For a long time, many business owners have believed that the best way to make their business successful is to draw as many customers as possible their way. Indeed, getting customers is a significant part of growing your company, but making sure those clients stay with you is just as important. After all, if you want to have an impact on the market, you should make a name for yourself as a reliable provider.
For that to happen, not only do you need to draw customers but also keep them there. Customer satisfaction is a crucial aspect here, as it encourages people to come back for more. By understanding customer lifetime value, you can potentially save expenses and keep the customers who already trust your service. This article can help you measure the costs of customer retention so that you don’t exceed your budget.
What Is Customer Retention?
Customer retention is one of the most important parts of every business, as it helps increase customer loyalty. As a business, you may not want to rely on new customers to make purchases from you, as you never know when or where they may be coming from. Very often, it also takes a lot of money on resources to convince prospective customers it’s a good idea to buy from you.
Someone who already purchased from you knows your worth, as they interacted with your product/service. If they are content with what you offer, there is a good chance they may be willing to buy again. All it takes is a nudge in the right direction.
However, these customers will not buy from you again unless you make the effort to prove you’re worth it. Overall, here are the key factors that influence the customer retention rate:
1. Service or Product Quality
Product or service quality refers to a product’s ability to satisfy the needs of a client. If they are happy with a specific item, they will be more than willing to make another purchase the next time they need it. For instance, someone who previously bought a device from your company would be more likely to upgrade to a newer model if they are satisfied with how the old one previously worked.
2. Customer Satisfaction
A happy customer will likely buy from you again and again. Their satisfaction may be a result of a series of factors, from the quality of the product to how well they were treated by your staff.
For instance, even if the user previously had an isolated issue with the product, they may still become loyal customers if you took the time to solve that problem. Your relationship and engagement level with the client may also affect the retention rate, as they may seem more likely to buy if they see you interacting with them.
3. Convenience and Delivery
Nowadays, most customers are looking for convenience and quick delivery. They no longer like waiting for days for their orders, and they also want the easiest ways to pick up the items that they have been waiting for.
As an example, parcel lockers have become very popular lately, with more people preferring to pick up the box at their own convenience instead of waiting for the deliveryman. This is why more companies are offering this option, to improve delivery services for their clients.
4. Competitive Pricing
At this point, it’s no longer a secret: customers are looking for the best deals around. Discounts always attract customers, and in this highly saturated market, you will likely need all the help that you can get.
They may buy expensive items for you because they believe it’s a better quality, but if it turns out just around average, they may begin shopping around for other deals. By offering them a competitive price in comparison to other companies, they will be more than likely to remain loyal, even if your product is just above average.
5. Branding
Very often, branding attracts new customers your way, but it also keeps the old ones coming. For instance, if you work to create a reliable brand, the chance that people will come for a second product is high.
Take Apple with its iPhones, for example – many people associate the brand with ease of use and functionality. It’s one of the main reasons why individuals keep coming for more, upgrading their iPhones year after year.
The Economics of Customer Retention
As a business owner, you must understand that there are a few differences between customer retention cost and customer acquisition cost. To make things simple, customer acquisition costs involve how much you spend on a prospective customer before they become the buying type. On the other hand, customer retention costs involve the money that you will have to spend on maintaining your already paying clients.
With customer acquisition costs, you focus on new and innovative ways to turn a curious browsing visitor into a paying one. Very often, this involves new marketing channels and strategies that are meant to grab their attention. On the other hand, customer retention understands the importance of existing customer value, looking for ways to keep them loyal.
Customer retention costs are different when compared to the acquisition type. When it comes to acquisition, business owners often focus on costs such as promotional campaigns, advertising, and sales commissions. On the other hand, retention involves good customer service, discounts, and loyalty programs.
Analyzing your customer retention costs is important because it offers you a bigger picture of how much you need to spend to keep the old clients coming. You can use it to evaluate the effectiveness of your strategies and validate the way you allocate your resources. This should offer you some valuable insights into the sustainability and long-term profitability of your business.
Measuring the Cost of Customer Retention
Measuring customer retention costs can be rather tricky, as the values and data may differ from one company to another. For the most part, you can get these retention figures by calculating the purchases over a specific timeframe and mitigating them with your spending. This includes retention expenditures, acquisition costs, customer churn rate, and general overheads. The customer churn rate is important because it shows you how many clients have stopped buying from you.
Once you have those retention figures, the commonly used method is to divide them by how many active customers you have within a specific timeframe. This should give you the average revenue per user, so you have an idea of how much you spend on them.
In other words, when calculating customer retention, the formula should look something like this:
Customer Retention Costs = Total Costs from Retention Programs / Number of Active Customers
Customer retention will significantly impact the lifetime values (LTV) of your company. If your calculations show high retention costs, then the profits and margins are also lowered, since the worth of the purchase becomes reduced. However, low and steady retention costs can help you create predictable and consistent recurring revenue models so you can create a monthly budget for your company.
Strategies for Reducing Customer Retention Costs
Reducing customer retention costs can involve a series of techniques. These strategies to reduce the customer retention cost may include the following:
1. Implement a Customer Feedback System
Customer feedback systems represent a very effective way to reduce retention costs, as they offer you information for actionable insights. For instance, many business owners spend unnecessary amounts of money on actions they believe are good. However, these actions may be wrong, as customers may have a different idea.
By implementing a customer feedback system, you can collect and analyze the data from your users. This helps you make client service improvements, product developments, future branding decisions, and more. You can create a better strategy that reduces your marketing efforts, diminishing customer retention costs.
2. Focus on Great Customer Service
You may have a great product to offer to your buyers, but if they have multiple unsatisfactory or disappointing interactions with you, they may be more likely to buy from someone else. This is why the focus on customer service excellence should be one of your priorities.
For instance, let’s say that someone buys a product that they end up dissatisfied with, and they reach out to you for a solution. If you help them out with it, they may just be impressed enough to try your service again. However, if you ignore or simply dismiss their concerns, they may be more likely to switch providers on their next purchase.
Make sure that your customer support team is knowledgeable, well-trained, and responsive. They should quickly respond to the inquiries, feedback, and complaints of your customers. The fact that they go way and beyond to solve a potential issue will show clients that you care, preventing them from leaving you for your competition.
3. Personalize Customer Experience
About 0.1% of people unsubscribe from marketing emails, and this usually happens within the first few weeks or months. Very often, the reason is that users cannot resonate with the emails or ads, finding them way too generic and unnecessary. You can significantly increase your ROI of customer retention cost by offering personalized customer experience.
You can do that by using insights and customer data to offer targeted offers, personalized recommendations, and proactive support. Once your clients see that you understand them, they will be less likely to unsubscribe from you, as they will feel valued. This can help you create a strong connection with them and increase customer loyalty. In return, this may lower your customer retention costs.
4. Foster Community and Engagement
We live in a time where users are looking to connect with the people around them, and this includes the brands they choose to rely on. Many individuals will be less likely to switch to a different company if they feel like they are part of the community. The more they can connect to the “human element,” the likelier it will be for them to stay. This is why you need to work on your relationship management.
For this to happen, you must create opportunities for customer engagement and interaction. This can be done through any social means, from online forums to social media platforms and even in-person events. Plus, not only can this increase customer loyalty, but it also allows them to become advocates for your brand. Indirectly, this can improve your customer acquisition costs while drawing back those who have potentially drifted away.
5. Offer Incentives and Loyalty Programs
What’s better for increasing customer loyalty than implementing a loyalty program? Not only can this make your customers feel special, but it may also offer them the incentive to make another purchase. Through these programs, you can offer them VIP perks, exclusive discounts, or early access to certain products to keep them engaged.
Keep in mind that research is a very important part of creating a loyalty program. Not only do you need to analyze user behavior and motivations, but you should also investigate the programs offered by your competition. If you want to keep the users around for longer, you need to provide them with incentives they won’t be likely to find anywhere else.
6. Identify Common Customer Complaints
No business is perfect, and there may always be someone unhappy with what you have to offer. Sometimes, it may be a case of poor compatibility with the customers. Other times, it may be a matter of communication or product quality. Regardless, you need to get as much feedback as you can and identify the most common complaints.
Once you have efficiently gathered the data, train your staff on how to handle it as quickly and efficiently as possible. When a recurring issue is identified, they should take proactive measures to prevent it from happening again. Even as a potential problem is resolved, you should follow up with the client to strengthen their loyalty.
7. Use Customer Data Platforms and Predictive Analytics
The more info you have on your clients’ behavior, the easier it should be for you to come up with a good strategy that reduces costs. This is where customer data platforms and predictive analytics can come to your aid. With such data, you can pull customer data from various channels and systems and do an in-depth customer retention analysis.
By mixing it with predictive analytics, you can create a unified customer profile that allows you to automate your campaigns. This makes it easier for you to perform customer segmentation and target specific users, creating highly customized experiences that take fewer resources, yet keep existing users engaged.
Strategies to Optimize Customer Retention Costs
When it comes to putting together customer retention strategies, you need to be very thorough with your methods. Below are a few tips for you to improve your strategy and optimize customer retention costs.
· Create Empathic Customer Relationships
The more you get along with your clients, the easier it should be for you to create a connection. This is why many companies use empathy in their strategies to reduce customer retention costs. Look at Zappos, for example. During the pandemic, they created a hotline where they could be contacted for anything a customer needed, no matter if they made a purchase or not. This led to a significant increase in their popularity, and their customer service excellence lowered their customer retention costs.
· Offer Ongoing Customer Education
One of the best ways to lower your customer retention costs is to keep your users informed. This can be done through blog spots, webinars, tutorials, and more. By offering your users this type of knowledge, you maximize the value they can derive from your services. For instance, IKEA improved its customer onboarding by moving its content to social platforms. By frequently posting informational blogs and ideas, they increased their traffic and offered their clients the right incentive to make another purchase.
· Make Customers Feel Special
When a customer feels like a VIP, they may be more likely to stay with you in the long term. This can be done through exclusive benefits, discounts, and even high-end services. For instance, Four Seasons increased their customer retention by creating a WhatsApp channel, allowing customers to directly ask the staff questions and recommendations. Since the platform is free to use and employees must no longer leave their posts, this significantly improved their retention costs.
Conclusion
The more careful you are with your customer retention metrics, the easier it should be for you to reduce costs. Depending on the size of the company, it may take a couple of weeks or months until it pays off. However, once you’ve accurately measured those retention costs, you can create an effective strategy that improves your long-term retention. You just need to adapt to the needs of your clients.
...
