post originally appeared on MarketingProfs.com and is authored by Jerry Jao, a co-founder and the CEO of Retention Science, which provides customer retention solutions to some of the country’s largest online retailers. Twitter: @jerryjao LinkedIn: Jerry Jao 

Blogs and communities are always buzzing about one form of marketing or another. And if you listen closely, you’ll notice that most of the marketing conversations going on—whether they’re about inbound marketing, SEM, affiliates, or mobile—emphasize the importance of getting new or more customers, as opposed to keeping the ones you already have.

The same trend can be seen in the way companies reward their sales and marketing staff. Those who acquire new customers are rewarded with generous commissions and recognition, whereas the ones working to retain current customers get a lukewarm pat on the back.

Now, to be clear, there’s absolutely nothing wrong customer acquisition. However, it’s unfortunate that customer retention isn’t getting the same (if not more) attention from marketers—because retention usually brings in more revenue, at lower cost.

New Business Is Great, but Repeat Business Is Even Better

It’s time for marketers to shift their focus to customer retention and loyalty, instead of putting all their eggs in the acquisition basket. The good news: doing so may actually be easier and far less costly than you think.

Not only is it more expensive to acquire new customers than to keep existing ones (acquisition costs five times more than retention, according to Lee Resource Inc.), but current customers actually tend to spend more than new ones.

And if that weren’t staggering enough for you, consider the Harvard Business School study that found “increasing customer retention rates by 5% increases profits by 25% to 95%.”

Why not crunch the numbers in your own business and see for yourself just how important repeat customers are for your company? Quantify your customer acquisition spend vis-à-vis retention, and take note of the revenue that new customers bring in versus how much your existing customers are spending.

First Step in Retention Marketing: Calculate CLV

Now that you’ve established the significance of retention marketing, it’s time to get started on what you can do to retain more customers. Before you start rolling out customer retention campaigns, though, you need to figure out how much you should spend on your customers to maximize your profits.

The first step in setting a budget for your marketing campaigns is measuring customer lifetime value (CLV). You need to find out how much value each customer brings into your business so you can determine exactly how much you should be spending on them.

You can use a variety of CLV equations to calculate the value of your customers. Management Accounting Quarterly, for instance, shares this formula (PDF), where it incorporates contribution margin, marketing cost, and probability of purchase to calculate CLV.

KISSmetrics, on the other hand, uses three CLV equations and averages the amounts to arrive at a final CLV.

Note that CLV depends on various factors, including business type, the nature of its customers, as well as the industry that the company belongs to; accordingly, there isn’t one universal formula that you can adopt. That’s why you should look into various equations and use the ones that incorporate metrics relevant to your business and industry.

You can also seek the help of companies that specialize in data and marketing and let them create a customized CLV approach for you.

Action Steps to Retain Existing Customers

Once you’ve established your budget, the next step is to decide where and how to spend it. Here are a few ideas to get you going.

1. Personalize

The best way to build loyalty with your customers is to make them feel valued. Don’t treat customers like numbers on a spreadsheet. Regard them as individuals by personalizing your correspondence with them (e.g., emails or website greetings that mention their name), or by adding thoughtful touches to your communications with them (e.g., handwritten notes and birthday cards).

You can also customize the offers or website experiences that you provide. Gather as much data as you can about your customers. Track their site behavior, purchase history, demographic information, etc., and use that data to create personalized experiences for them.

For instance, if you know that the person browsing your site is a female who bought shoes from your store in the past, then you should display relevant product recommendations on your site instead of a generic one-size-fits-all page.

The same goes for the discounts and offers you give out. If the data tells you that Person A has a higher chance of purchasing when given a free-shipping coupon, and Person B will appreciate a 20% discount more, then send out a different offer to each customer to increase your conversion rates.

Consider optimizing the timing of your offers as well. Segment your customers according to the time of day that they made a purchase, and reach out to them when they’re most likely to buy.

2. Track and Test

Remember to monitor the performance of your retention campaigns. If you’re sending personalized offers, be sure to take note of the sales that those offers brought in. When you’re personalizing the timing of your offers or messages, track open rates and clicks, then compare them with those of previous campaigns.

Not seeing the best results? Perhaps you need to resegment your customers, change your messaging, or incorporate more data. It could also be a sign that you need to move on to another type of campaign. In any case, the only way to find out is by tracking and testing.

When you’re at this stage, you also need to make sure that you’re setting the right metrics. Getting 10,000 signups in one day may sound sexy, but if those users don’t amount to actual sales, then it probably isn’t worth tracking.

Always be clear on the metrics that count (it could be sales per customer, or rate of repeat purchases, or something else) and monitor only the numbers that matter.

3. Reward loyal customers

The great thing about loyal patrons is that they don’t just give you repeat business, they can bring you new customers as well. Extremely satisfied customers are more than likely to recommend companies to their friends. Encourage this practice by rewarding the people who send new business your way.

You don’t have to create an elaborate referrals program or offer huge monetary rewards to customers if you don’t have the resources to do so. A relevant offer or a token/freebie that you know they’ll love will go a long way.

Be genuine, and remember that simple, yet thoughtful, gestures toward your customers will be recognized.

4. Ramp up your customer service

Providing excellent customer service should be a no-brainer, but some companies don’t seem to spend enough of their resources on their customer support department, instead pouring everything into Sales and Marketing.

Remember, your sales and marketing team can perform a stellar job in bringing in new people, but if your support reps aren’t doing enough to keep those customers, you’re just wasting your resources.

Again, it boils down to showing your customers just how much you value them. Be respectful, treat them well, and go above and beyond to solve their problems. And if you think about it, the bar for customer service is set really low. People don’t expect much from support teams these days, so if you step up and blow them away with amazing customer service, it won’t be ignored.

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Love The One (Client) You’re With

What’s the real cost to a public relations agency of losing a good customer?

Well, there’s the risk of bad publicity via word-of-mouth. Clients can be pretty open with their network about why they’re ditching an agency.  Many even go as far as sharing the specifics with the agencies who are vying for their business. We’ll hear anything from “I only saw the agency executives when I called them” to “they put only junior people on my team” to “we really didn’t have a good sense of what we were getting for our retainer.”

There’s also the risk of low employee morale.  Each time a client leaves a firm, there’s the concern by the now underutilized rank and file that their job is in jeopardy.  Instead of only focusing on their remaining accounts, they’re distracted by the outgoing one. They ask their friends at other agencies to keep an eye out for opportunities for them, start talking to recruiters and look for reassurance from agency principals that all will be OK.

And then there’s the mad scramble to replace the business.  Initially, the intention is to replace the outgoing client with a competing company to leverage the account team’s domain knowledge.  But the stars have to align for this to come to fruition.  For one, the prospect has to be either actively seeking a new agency partner at the time, has to be dissatisfied with its current agency and is mulling a change, or your agency was doing such fantastic work for the outgoing client (unlikely given the circumstances) that the prospect would have to be crazy to not jump at the chance to make a switch.

What happens in many cases, despite the best of intentions, is that an agency will wind up chasing the first piece of new business that comes there way even if it isn’t strategically-aligned business; even if the firm knows going in that it can’t create and sustain value for the prospect.  This creates an entirely different set of client (and employee) retention issues. Losing a good client is one thing, but replacing it with non-aligned business because employees are underutilized leads to the same nasty outcomes:  1, bad publicity (“XYZ Firm will go after anything that moves”), 2, employee morale suffers because staffers are forced to work on bad business, and 3, non-aligned business will leave a firm…eventually…starting the vicious cycle all over again.

Replacing an existing customer can cost up to five times more than retaining an existing one.  A one step forward, one step back strategy is not a growth strategy – for any business.

Client profitability increases over the life of the agency-client relationship (customer lifetime value).  The longer an account team stays on an existing account, the more knowledgeable they become about the business and thus become more deeply engaged on the account. There’s a direct correlation between high employee morale and deep engagement.  The more an account team knows about a client’s business, the easier it is to grow that account organically.

Even a small improvement in client retention rates (as little as 5 percent) can have a significant impact on a firm’s overall profitability.

Courtesy of Entrepreneur.com special projects editor and WSJ alum Colleen Debaise, here’s a great list of client retention tips directly from a few folks in the trenches.