Customer Retention Part 1: Your Leaky Customer Pool

by Dean Rieck

A while back, I lived next door to a guy named Wayne. Wayne had a pool. It was his pride and joy. Trouble was, Wayne's pool leaked. Slowly and persistently. We knew where the water was going, because the area under my deck was muddy all the time. But we didn't know where the leak was. All Wayne could do was run a hose to the pool to constantly replenish the water that disappeared. His water bills were outrageous.

It's almost funny, until you realize that you're in the same situation as poor Wayne. Your customers are leaking away. Slowly and persistently. You probably don't know where the leak is. And the cost of replenishing your pool of customers is almost certainly more than you want to spend.

If you're a service business, you're losing 15 to 20 percent of your customers every year. And according to a study in Harvard Business Review, "...customer defections have a surprisingly powerful impact on the bottom line. They can have more to do with a service company's profits than scale, market share, unit costs, and many other factors usually associated with competitive advantage."

At issue here is the "lifetime value" of a customer. Let's say you lose just one customer who spends a mere $5 a week. That means you lose $260 a year. Not much. But if you lose one such customer every day, you're looking at an annual loss of $94,900 by the end of just one year ($5 x 52 weeks x 365 days = $94,900). And the loss is progressive.

The question is, why do customers defect? According to a U.S. News and World Report article, out of every 100 customers who jump ship, nine do so because they move, nine because they go to the competition, 14 because of poorly handled complaints, and 68 for no special reason. In other words, 91 percent of your lost customers leave simply because they aren't satisfied.

How do I arrive at that? Well, you aren't satisfying people if they go to the competition (that's 9 percent). You aren't satisfying people if they feel their complaints aren't handled properly (that's another 14 percent). And you're not satisfying those who leave for "no special reason" because, while not specifically unhappy, they haven't been given a good reason to stick around (that's the final 68 percent for a total of 91 percent).

Okay, that's all well and good. But how much can you actually add to profits by retaining customers? According to the Harvard Business Review study mentioned earlier, you can increase profits up to 100 percent by retaining just 5 percent more customers! The calculation here is more complicated, but it comes back to the lifetime value concept.

At first, a customer does a little business with you. Over time, as the customer's confidence in you increases, the customer's purchases increase in number and value. And as purchases rise, your operating costs decline, since your experience with that customer makes the relationship more efficient. Plus, the word-of-mouth advertising the customer does for you brings in many more customers.

The figures work a little differently for each business, but they're impressive. One auto service chain increased profits 30 percent by retaining an additional 5 percent of its customers. An insurance company increased profits by 50 percent. And a bank boosted profits by 85 percent. That's why they say, "Your best prospects are your own customers." It's not just that they're easier to sell to. It's that they add far more to your bottom line than new customers.

Okay, so let's summarize. Customer defections reduce profit. Customers defect because they aren't satisfied. Therefore, if you satisfy your customers, you'll reduce defections and increase profits. But how can you satisfy customers? Specifically what can you do to make customers so happy they would never think about doing business anyplace else?

Whole books have been written about customer satisfaction, and there are a million things you can do. But the place to start is with simple customer communications. By knowing more about your customers, letting them know more about you, and giving them ongoing special attention, you can plug the leak in your pool of customers and start increasing profits today.

Don't worry. Starting and maintaining a customer retention program isn't as hard or expensive as it sounds. In Part 2, I'll give you a simple, three-step customer retention program that you can tailor to your own needs and budget.

Copyright © 2001 Dean Rieck. All Rights Reserved.
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