To Increase Profitability, Hold On To Your Customers

"… it costs three or four times as much to add a new customer as it costs to retain an existing one."

By David P. Kowal

The best way to get new customers is to pay attention to your old customers. When outstanding service is provided, customers buy more. Better still, they also may refer new business to your company.

Business obtained through referral has a higher retention rate than business obtained through other marketing methods. According to Lynn M. Thomas, president of 21st Century Management Consulting in Waltham, referred customers have a 92 percent retention rate, compared with a 65 percent retention rate for other customers.

A company that is able to retain its existing customers also can be much more profitable. Assume that a company wants to grow 15 percent a year. If the company retains 80 percent of its existing business, new business has to account for 35 percent of sales if the company is to achieve its goal. If the company's retention rate is 95 percent, new business has to account for only 20 percent of sales for the company to achieve its goal.

According to Thomas, it costs three or four times as much to add a new customer as it costs to retain an existing one. So a company with an 80 percent retention rate is nowhere near as profitable as it could be if it had a retention rate of 95 percent.

So what should you do to retain your customers?

Step #1. Research. The solution to any marketing problem begins with research. Assuming that you already have identified your target market or markets as accurately as possible, the next step is to identify which customers are most profitable for you. Once you've identified the customers that contribute most heavily to your bottom line, interview or survey them to find out what values are most important to them and how well your company measures up.

Step #2. Plan. Once you've determined the values that drive your customers' decision making, use them as a basis for developing a customer retention plan.

Develop a plan for customer retention just as you would for marketing to new customers. Begin with realistic goals and objectives. The typical retention rate is 78 percent to 85 percent, while the top five companies in an industry have a retention rate of 93 percent to 95 percent. A typical goal may be to achieve a retention rate of 90 percent or better.

Tactics in the plan should be based on the research results. If research determines, for example, that customers want to hear from you more often, consider developing an e-letter and sponsoring a series of seminars for your customers. If the survey shows that your customers want quicker accessibility, the company may need to make a few hires and initiate a company wide policy that makes customer response a top priority.

Step #3. Implement Your Plan. Your plan should include an internal communications component, because it is important that employees at all levels buy into the plan and help to implement it.

Regardless of the strategy chosen, it is important to provide adequate funding. Console yourself in knowing that the money is likely to provide a high return. Companies that initiate customer retention programs report that for every $1 invested in customer retention, their return is $15. That's a 1,500 percent ROI.

Step #4. Evaluate the Results. After the plan is implemented, survey your customers again. Using your initial survey as a benchmark, determine whether your performance has improved and, if it has, by how much. Review your retention rate again and determine whether you've met your goals.

Step #5. Start All Over Again. Customer retention is a continuous process. Ideally, you'll want to develop a group of key customers who can serve as advocates for your business and refer new business to you.

In addition to reinforcing your relationship with your most profitable customers, give further thought to your other customers. If you have customers that are contributing only marginally to your bottom line, you may be better off spending your time servicing other customers that will contribute more to your profitability. Consider ways to tactfully disengage them. Conversely, there may be customers that can be cultivated so that they contribute more to your bottom line.

In business, as in life, divorce can be costly. It's also true that in business, as in life, a successful relationship requires a great deal of attention, understanding, thoughtfulness and hard work.

David P. Kowal is President of Kowal Communications, Inc. of Northboro, Mass. He can be reached at kowal@kowal.com.