This is the first of a four-piece series devoted to the topic of customer retention. Here, I will talk about retention, what it is, and why it drives successful business operations. The three subsequent blogs will present a conceptual framework for issues, rationale, cost models, and examples for use in developing and maintaining a loyal and profitable customer-base.
Never, never, never take a customer for granted — I mean it!
Throughout the past year, I have written about customer satisfaction and its permutations (customer loyalty, customer partnerships, customer bonding, tracking and measurements and employee loyalty). Now I want to talk about customer retention: the key to profitability and longevity.
The importance of retention becomes evident once you understand clearly the relationship between customer loyalty and profits. Some large companies estimate that as much as 95 percent of their profits derive from long-term customers. Many other companies know that a mere 5 percent decrease in customer defections can boost profits any where from 25 percent to 95 percent.
The decision to cultivate a highly loyal customer base must be integral to all aspects of a company’s business strategy. You must know who your best customers are and what it takes to keep them. Then, you must meet, exceed and anticipate their needs better than the competition and give them reasons to buy more.
Retention depends on what customers actually do, not necessarily on what they say they will do.
Customer loyalty implies a conscious choice to remain faithful. A customer-driven approach to business examines products and services in terms of customer perceptions and expectations. Customer retention can be defined as the ability to consistently meet or exceed customer needs, wants and expectations throughout the life cycle of the customer-company relationship which results in repurchase loyalty and positive word-of-mouth comments.
Tracking System and Measurements
Several elements are required to build an effective tracking system:
- It must be easy to administer;
- It must provide reliable data;
- It must focus on the customer’s priorities;
- Simple reports should tell managers where and how to allocate their resources for maximum benefit.
A comprehensive retention program focuses on two essential measurements.
1. Identify where and how often customer expectations have not been met.
In a 1994 article in Small Business Reports, William Sherdan, author, management consultant, and adjunct professor in the Brandeis International Business School, recommended the development of a customer relationship timeline that identified each key event and interaction starting with the initial sales contact and ending with the loss of the customer. He used the information to analyze customer defection trends and identify warning signals. Once each issue is understood clearly, he figured, then he could develop solutions to resolve the core process problems.
John Goodman, president of the U.S. arm of TARP, a customer experience research firm, suggests that customer satisfaction and customer loyalty are the operational measurement standards of customer expectations.
In an article for National Productivity Review, he suggested presenting customers with a list of potential problems or questions, across a broad range of transaction types, then soliciting which and how many, problems or questions they have experienced.
The key points to remember are that:
- You must evaluate each critical incident and determine accurately the nature and extent of problems where they occur; and
- Whatever the customer says is a problem, is a problem.
2. Determine your company’s ability to handle customer complaints and inquiries.
This includes obtaining a baseline indication of the extent to which your existing recovery process reduces defections or helps retain customers who might otherwise defect to the competition.
Comparisons against industry baselines will improve your frame of reference. The financial consequences of problems and customer-response systems can be determined by measuring word-of-mouth behavior. This can also be used as an indicator of future profitability.
Customer loyalty provides strong protection against competitive threats. The strength of your business relationships are reflected in your customers’ attitudes, repeat patronage and their word-of-mouth endorsements.
Focus on the core causes of defections rather than triggers and warnings signals, after the fact.
Some of the best ways to pre-empt customer defections include:
- Monitoring customer expectations, needs and desires,
- Monitoring the gap(s) between customer expectations, benefits, needs and experience,
- Removing the gaps and satisfying your customer’s expectations, needs and desires better than the competition, and
- Removing the customer’s perception of gaps between expectations and experience.
From an analytical perspective:
- Compare the value of your products and services against competing offerings to assess, and thoroughly understand, defections.
- Determine the relative significance of antecedent factors and the possibility of different outcomes.
- Identify and compare the variables of your best customers as compared to next-best customers relative to defections.
- Compare your defection statistics with key competitors and the industry baseline.
The key point to be made here is that most companies do NOT measure the number of customer defections nor do they analyze why customers leave.
A Retention Tool
Active listening, for the sole purpose of understanding, is the most important aspect of effective business communication. A thorough and accurate understanding of your customers’ expectations, from their perspective, can give you the necessary information to avoid, or solve, problems.
Active Listening: This is the best consulting advice a company can get and it costs nothing!
Armed with this critical information you can delight customers, develop needed products, or make adjustments to enhance their interactions with your organization.
When you really understand your customers and earn their trust and respect you derive many substantial rewards:
- You deepen the relationship and begin a partnership;
- You earn the opportunity to serve them;
- You learn how, what, how much, and when to sell to them;
- You reduce the opportunity for your competitors to penetrate your customer base and even your potential customers.
Companies that manage customer relationships successfully over time, take an integrated approach to management which includes marketing, information technology, market research and quality operations (manufacturing and/or service) and financial operations.
A successful company recognizes that, after the first sale, it has an opportunity to begin a relationship which may develop into a partnership.
Pursue any activity that preserves or enhances the relationship with your most valuable asset, your customer. As management guru Peter Drucker points out, “The customer is the only reason for any business to exist.”
I couldn’t have said it any better!
Look out for the next three parts in this series:
Part 2: Assessing the Customer’s Perceptions and Expectations
Part 3: Investing in Customer Solutions
Part 4: Using Customer Data Effectively
This post first appeared on my blog, The Customer Institute, on May 7, 2008.
Related Resources in the Graziadio Business Report
Cultivating the Customer Asset by William Bleuel, PhD
Customer Satisfaction Measurement by Charles W. Fojtik, DBA, and John D. Nicks, PhD
Calculating the Strategic Value of Customer Satisfaction by Chic Fojtik, PhD