Customer Retention: Keeping Your Best Customers for the Long Term
Published by: Performance Improvement Council of the Incentive Marketing Association
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It’s easier and less costly to sell to existing customers than to new customers. The more customers you keep through active retention efforts, and the longer you keep them, the more profitable your company will be.
Keeping customers drives profitability. Whether we’re talking about consumers or business-to-business customers, existing customers cost less to reach, cost less to sell, are less vulnerable to attacks from the competition, and buy more over the long term. The economics of customer retention is obvious according to Frederick Reichheld of Bain & Company, and author of The Loyalty Effect: customer spending tends to accelerate over time; longer-term customers are more efficient users of the products and services they buy and have lower operational costs; long-term satisfied customers provide more referrals; and longer-term customers are less price-sensitive than newer customers. The end result is that the overall value of a customer increases the longer that customer remains a customer. Bain & Company’s research in a variety of industries suggests that a mere 5% increase in a company’s customer retention rates will increase the average lifetime profits per customer.
Making the effort to track loyalty is the first step toward profitability. In a recent study, Deloitte Research found that manufacturing companies who tracked customer retention, set loyalty goals, and made efforts to exceed their loyalty goals, were 60% more profitable than those manufacturers who made no efforts to track customer loyalty. In addition, the study found that these loyalty-conscious manufacturers were also more likely to exceed their goals for growth and shareholder value.
Similar economics exist from the perspective of business-to-business sales. In a comprehensive survey of selling costs, Sales & Marketing Magazine reported that the number of sales calls required to sell a product to a new account was more than twice the number required to sell the same product to an existing account. Overall, the study found that it costs 133% more to sell new accounts than existing ones.
In an era when technology changes are accelerating, low price competition abounds, sales channels are shifting daily, and loyal customers are in short supply, the company that invests in a customer retention strategy and makes a commitment to customer loyalty gains an important competitive edge. The key is to understand where that commitment and investment can be best applied and what tools and programs can make them work.
Empirical evidence suggests that success in retaining customers often boils down to doing the basics right, such as:
Many consumer incentive and promotion programs can increase sales, but when the goal is customer retention, it is best to start by learning more about your customer base. Specifically, you will want to identify the specific customers that you want to retain, understand what types of services they value, and determine what incentive motivational programs will work best with those customers.
How do you begin the process of listening to and learning about customers? Thomas O. Jones and W. Earl Sasser Jr., in an article in the Harvard Business Review, offer the following suggestions for customer research:
The authors found that simply contacting departing customers and "listening to them earnestly" was enough to recapture 35 % of one company’s departing customers.
In an ideal world, loyal, long-term customer relationships will evolve toward partnerships.
Michael LeBoeuf, author of How to Win Customers & Keep Them for Life, argues that "It’s not enough to reward your customers with good service. You have to make them aware of the good deal that they’re getting for doing business with you—and keep reminding them of that in many subtle, different ways." For instance:
Develop a customer profile that will give you a clear picture of the kind of customers you want to win and keep. "The more you can precisely define which customers you’re trying to serve, the easier it is to perceive your business through their eyes," LeBoeuf says.
Look at your business from your customers’ perspective. Evaluate everything about your company that the customer sees or comes into contact with—from business communications to telephone greetings to sales and service contacts.
Use problems as opportunities to demonstrate what great service your company gives. "Smart companies go the extra mile for the customer and show them just how dedicated they are to making sure that they feel good about doing business with them," says LeBoeuf.
Develop a unique relationship with your customers and treat each one as someone special. The more customization you can build into customer relationships the better.
Keep in touch with customers and keep them informed. "By staying in touch with customers after the sale or between sales," says LeBoeuf, "you can remind them of the fine service you give, make them aware of new products and services, and offer information to help them get more for their money."
Remember that a large part of good service is show-biz. So don’t be shy about infusing your customer retention program with some style and pizzazz.
Retain your own employees. Research shows that companies that have high employee retention rates have high customer retention rates.
Frequency marketing is a term generally applied to any program designed to generate brand or customer loyalty which results in a long-lasting relationship with customers. Specifically, it encourages and rewards the ongoing purchase of products and services.
The concept gained popular attention in the 1930s with supermarket trading stamps. Overuse and tight grocery margins caused those early frequency marketing programs to lose their luster after a few years, but they have now returned with a vengeance. Often online, most offer more extensive and sophisticated reward possibilities, and this time the goal is more than loyalty: the goal is to get permission from consumers to market to them over time, and to make them feel appreciated for loyalty. The cost of the incentives pales against the value of target marketing to a willing customer.
By giving consumers an incentive to allow their purchases to be tracked, frequency marketing programs enable marketers to target promotions in a way never before possible—based specifically on consumer requests and business needs. They can help increase store traffic (online or on-premise), influence the size of purchases, stimulate faster purchase cycles, and/or add value, etc. They can prompt consumers to load up on product to thwart a competitive launch or encourage referrals. Best of all, because they target a specific, defined audience, you can precisely measure the results.
The growth of Internet-based marketing has given a whole new life to loyalty marketing. It’s a medium that allows organizations to build extensive, permission-based databases, segment customers by pertinent characteristics, and communicate frequently to receptive customers with customized messages at costs far below traditional advertising.
A marketer can send an e-mail to one million consumers who have opted in to receive it for far less than the comparable cost of print, radio, and television advertisers, with the further benefit that consumers have given permission and the results can be precisely tracked.
Some businesses have characteristics better suited than other businesses for loyalty/frequency marketing programs, according to Jill Griffin, author of Customer Loyalty: How to Earn It, How to Keep It. Her book includes the following questions to help determine whether a frequency marketing program makes sense for your company:
And, most importantly, what do you intend to do with the data you receive? Do you have a comprehensive relationship-building strategy and a means to measure it?
Not every product or service is suitable for loyalty marketing. You have to evaluate your product or service from all sides to determine how it stacks up, in terms of economics, not only to the competition, but also to the most discriminating consumer. Here are some things to keep in mind:
A loyalty marketing campaign can cost anywhere from a few thousand dollars to millions of dollars, depending on the size of the audience. Because of the wide variety of options and the many ways in which a company can target its top customers, many components go into determining the cost and return on investment:
Different types of companies can assist with various aspects of a loyalty program, including technology, awards, communications and promotion, tracking and administration, customer service, etc. Full-service performance improvement companies can provide a complete solution, while various types of technology, marketing, and fulfillment companies can provide unbundled services without strategic support.
If your organization takes its customer loyalty programs seriously and recognizes the significant returns of this marketing strategy, you will greatly benefit by using a performance marketing agency that specializes in designing and measuring loyalty solutions.
Because of their long experience with frequency marketing programs, incentive companies have developed a number of different variations—both traditional and online—suitable for a variety of different needs and goals. For instance:
Don’t forget to communicate. Whatever your choice of program, don’t forget that communication is one of the keys to a successful customer retention program, and communication is a two-way street. You are advertising and marketing to external customers, who in turn communicate with the internal employees they encounter on a day-today basis. The feedback customers give to employees about your program may be one of the most overlooked areas of business intelligence in helping organizations better understand what they can do to please customers and promote retention over the long-term.
This White Paper was put together under the auspices and with the input of the Performance Improvement Council, a unit of the Incentive Marketing Association.
The members of the Performance Improvement Council are dedicated to offering companies solutions-based incentive and performance improvement programs.