A good customer acquisition strategy is important in any business – but what’s more important is a solid customer retention strategy. Just because you have your foot in the door does not mean that the deal is sealed.
The tactics needed to retain customers are different from those needed to acquire them. Similar to online dating, wooing someone is very different from maintaining a solid relationship with them. Let’s first cover some fundamentals.
What is customer retention?
Customer retention is the process by which you remarket and service existing customers with the intention of persuading them to buy new products and services. It differs from lead generation and customer acquisition in that you have already sold the customer once. This means that they already have some level of trust in the business.
Why is customer retention important?
I’ll let the numbers speak for themselves:
- A 5% increase in customer retention leads to a minimum of 25% increase in profits.
- Repeat customers spend 33% more average than your first-time customers.
- 60% of loyal customers will proactively share the brand with their friends.
- Satisfied customers are 87% more likely to upgrade their service or product.
- Marketing to new customers is 7x more expensive than to existing customers.
Retaining customers is much cheaper than acquiring new customers and also gives you more bang for your buck. If you want to operate your business more efficiently invest in a solid retention strategy.
How would this be done?
We start by looking at measurable customer retention metrics.
What customer retention metrics should we look out for?
Peter Drucker, the man who invented modern business management once said “If you can’t measure it, you can’t improve it.” Prior to designing a customer retention strategy, we first need to know how to measure its effectiveness. Here are the top 4 metrics that you should look at.
- Purchase frequency. This is the rate at which customers buy a specific item from you. If you are selling toothpaste for example, customers may buy from you every 30 days. If you are selling luxury products such as handbags, this would be much higher (once a year).
- Average order value (AOV). This is how much an average customer spends per transaction.
- Repeat customer rate. This is a % figure and represents the number of customers who have bought from you again divided by the total number of customers.
- Customer lifetime value (CLTV). This is the total value of the customer to the business over a long period of time. Probably the most important metric to keep your eye out on and one that you should strive to increase.
A good customer retention strategy focuses on these 4 metrics and improving them will guarantee a bottom-line increase in revenue. Customer retention goes beyond just a strategy, it must be something that is embedded in the values of your business. Think about Amazon and how customer obsessed they are and look at where they got to.
5 ways to create a sticky customer retention strategy
We’ve built up the foundation – now it’s time to get to the meat of the article – methods to develop an effective customer retention strategy.
1. Prioritize your customer service
You remember the 1 bad thing your boss says to you vs the 99 compliments that you receive from family and friends. A customer also experiences the same thing – one sour experience is enough to switch them off from your brand. In fact, 33% of customers switch over to competitors due to poor customer service.
It’s best to learn what great customer service is by example. Zappos does this by responding to every email it receives and it’s paying dividends. Check out this raving tweet from a fan.
Customer service starts from the ground up – from culture and not systems. CRMs may make it easier to manage customers, but no software can replicate the human touch in this email.
2. Reward your best customers
Your top customers are also the ones that are most likely to be your undercover brand ambassadors. Here’s a little trick that can push them over the edge – treat them like royalty and pamper them with free gifts and rewards every now and then. You don’t even need to be secretive about it.
Look at how Chipotle does it.
For every $125 spent, you will get a free Chipotle as a customer. Chipotle has made this reward program seamless through online purchases. You can implement a similar strategy by segmenting your customer/email list into VIP and non-VIP and creating exclusive offers just for them.
3. Improve your products with customer feedback
It’s hard to perfect a product straight out of launch especially if it is a new one. If your product is overhyped and disappoints customers on launch then using their feedback is one of the best ways to improve it.
Take the game No Man’s Sky – it was initially touted as a ground-breaking open world RPG but was so hyped that it failed to deliver on its promises in 2016. It was marketed as a AAA game when in fact it was developed by an Indie studio (Hello Games).
Despite the rocky start, developers iterated on feedback and added free content to build the game up to where it should have been. On launch in 2016, it only had 61% favorable reviews according to Steam, recent reviews however tout an 89% satisfaction rating. This is what a specific fan had to say.
4. Make your mission statement crystal clear and act upon it
Customers are spoilt for choice and with new competitors popping up left, right and center it’s difficult to distinguish your brand. But remember, customers don’t buy products, they buy the vision of the company and what it stands for.
Patagonia does this brilliantly by not just talking the talk but also walking the walk. They donate 1% of sales to the preservation and restoration of the natural environment and have awarded $89 million in cash and in-kind donations to domestic and international grassroots environmental groups making a difference in their local communities.
By sharing their mission statement and acting on it, Patagonia creates a stronger relationship with its customers and aligns itself to those who care about climate change. This is one of the best ways to retain customers.
5. Create convenience through subscriptions
Subscription programs provide your company with stability of revenue and convenience for the customer. These programs are one of the easiest ways to increase customer lifetime value for existing customers.
Amazon has perfected this by providing subscription discounts to items such as toothpaste, razors and soaps. They intelligently use discounted subscriptions to get customers to use their store card. At a broader level, their Prime service earns $5.6B in revenue in a single quarter.
By creating subscription packages, you are immediately locking in future revenue and providing consumers with peace of mind that their item will arrive when needed. It’s hard to think of a better win-win situation.
Customer retention – the key to long term growth
The key to growing your business and your bottom line over the long run isn’t in finding new leads and customers, it’s in nurturing existing ones. To do this you need an effective customer retention strategy that is actionable and whose outputs can be measured.
About the Author
Eddie Litonjua helps entrepreneurs grow and scale their business on his blog Passive Income Tree. A consultant by day, he applies his knowledge from the business world to identify winning business models for generating passive income and finding the best software and tools to do this.