Customer retention has traditionally never ranked high as a business priority. Acquisitions have always held more weight, and getting new customers was seen as prime importance. Even in 2012, marketing experts ranked cultivating customer loyalty and engaging customers lowest, while continuing to throw their marketing budgets into acquiring new customers.
However, as I discussed last week, Retention Marketing efforts are slowly gaining more traction as businesses begin to learn how valuable current customers can be to profit margins. According to a study by Bain & Company, increasing customer retention rates by just 5 percent increases profits by 25 to 95 percent. Additionally, 82 percent of companies agree that retaining customers is cheaper than acquiring new ones. How are companies’ attitudes changing?
Return on Investment
Traditionally, customer value is based on a simple formula: return on investment (ROI). This is calculated by amount spent marketing versus how many customers make a purchase – a quick and easily figured sum. Most companies prefer this simple formula to measure results, as it is a fast and visible amount. However, what people seem to forget is ROI implies the concept of time, because “return” happens over time. Without looking at time, you cannot calculate the “real ROI” of a campaign.
In contrast, customer retention takes into account the potential value of a customer over the longer period of time, by looking at their spending habits and behavior. Using this data increases the accuracy of calculations regarding campaign effectiveness.
Losing the Profit Margin
Marketing campaigns are built around driving the ROI at any cost, often by adding discounts and other tactics that eat away at profit margins. Yet not only is this bad for your bottom line, there is proof discounts alone do not drive sales. This year’s Black Friday posted lackluster sale numbers, even though doors opened earlier and discounts were deeper. The National Retail Foundation reported an estimated 11% slide in profits, despite an increase in online sales. Discounts may increase the number of purchases, but the average order value drops.
The Shift from Price to Value
As competitive pricing reaches its zenith, consumer focus has changed from price to value. The difference is crucial: the value is formed not only by price, but also by the perceived value of the entire shopping experience. 66 percent of customers would rather spend an average of 13 percent more to buy from a company that provides excellent service, than to find the lowest price available.
This is huge! It means customers are willing to invest in companies that care about their audience. To provide value, you have to invest in your customers – beginning with changing how you perceive customer value.
Customer Lifetime Value
In acquisition mode, a business gives value to the customer based on the price of their first transaction. In other words, a customer is worth only as much as they bought, as a one-off profit. In contrast, customer retention measures the lifetime value (CLV) of each individual, or the potential net profit from an individual throughout the course of their interactions with the company. Just as customers have begun to choose value over price, companies must learn to choose at CLV over one-time transactional value. The loyalty of existing customers is higher than that of newly acquired customers. Generally, each additional year a customer stays with you brings both an increase in orders per year, as well as in average order size.
Execute A “Hard Reset”
In order to capitalize on the new research into CLV, a company must execute a hard reset on how they define business profitability. Retention Marketing must be equal to, if not more important than, acquisition efforts. At least 50 percent of the total marketing budget should be earmarked for retention, and it should be a CEO-level and company-wide goal. Instead of adding to current staff responsibilities, a separate Retention Marketing position should be created.
Finally, the results of acquisition and retention efforts must be considered proportionate. Performance reviews and campaign results must be restructured to take long term effectiveness and CLV into account, so acquisition numbers are not given priority.
This all means a company-wide reorganization effort, which is a drastic but necessary measure. If acquisition is a short-term sale that ends when a customer finalizes their purchase, retention is a long-term investment in your company, and your profits. Businesses who invest in customer retention practices find it pays handsomely in the end.
The time is right for customer retention. Are you willing to invest?