Increasing customer retention rates by 5% can increase profits by as much as 95% according to the Harvard Business Review.
Take a moment to grasp how powerful this statistic is. Despite the fact that there is a massive opportunity to improve company profitability by placing an increased focus on customer engagement and loyalty, many companies devote very little time and resources into keeping their existing customers happy and coming back for more. The lifetime value of one loyal customer can be extremely high when you take into account their purchases over the years.
We all understand that customer acquisition and awareness building is vital to growth and should be prioritized. However, it is time that customer retention is treated as an equally important initiative.
Customer Retention is Downplayed (Source)
- 34% of those surveyed said they will increase their investment in acquisition in 2014, compared to only 18% heightening their focus on retention
- 71% of content marketers said one of their main goals is acquisition, while only 65% cited customer retention and loyalty
- 31% of marketers feel that their personalization efforts had a “high impact” on awareness compared with only 24% on retention and loyalty
To break it down into dollars and cents, we look to a powerful B2C example that demonstrates exactly how much more profitable it is to sell to a current customer than to acquire a new one.
The study determined how many pairs of shoes the company had to sell to achieve a profit of $100,000 under two particular conditions.
Under the first set of conditions, the company is investing a great deal of money into advertising to generate sales. Since 98% of their business is first-time buyers, they are spending $20 in acquisition, $10 in general administrative costs, $5 in shipping, $50 in product cost and have a profit margin of $15. High advertising costs and lower loyalty are causing acquisition costs to spike.
At these costs, 6,600 pairs of shoes must be sold in order to gain a profit of $100,000.
If they flip the script and devote 98% of their budget to selling to existing clients, the profit margin increases by $20 per unit to reach $35. $100,000 in profit will now be achieved when only 2,800 pairs of shoes are sold. That is a 58% decrease (3,800 units) in amount needed to reach that profit target.
Although the advertising and profitability numbers will be different for every industry, a similar picture remains. It is far more profitable to gain repeat business from your existing customers than to seek out new customers by exhausting large advertising budgets and/or devoting resources to lengthy selling cycles. New business is a must, but the value of repeat business is severely undervalued.
With that said, incentives for repeat customers should be considered. This might be as small as offering a $1 off discount coupon on the purchase of a car wash to a consumer or as extravagant as gifting a trip to South Africa for an advertiser that exceeds $10,000 in spend. Size of customer purchase will greatly affect incentive choice.
Sometimes even a simple, genuine “thank you” can go a long way…and this does not cost more than a moment of your time.
For more ideas on some interesting ways to thank customers, check out “24 Classic Tried-and-Tested Ways to Thank Your Customers” here or send us an email at firstname.lastname@example.org to pick our brains. We have been implementing programs for companies with some of the most loyal customers in the world for over 30 years in a variety of industries and would love to share our findings with you.
Written by Kristopher Hewkin
JNR Incorporated is a results-based, globally recognized leader that specializes in creating custom travel, meeting, event, prepaid card and merchandise programs that motivate, engage and inspire the employees, customers and channel members of our clients. We have over 30 years of experience working with Fortune 500 companies of many diverse industries. Our programs are tailored to fit the specific needs of marketing, sales, management and human resource professionals. The unique solutions we apply are measurable and proven to increase performance, loyalty and revenues.