Winning a new customer costs five times more than retaining an existing one. Some surveys say the differential is far higher. On the other hand, says international consultant Bain & Company, a five per cent improvement in customer retention can lead to profit improvements of over 25 per cent.
There are lots of reasons why existing customers are more profitable. First, it takes time to turn a new customer into a regular one. Second, new customers rarely give you as high a proportion of their business from the off as an established customer. Third, existing customers are easier to sell to, with resulting lower costs. Fourth, loyal customers are less price sensitive and less inclined to switch to a competitor because of reasonable price increases. Finally, long-term customers often make referrals that enhance their value to you still further.
The aim is to have loyal or committed customers, not locked-in customers. Loyal customers go on buying because they perceive total value from a supplier greater than their costs. They also feel they can’t get that value elsewhere, even though they’re free to try.
A focus on customer retention requires taking the long view and that can demand courage. If, for example, a customer asks about a premium priced product when they or their children are starting or relearning a sport, what do you do? With your commercial hat on, you sell the premium priced product. But the best product for the individual may be down the scale. Good advice that saves a customer money keeps that customer.
Too many businesses have a customer retention policy that can be summarised as: ‘Don’t rock the boat’ or: ‘It isn’t broke, so don’t mend it’. But that’s the equivalent of not servicing your vehicles or doing running repairs on your premises. You need to be active, not reactive.
What practices should you build into a customer retention policy? This can be summarised as communication, completion and cock-ups.
Sometimes the first sale to a new customer doesn’t go as planned. The product fails and you think they won’t use you again. First up, this is rare - or you aren’t in business for long - and, remarkably, some of these customers can be rescued, as we’ll see.
Far more commonly, you lose a customer because of cumulative mistakes. A series of small dissatisfactions build up into full blown unhappiness and then you have a mountain to climb getting them back. Those mistakes arise from not giving the customer enough time, the time you gave they in the early days when you were as keen as mustard and they were very important. Familiarity breeds if not contempt, then inattention.
So rule one is mind the gap. Once you’ve established regular business with a customer, the process becomes straightforward. You don’t need to spend as much time on each visit. But they still need personal attention. That is particularly true if you’ve passed control over to a staff member. Your junior may be brilliant, but your customer bought from you personally, so keep in regular contact.
Write to all your loyal customers to introduce new staff members or announce any new corporate or school contracts and the like. This can take the form of a newsletter, but a simple letter does the job as well. Send a postcard to each of them before you go on holiday suggesting they get in touch before you go. Each of these social contacts encourages clients to highlight a small problem before it accumulates serious ramifications.
Rule two is priorities. It is classic to hear of businesses busting a gut to satisfy a new client and losing an existing one in the process through failure to deliver, poor quality control or similar. Clearly, new customers are key to growth, but not at the expense of existing ones. While new business hunting may be exciting and stimulating, it is not as profitable as existing business - and that must have priority.
Which brings us to rule three. When you hit gold, dig all the way through the mountain. Sell every product and service to your existing customers. Try to do it formally, as if it were a new client, as it helps them to realise you’re serious and ensures you do it properly. Sell to every relevant division, department and subsidiary of a client, too. This is all part and parcel of becoming an essential supplier, so increasing their loyalty to you.
Note that people, including sports teachers, move jobs. If your customer retention policy is good, you’ll keep the existing client and probably pick up a new one when your contact moves on. This can make your customer retention policy part of your new business plan, too.
Have a plan to solve problems
It’s how you react when something goes wrong that defines the quality of your customer retention skills. Consider these statistics - the satisfied customer tells four people, the dissatisfied customer tells nine people and the delighted customer tells 18 people. It’s strange but true that the difference between the satisfied and the delighted customer is quite often that the latter has had a problem put right, completely and quickly.
Dig a bit deeper and it becomes less strange. If you work hard to solve a problem, you’re demonstrating the best of customer service. You’re not earning a penny for the effort you put in, but you’re proving to the customer they’re important. So it then becomes logical that they will buy from you again. The customer already knows your service is normally good. Now they know that, even when things go wrong, they can trust you to put it right.
So have a plan to solve problems. What should this include and how do you operate it in practice?
Until recently, Marks & Spencer was a byword for building a loyal customer base. The central plank of its policy was a no-quibble returns policy. If this is relevant, use it. (Note that M&S is proof this isn’t enough - the product has to be right, too.) Such a policy forces you to raise your quality control standards, which will help customer retention.
The key issue is who sorts it out. In a small business, a hot potato lands in the managing director’s lap pretty fast. They can authorise action and get results, but that won’t work if they aren’t on site 90 per cent of the time.
It appears that empowerment of staff works best. If a problem can be put right by the first point of contact, customers are more impressed than if it takes the managing director’s heavy hand, not least because they get a fast response. It’s impossible to generalise, but hotel chains and car rental companies have made a benefit of this approach in their advertising - the off-duty receptionist who gave a guest a lift to the airport and the rental agent who gave a customer his own car and had to take the bus home, for example.
Let’s say you manage to sort out your customer’s problem. Whether you’ve had to spend hours on the phone for nothing or just made three phone calls, you’ve got that key customer back onside. No, you haven’t, not yet.
You have to call and say sorry. If the fault lies with a manufacturer, show them any grovelling letters or emails to support that. It’s tempting to sweep a mistake under the carpet. Just because your customer doesn’t mention it to you, it doesn’t mean they’ve forgotten. So it’s far better to address the issue squarely with them.