Don't Let Your Customers Get Away

There used to be a saying in business that cash is king. However, a more modern version would be accurately stated that customers are king. As a result, many companies are recognizing the importance of customer retention and implementing systems and policies to minimize customer defection.

In order to grow, a company must increase sales through gaining new and profitable customers. Such attempts to obtain new customers can be very expensive. “Acquiring new customers can cost five times more than satisfying and retaining customers.” (Kotler and Keller. 2009. pg. 138) Often times, this responsibility falls upon the marketing / sales team, and can dominate their efforts and mindset. Setting aggressive sales goals and maximizing such importance can create a narrow minded approach to profits. “Unfortunately, much marketing theory and practice centers on the art of attracting new customers, rather than on retaining and cultivating existing ones. The emphasis traditionally has been on making sales rather than on building relationships; on preselling and selling rather than on caring for the customer afterward. More companies now recognize the importance of satisfying and retaining customers.” (Kotler and Keller. 2009. pg. 137)

In today’s hyper competitive markets, companies are taking critical steps to reduce defection rates of customers. First, the company needs to determine and measure its current retention rate, or the rate of which customers remain as loyal customers. A good example of retention is the renewal of a club membership at a wholesale store such as Sam’s or BJ’s.

However, companies must be careful in defining the retention rate. For example, measuring the number of returning college students in their senior year may not be a good indication or accurate measurement of retention. By the senior year, it is unlikely that a student will transfer schools and risk loosing hard earned credits. Such a measurement may result in a skewed higher retention rate. A more accurate and reflective retention measurement would be to capture the number of returning sophomores, who have less to risk in transferring schools at an earlier stage in the educational process.

Accurately measuring retention rates will help evaluate customer satisfaction. If a company experiences high retention rates, then it appears that they are performing well and have satisfied customers. As a result, they can increase their focus on acquiring new customers for growth. However, if the retention rate is low and the defection rate is high, the company should place their main focus on satisfying customers. The main focus should be reverted to implementing changes to fix the problem in an effort to satisfy customers through strong customer relations management.

Once you determine that your retention rate has decreased, the company must act to avoid further customer defections. A company must, “distinguish the cause of customer attrition and identify those that can be managed better.” (Kotler and Keller. 2009. pg. 137) A company must determine what they are doing wrong to cause customers to defect. They must also determine how to make improvements to avoid further defection and to retain customers on the verge of defection. It is important to realize that defection isn’t always the result of poor service or inadequate quality. The competition may have developed a new product or service that your company currently does not offer. If you do not fill this need, the opportunity to defect will increase as the need and/or desire for this product or service grows in the mind of the customer.

Whatever the case for defection, a company must act quickly and determine what factors need to be changed, added, eliminated or adjusted to provide the best possible customer experience. “Listening to customers is crucial to customer relationship management.” (Kotler and Keller. 2009. pg. 138) Find out what they want and delivery.

Another important thing that companies must realize is that customer defection is not always a bad situation. There is a cost associated with servicing customers. Depending on the amount of money spent within a company, some customers can actually cost the company money to make a sale. Companies view customers in relations to profitable stature based on purchasing history and the level of attention required to service. Marketers understand that there are profitable customers and unprofitable customers. This can be determined by the customers lifetime value (CLV). “In marketing, customer lifetime value (CLV), a new concept of ‘customer life cycle management’ is the present value of the future cash flows attributed to the customer relationship. Use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales.” (Customer. Nd. para. 1)

Understanding the customer lifetime value can better explain why losing some customers is not the end of the world. The key factor related to defection is to, “compare the lost profit equal to the customer’s lifetime value from a lost customer to the costs to reduce the defection rate. As long as the cost to discourage defection is lower than the lost profit, the company should spend the money to try to retain the customer.” (Kotler and Keller. 2009. pg. 137) In the case where the cost to discourage defection is higher than the lost profit, the company should accept and allow the loss of the customer.

A company should do everything possible to keep profitable customers. This goal should be expressed as the key to sales since the cost of finding new customers is far more expensive than retaining current ones. Progressive companies will adjust sales commissions to include compensation for both new sales as well as customer retention rates achieved through strong customer relations management by the sales person. If a company experiences high retention rates, they can adjust their focus on acquiring new customers in an effort to increase profits and growth. In addition, companies should not overlook the possibility of new profit growth potential within the current customers. It’s typically easier to cross sell additional products and services to a current customer than to generate a new sale customer.

By measuring retention rates, making necessary adjustments and evaluating the cost of retention efforts to profit, a company can increase its chances for profitable operations.


References
Kotler, P., Keller, K. L. (2009). Marketing Management. New Jersey: Pearson Prentice Hall.

Customer Lifetime Value. (n.d.). Retrieved June 15, 2009, from Wikipedia: http://en.wikipedia.org/wiki/Customer_lifetime_value