To
Increase Profitability, Hold On To Your Customers
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 a newsletter
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
to add e-mail and a web site.
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.
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