The Importance of Customer Retention

The Importance of Customer Retention
March 27, 2020 Mackman
Lecture hall of students taking important notes

In any business, no matter the size, acquiring new customers will always be a key part of growth and ongoing profitability. However, retaining existing customers has a vital impact in the form of long-term benefits, comparatively small cost, and maximising return on investment. The importance of customer retention is therefore paramount.

In recent years, marketing has become dominated by TLAs – three letter acronyms including MRM, DAM, SLA, SEO, PPC, CTR, CLV, CMS, CRM, CTA – and the list goes on…  Many of these serve to provide KPIs – being Key Performance Indicators which combine to form a dashboard that helps management teams to make tactical decisions about areas of their marketing and overall progress towards strategic objectives. But how do they relate to customer retention and the value it provides?

Some organisations have become more data-driven than others, and the debate remains as to how much data is enough, and how much becomes too much.  Like oil, raw data is useless unless refined; and so the real answer to that conundrum is that the value of the data depends on an organisation’s capacity to analyse and understand it. 

Similarly, the mantra of some leaders is that if you can’t measure it, you can’t manage it; while others agree with the quote attributed to Einstein which points out that “Not everything that counts can be counted, and not everything that can be counted counts.”  We can all agree that best practice combines both of these approaches, but ultimately decisions about business and marketing strategy are made by insightful leaders using whatever data they have, but also their own experience and conviction.

Profit and Loss

For most businesses, the Profit and Loss Account (P&L) is the ultimate performance dashboard.  It provides a monthly (usually) post-mortem of what has happened to date, which enables a well-informed view of the progress the organisation has made towards its commercial targets. This, in turn, helps to predict future outcomes and influences decision making.  For most established companies that are professionally managed, the primary objective is annual profitability.  However, there are other models.  For example, for some the P&L may reflect pre-profit proof of concept and so called ‘burn rate’ – being the rate at which they are investing their funding in order to achieve their objective whilst losing money on a P&L basis.

Readers who follow team sports will have become used to the spread of statistical information.  Whilst Cricket has always had its elaborate scoring and reporting process with wickets, runs, catches and other events constantly captured and attributed, and F1 has operated telemetry for many years, the same is now true of many sports.  Yet, they remain results businesses.  Who cares how many tackles a rugby player makes or how many corners a football team has in a game or a season if the result is that they lose the match or get relegated that season?  Ultimately, that is what matters.

But from a marketing and business growth perspective, there is one KPI that all businesses should be aware of.  It is the KPI which, over any amount of time, will correlate to business success providing costing and pricing rates are correctly calibrated and the business is not underfunded. That KPI is another TLA called the NPS – the Net Promoter Score.

Net Promoter Score

The KPI That Matters Most: 

That said, like all KPIs, it is not the NPS that matters, it is how well that company is doing in one of the most important aspects of business growth – which is the combination of retaining customers and having them recommend your products and services to their networks.  In this respect, the NPS provides a management diagnostic insight which is second-to-none.

The Net Promoter Score is a spectrum between -100 to +100.  It provides an insight into a customer’s overall satisfaction with a company’s product or service, and thereby their loyalty to the brand. Using a questionnaire or survey, the process measures existing customers’ propensity to recommend the customers’ products or services to their network of friends or colleagues.

The process categorises participants into three groups – happy promoters, neutral passives and unhappy detractors. By aggregating all responses, the researcher can calculate the subject’s Net Promoter Score by subtracting the percentage of Detractors from the percentage of Promoters. For example, if 70 per cent of respondents were Promoters, 10 per cent we Passive and 20 per cent were Detractors, their Net Promoter is a score of 30.

A positive score above 0 is considered good, while scores of 50 plus are excellent and should reassure you that your company understands the importance of customer satisfaction and has significantly more satisfied customers than dissatisfied customers.  Scores over 70 are world class.  These indicate that your customers really love what you do and have become all-important advocates. Any score above 0 indicates that the majority of your customers are loyal, but any lower than that should trigger a significant rethink; and its implications may well already be visible in the P&L.

Customer Loyalty and Retention: 

Existing customers should form the foundation upon which businesses grow.  Research shows that for every pound it costs to retain a customer, it costs £5 to £7 to gain a new customer. It is also said that a new customer will, on average, spend ten times the value of their first transaction with the supplier in total.

One way of looking at customer retention, or customer loyalty from the customer’s perspective, is using the customer loyalty ladder.  This theory sees customers moving up the steps as follows:

Step One:             Prospect – a potential purchaser

Step Two:             Customer – a first time purchaser

Step Three:          Client – a repeat purchaser

Step Four:            Supporter – willing to try additional products and services

Step Five:             Advocate – a champion for your brand

Companies which invest in progressing their customers up this ladder have more loyal customers, more loyal employees, and, where relevant, more loyal shareholders. High loyalty rates among employees have a clear and direct correlation with customer loyalty and vice versa – because happy employees create happy, loyal customers and, in turn, happy customers create happy, loyal employees. This then serves to generate increased customer lifetime value, and enhanced employee engagement.  This is why the Net Promoter Score is considered to be so important, because it effectively measures the number of customers that the company has progressed to Step Four or Five on the ladder, and thereby the overall health of the brand and/or company.

But what can you do to help to ensure that your customers become clients, and then supporters and finally loyal and vocal advocates?  Here are five tips:

Start With You and Your Employees: 

Do all your employees know what is expected of them in terms of the way that they interact with customers?  Are the behaviours that you expect factored into the recruitment of new employees? Is your path to purchase process mapped? Are you consistently role modelling the way that you expect employees to conduct themselves?  Do your company’s vision, mission and values serve the customer retention objective, and do all your employees know and understand them?  Do your employees understand the importance of customer loyalty and retention in terms of the company’s viability and their own employment?

Poor customer service and high rates of employee and customer attrition starts with poor leadership, and great customer service and retention starts with good leadership.  Getting this right is as much about attitude as it is about ability.  If business owners and leaders are not empowering their employees to look after customers and compelling them to remain loyal, then they ought to consider getting themselves some serious coaching.

Make New Customers Feel Welcome:

You only get one chance to make a first impression.  Onboarding new customers provides a single, one-off opportunity to set the tone of your relationship with your new customer.  What can you do to make it more effective, enjoyable and memorable?

A generic answer to this question, regardless of what your product of service may be, is to contact the customer around the time that they make their first purchase to check that all is well.  If a product has been sent, has it been received?  Might they need some advice on how to set up the product?  Perhaps they need training to use it?

Alternatively, can you provide a cost-effective gift with the product or service?  For example, a free accessory?  A gift voucher to prompt further purchases?  A packet of sweets?  Unexpected displays of appreciation are valued and memorable, so find a way let them know that you are grateful for their business, and to get the relationship off to the best start.

Involve Your Customers:

Create a two-way conversation which serves to both let them know that you welcome and value their opinion, and to keep them up to date with your company’s developments.  Social Media channels provide ideal platforms for this, and the fact that they are open channels will help to ensure that your company is doing the right thing in order to avoid being criticised.

Customer satisfaction surveys achieve the same objectives, generating a combination of qualitative and quantitative data to inform company leadership teams and their decisions.  We’d recommend that these are done annually and made as simple as possible for customers to participate.  There are plenty of excellent, user-friendly software options available if you have customers’ email addresses, with Survey Monkey, JotForm and Google Forms being among the most popular.

Create a Communication Calendar:

Even if your customers are not communicating with you, that’s no reason not to communicate with them, subject to GDPR compliance.  Although we may think of Social Media as providing a way to generate new interest in our products and services from new prospects, it also serves to remind existing customers that you are there for them.  In addition, and particularly for B2B sectors, it helps to reassure decision makers and influencers that your company is a strong, opinion-leading market leader.

There are no hard and fast rules about how often to post and on what Social Media channels, and different types of companies will have different amounts of news to share.  In general, we advise between three and five times per week on Facebook and LinkedIn.  If you are not tweeting on Twitter more than five times per day, the chances are that you will not be visible on that platform as the life cycle of a tweet is much shorter than alternatives.  Frankly, if you do not have positive, valuable content to post on Twitter at least five times per day, it is unlikely that this is the right channel for you to use.

By creating a Communication Calendar, or Content Calendar, you create a structure that will discipline you and ensure that you keep on top of the need to create and post content.  Plan content around the seasonality of your business and national events to make them more relevant, and be ready to engage in conversation with anyone who responds to your efforts.

Reward your VIPs:

We often hear tales about companies, such as utility and insurance providers which tend to be renewed on an annual basis, providing more advantageous rates to new customers than to existing, loyal customers.  Whilst we recognise that they are doing this in order to attract new customers and then, of course, to retain them and their lifetime value – so it follows that they need go on to look after these customers if they are to remain loyal!

Use your CRM system to identify who your VIPs are (Another TLA – Very Important Purchasers!) by either setting a spending threshold over which they qualify as VIPs, or perhaps identifying the top 20 per cent – since Pareto’s Principle is sure to exist in some form or another, if not at the 80/20 rates.  Make sure these people or companies realise that you value them in order to improve your chances of maintaining their support, and building upon it.

In conclusion, if your Net Promoter Score is lower than zero then it’s time to find new ways to manage your brand, your reputation and your people.  As ever, Mackman is here to help, just pop us a message on the contact form or get in touch with us on 01787 388038.

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