No doubt your firm says it puts a priority on retaining customers.

But does it know what that really means?

Customer retention is certainly one of the most important reason's behind any firm's success. While academics and professionals may disagree on the exact numbers, some estimates say that a 5 percent increase in customer retention can improve profit by as much as 70 percent.

But despite customer retention's widely recognized value, it remains one of the most misunderstood marketing components.

In this tutorial we discuss the five major benefits to keeping customers. Then, we cover a quantitative way to measure the lifetime value of a customer. In this way, you'll better understand what it means to keep a customer. And when you know that, you'll take yet one step closer to long-term success.

THE FIVE MAJOR BENEFITS TO CUSTOMER RETENTION

Here are some of the big reasons why keeping customers should be among the firm's most important priorities.

Cost Savings: Though estimates vary, it is largely accepted that acquiring new customers is vastly more expensive than keeping the ones you have. Some estimates put it at five-times as much. This makes perfect sense, when you think about it.

Acquiring customers can be a wildly expensive exercise in trial-and-error. Often, you don't know the benefits they care about most. Or, you haven't found the right tactical marketing mix to inspire the customer to buy. Perhaps your product isn't tailor-made for their needs. The point is, no matter how sound your analysis, acquiring new customers requires the firm to make mistakes until they get it right.

Keeping the customers you have, however, is far less expensive. For one, you already know tons about the customer's buying habits, favored benefits, and the like. In addition, the customer is already aware of your brand; not having to promote awareness can save the firm tons of cash. For these and other reasons, the firm that mines its current customer base bypasses many of the costs inherent in bringing on first-time buyers.

More Spending: Research shows that the longer customers stay with your firm, the more they spend on average per transaction. In other words, a customer's third purchase is likely greater than her second, which is likely greater than her first. When you consider the cost savings discussed above, this means more revenue and greater margins with each repeat purchase.
Why do customers spend more? Often, a customer's first transaction is a test of your services. Subsequent transactions are votes of confidence. With each transaction the customer is increasingly aware of your breadth of services; in turn, you are increasingly aware of what the customer wants. In this way, the customer's awareness and confidence increase while your ability to market grows as well.

Reputation: The firm with high customer retention rates is, by definition, keeping customers satisfied. In this way, high retention rates enhance the firm's reputation with in the industry and among potential customers.

Word of Mouth: It's no secret that customers talk to other customers. When they're unhappy with your firm, they'll frankly tell others their opinion. On the other hand, when they're satisfied with your services, they may sing your praises. This is free and credible marketing, the beauty of word-of-mouth. Perhaps no other marketing tactic is more effective. Customer retention - which results from customer satisfaction - is the most effective way to generate word-of-mouth marketing.

Productivity Gains: Your employees gain greater satisfaction knowing that their efforts not only bring customers, but also keep the ones you have. In a concrete sense, repeat customers signal the lasting significance of their work. Alternatively, high customer attrition rates tell employees that all their work in acquiring customers were for naught. In this way, high customer retention rates improve employee morale. This, in turn, increases productivity.

CONCLUSION

Clearly, customer retention should be among any firm's most important priorities. But success doesn't occur in a vacuum. Rather, strong customer retention rates result from customer satisfaction. This, in turn, results from the firm's continuous ability to provide value at all contact points with the customer. For this reason, the firm must put a premium on value creation. Only then will retention follow.