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Customer Retention Is King: Four Steps to Secure the Throne

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Blogs and communities are always buzzing about one form of marketing or another. And if you listen closely, you'll notice that most of the marketing conversations going on—whether they're about inbound marketing, SEM, affiliates, or mobile—emphasize the importance of getting new or more customers, as opposed to keeping the ones you already have.

The same trend can be seen in the way companies reward their sales and marketing staff. Those who acquire new customers are rewarded with generous commissions and recognition, whereas the ones working to retain current customers get a lukewarm pat on the back.

Now, to be clear, there's absolutely nothing wrong customer acquisition. However, it's unfortunate that customer retention isn't getting the same (if not more) attention from marketers—because retention usually brings in more revenue, at lower cost.

New Business Is Great, but Repeat Business Is Even Better

It's time for marketers to shift their focus to customer retention and loyalty, instead of putting all their eggs in the acquisition basket. The good news: doing so may actually be easier and far less costly than you think.


Not only is it more expensive to acquire new customers than to keep existing ones (acquisition costs five times more than retention, according to Lee Resource Inc.), but current customers actually tend to spend more than new ones.

And if that weren't staggering enough for you, consider the Harvard Business School study that found "increasing customer retention rates by 5% increases profits by 25% to 95%."

Why not crunch the numbers in your own business and see for yourself just how important repeat customers are for your company? Quantify your customer acquisition spend vis-à-vis retention, and take note of the revenue that new customers bring in versus how much your existing customers are spending.

First Step in Retention Marketing: Calculate CLV

Now that you've established the significance of retention marketing, it's time to get started on what you can do to retain more customers. Before you start rolling out customer retention campaigns, though, you need to figure out how much you should spend on your customers to maximize your profits.

The first step in setting a budget for your marketing campaigns is measuring customer lifetime value (CLV). You need to find out how much value each customer brings into your business so you can determine exactly how much you should be spending on them.

You can use a variety of CLV equations to calculate the value of your customers. Management Accounting Quarterly, for instance, shares this formula (PDF), where it incorporates contribution margin, marketing cost, and probability of purchase to calculate CLV.

KISSmetrics, on the other hand, uses three CLV equations and averages the amounts to arrive at a final CLV.

Note that CLV depends on various factors, including business type, the nature of its customers, as well as the industry that the company belongs to; accordingly, there isn't one universal formula that you can adopt. That's why you should look into various equations and use the ones that incorporate metrics relevant to your business and industry.

You can also seek the help of companies that specialize in data and marketing and let them create a customized CLV approach for you.

Action Steps to Retain Existing Customers

Once you've established your budget, the next step is to decide where and how to spend it. Here are a few ideas to get you going.

1. Personalize

The best way to build loyalty with your customers is to make them feel valued. Don't treat customers like numbers on a spreadsheet. Regard them as individuals by personalizing your correspondence with them (e.g., emails or website greetings that mention their name), or by adding thoughtful touches to your communications with them (e.g., handwritten notes and birthday cards).

You can also customize the offers or website experiences that you provide. Gather as much data as you can about your customers. Track their site behavior, purchase history, demographic information, etc., and use that data to create personalized experiences for them.

For instance, if you know that the person browsing your site is a female who bought shoes from your store in the past, then you should display relevant product recommendations on your site instead of a generic one-size-fits-all page.

The same goes for the discounts and offers you give out. If the data tells you that Person A has a higher chance of purchasing when given a free-shipping coupon, and Person B will appreciate a 20% discount more, then send out a different offer to each customer to increase your conversion rates.

Consider optimizing the timing of your offers as well. Segment your customers according to the time of day that they made a purchase, and reach out to them when they're most likely to buy.

2. Track and Test

Remember to monitor the performance of your retention campaigns. If you're sending personalized offers, be sure to take note of the sales that those offers brought in. When you're personalizing the timing of your offers or messages, track open rates and clicks, then compare them with those of previous campaigns.

Not seeing the best results? Perhaps you need to resegment your customers, change your messaging, or incorporate more data. It could also be a sign that you need to move on to another type of campaign. In any case, the only way to find out is by tracking and testing.

When you're at this stage, you also need to make sure that you're setting the right metrics. Getting 10,000 signups in one day may sound sexy, but if those users don't amount to actual sales, then it probably isn't worth tracking.

Always be clear on the metrics that count (it could be sales per customer, or rate of repeat purchases, or something else) and monitor only the numbers that matter.

3. Reward loyal customers

The great thing about loyal patrons is that they don't just give you repeat business, they can bring you new customers as well. Extremely satisfied customers are more than likely to recommend companies to their friends. Encourage this practice by rewarding the people who send new business your way.

You don't have to create an elaborate referrals program or offer huge monetary rewards to customers if you don't have the resources to do so. A relevant offer or a token/freebie that you know they'll love will go a long way.

Be genuine, and remember that simple, yet thoughtful, gestures toward your customers will be recognized.

4. Ramp up your customer service

Providing excellent customer service should be a no-brainer, but some companies don't seem to spend enough of their resources on their customer support department, instead pouring everything into Sales and Marketing.

Remember, your sales and marketing team can perform a stellar job in bringing in new people, but if your support reps aren't doing enough to keep those customers, you're just wasting your resources.

Again, it boils down to showing your customers just how much you value them. Be respectful, treat them well, and go above and beyond to solve their problems. And if you think about it, the bar for customer service is set really low. People don't expect much from support teams these days, so if you step up and blow them away with amazing customer service, it won't be ignored.


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Jerry Jao is a co-founder and the CEO of Retention Science, which provides customer retention solutions to some of the country's largest online retailers.

Twitter: @jerryjao

LinkedIn: Jerry Jao

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Comments

  • by Isabel Myburgh Thu Dec 19, 2013 via iphone

    Another approach is to look at how much time can be spent on a customer. Calculating the lifetime value of a customer can mean the difference between making a phone call and a personal visit. In my opinion, apart from knowing the rough $ value of a customer it is also useful to know how much time to spend on them.

  • by Qasim Eisa Tue Dec 24, 2013 via web

    "Remember, your sales and marketing team can perform a stellar job in bringing in new people, but if your support reps aren't doing enough to keep those customers, you're just wasting your resources"

    Really true...
    We should do much work on our repeated customer.


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