The importance of customer retention
Posted on 24th January 2020 by Marketing Executive - Katherine Ducie
For many companies, especially those that are still in their infancy, a considerable amount of focus is placed on acquiring new customers, yet customer retention is just as important.
A lot of marketing effort and budget goes into acquiring new customers through Google search, social media ads, online advertising and other offline forms of marketing.
Many companies believe that building the number of customers you have is the only logical way to increase profits, however there’s a big loss to profits when your regular customers are lost.
It has been shown that return customers usually buy more from a company over time with customers likely to spend a greater amount in months 24-30 than they are in months zero – six. Surprisingly, on average, it costs six times more to acquire a new customer than it would to get further business from an existing customer.
Just a small increase in your customer retention rate is shown to significantly increase profits. Especially for small businesses, losing just a few customers can have damaging effects.
In any business, you need a customer to stay with you for long enough to at least cover the acquisition investment. Having loyal customers will save you a lot of money but gaining that loyalty can be difficult and requires a carefully constructed retention strategy.
You need to give your customers a reason to stay with you and it doesn’t necessarily have to be a financial benefit. Customers would rather pay a bit extra to stick with your services, instead of switching to a competitor they’re unfamiliar with, that use different systems.
Ways to gain customer loyalty include:
- Providing products and services that are of the highest quality.
- Having a great commitment to customer service – being pleasant, empathetic and efficient.
- A rewards programmes such as a birthday discount or discounted deals exclusive to current customers.
- Be consistent, responsible and an expert in your field.
- Sharing a company story that gives customers something to relate to, grow attached to and be inspired by.
- Share relevant updates with customers through different channels of communication such as a newsletter email.
- Have your own company social media profiles so you can answer customer issues, provide solutions and keep your customers updated.
Remember that return customers will do some of the hard work for you. If you provide them with a great service, they will recommend you to friends and family and therefore refer new customers to your company. A customer referral scheme could be a good idea to encourage this. Give these customers a reason to share your services on their own social media channels.
According to research conducted by Frederick Reichheld of Bain & Company, in financial services, a 5% increase in customer retention can yield more than a 25% increase in profit.
It’s important to remember that not every customer will be long lasting. For example, in energy, customers shop around from year to year using a comparison and switching service like uSwitch. This is precisely why it helps to break your customers down into segments and understand which hold the most potential, so you can invest in relationship building with those.
Use a customer relationship management system
Using a CRM, you can manage interactions you have with customers and prospective customers. This will help you build customer relationships and better processes than can overall increase sales. Salesforce is one of the leading customer relationship management tools. They’ve proven that their technology can increase customer retention by an average of 20% to 42%. Other CRM’s to consider include Pipedrive and HubSpot.
Don’t let one bad experience out of many interactions convince you that a customer will be put off for good. A psychological strategy named the peak-end rule suggests that people’s cognitive bias heavily affects the way they remember an event or experience. Put simply this means that people tend to remember the most intense point of an experience, whether positive or negative, and the end of the experience, rather than remembering it as a whole and accounting every moment of the experience.
Even if a customer has a negative experience, by simply handling the complaint with care and effectively solving the issue in a timely manner, you can outweigh the negative experience with more positive experiences.
Often the cost incurred pleasing one unhappy customer is more than compensated by the revenue gained from a company’s excellent reputation.
Holding comprehensive business insurance can help you retain customers
Being equipped with business insurance helps to instil trust in your customers and demonstrates a high level of professionalism.
In times where a customer has a bad experience, business insurance is vital to your business. If for example you have a food company and a customer is claiming that the food they have bought from you has made them ill, they could claim against you. If you’re a retailer and someone has bought an electrical item such as a hair dryer which was faulty and has set on fire, again they are likely to claim against you. Should you be found responsible, this could have a great impact on your finances. Business insurance takes that risk away, covering you for legal fees and compensation.
How to measure customer retention rate
If you don’t already monitor your retention rate, it’s worth doing so to assess where there are areas you could improve on.
Customer retention rate calculation:
(CE-CN/CS) X 100 = retention rate
CE = number of customers at end of period
CN = number of new customers acquired during period
CS = number of customers at start of period
For many industries, retention rate tends to fall at around 20%. For the media and finance industries, a retention rate that’s over 25% is considered above average. In the clothing and footwear industry, the retention rate is estimated to be around 32%.
Whatever strategy you decide to choose for customer retention, remember that all stakeholders are potential cost-reduction champions too. That means keeping customers, employees, suppliers, distributors and partners equally as happy with your services.
For more information about which types of business insurance are available to you and for a competitive quote, please call our friendly team on 0333 321 1403.