Customer Retention

To increase profit and market share, not only customer acquisition but also customer retention is important. Net churn rate (Percentage of customers leaving-customers acquired) is directly related to a firm’s sales amount, and most of the times retaining customers is cheaper than acquiring a new one. The likelihood of repurchase of an existing customer is 60-70 percent, while the possibility of a prospect actually becoming a new customer is only 5-10 percent. According to Bain & Company, it is 30 percent cheaper to target existing customers than acquiring new ones.

Cross selling and up-selling are examples of customer retention. Cross selling is encouraging customers to buy related or complementary products. Harvard business school published a report that states profits from cross selling are five times higher than those from new customers. Up-selling is similar but invites customers to buy a slightly better product. An example of this can be providing a discount for existing customers when a brand new model of cell phone is launched.

Companies that have low cross selling rates go through some common problems such as over-marketing. To make deal with new customers, many sales associates tend to exaggerate benefits of a product or promise optional services that can be tempting. This, in turn, will make customers feel disappointed with actual services. Also, an incentive structure can hinder cross selling. When product A has higher sales incentives than product B, sales associates focus more on selling A. Another problem can be lack of information about customers. If companies are aware of some important events coming up for customers such as wedding or birthday, they can provide more suitable services or discounts which can lead to additional purchases.

Distinguishing loyal customers and providing them exclusive services is critical in terms of customer retention. Customer Satisfaction Index (CSI) is often used to measure customer loyalty, but this index can be misleading in that being satisfied with a certain product does not always mean that the customer would buy another product from the same company given a better alternative. Real loyal customers adhere to a certain company’s products even if there are many alternatives with cheaper price. A common tool to measure loyalty is Net Promoter Score (NPS). This is estimated by a survey question asking if the customer would recommend the company’s product to their acquaintances. On a scale of 1 to 10, those who gave 7-8 points are considered to be neutral (passives) and those who gave 9-10 points are classified as promoters. The rest are detractors. NPS is the ratio of promoters subtracting the number of detractors.

Detecting loyal customer and retaining them by providing special benefits can invigorate repeat purchasing and referrals, which will enable companies earn profits at a far lower cost than they need for usual advertising and customer acquisitions.

Written by Ahrim Kim