Getting from Sampling to Brand Loyalty (part 2)

Back to the present day … 

M had a terrific point. They only thing that changed was my attitude. I still owned all the clothes and they all still fit. I had just as much time and I had more information about what M liked, yet I put forth less effort towards keeping her attention than I had in gaining it in the first place. 

Where was I? Oh, yes costs.  

Let’s start with hard costs of acquiring a customer or retaining a customer. Depending on the study and the industry involved, acquisition costs are between five and 25 times higher than retention costs. A company could keep between five and 25 customers for the same cost as acquiring ONE new customer. We are just going to let those numbers marinate for a few minutes. 

The Return of Investment of retention, according to research done by Fredrick Reichheld of Bain & Company varies widely but indicates that increasing retention by 5% will increase profits by anywhere between 25% and 95%. Yeah… I thought the same thing… DANG! That’s five times to nineteen times increased profitability per percentage point of increased retention! I can get behind math like that. 

Customer replacement cost is the final metric in determining the cost of acquisition verses retention. The easiest way to determine is cost is determining a company’s customer churn rate, then apply the cost matrix for acquisition and retention. Customer churn rate (Burn Rate, or CBR as I like to refer it as) is a simple function of new customers acquired in a time period divided by customer count in that time period expressed as a percentage. For example, ACME Corp had 100 customers in the 1st quarter and 25 new customers for that time period, so the CBR for that quarter is 25 (new customers) / 100 (total customers or 25%. Essentially, ACME needs 25 new customers per quarter just to tread water. 

Once the CBR is determined, figuring the cost is straight forward. Let’s say a company has a CBR of 25%, and an acquisition cost of $1000 per customer, the cost of maintaining the customer base of 100 would be $25,000 per quarter. 

But if ACME focused on increasing retention. Keeping those 25 customers would only cost conservatively $2500. But the profitability would increase by 25%  

Many companies accurately forecast the increased profitability by solely monitoring the CBR of a business segment. When I work with a company in a consulting capacity nailing down their metrics is always the first step.  

Wait! My company has a customer retention program 

As a business management consultant, I regularly hear some version of the above statement. What follows is usually some version of the following. 

Me: Yeah? Tell me about that.  

Them: Well, we send a survey and ask about their experience. 

Me: What kind of engagement do you get with the survey? 

Them: Well we get about x% that open and of those x% complete the survey. 

Me: And what is the satisfaction rate?  

Them: (Proudly) We have a 90% satisfied or very satisfied. 

Me: Ok so you ask your customers how well you did. What are you DOING for the customers? How are you providing them value and connection when they aren’t buying from you? 

Them: We send them coupons and notices of specials.  

Me: So, you try to sell them more stuff?  

It is clear where this is going. Companies do not have a retention program, they have a ‘sell customers more stuff’ program.  

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