Return on Information: Smart Retention Always Wins
Hey, psst… I heard you want to grow your business.
One way to do that, of course, is to acquire more customers.
Another, perhaps less-often prioritized way to sustainably and profitably grow is by retaining more of your customers.
Do you know what your annual customer retention (or attrition) rate is?
Are you systematically addressing customer attrition?
Are you keeping your existing customers happy (and your profit margins healthy)?
A happy and, in turn, loyal customer is worth far more to your business than a new one over time. Satisfied customers buy more, pay higher prices and recommend your business more often — generating more revenue for your business without expensive marketing efforts.
It’s a no-brainer: keeping customers should be a priority in your business. (I’m sure you know this.) Yet, investing in the retention of every single customer is probably not the right approach. For the best results, it’s vital to know exactly which customers are worth keeping.
By knowing which customer segments are most valuable to your business, your business can pursue a smart retention strategy – one that is targeted and therefore more efficient and effective – and double your return on investment (ROI).
Let’s take a closer look at why targeted customer retention is the best bang for your buck.
Let’s imagine a midsize Canadian enterprise that spent $150K in acquiring new customers last year and generated a revenue of $750K.
The Canadian Enterprise also has a customer retention rate of 92% month over month, which at first glance seems pretty good. However, on an annual basis, this is a retention rate of only 40% of their customers from last year (yikes!). With this information about customer retention (or lack thereof) the Canadian Enterprise has reason and opportunity to increase the retention rate. An increase of only 3% month over month increases annual customers retention from 40% to 57% — a significant difference!
In my analysis, this 3% increase in monthly retention leads to a 55% increase in ROI (Scenario 2). More retained customers mean more opportunities for sales, cross-selling, and new customers via referrals (who buy more!)
The gains from Scenario 2 (some retention) are slightly greater than in Scenario 4 (replace with new customers). But since the difference in revenue is small, it’s understandable why a company would choose to chase new leads rather than invest in customer retention.
But this completely changes in the case of smart retention strategy (Scenario 3). With the knowledge from a fully comprehensive customer segmentation study, you can invest time and effort into retaining the right (most valuable) customers and yield a significantly higher ROI.
First, we can focus on retaining only the best 80% of customers and reducing our retention costs. Then, with customer segmentation insights in hand, we also know who to target and when to increase cross-selling success and referral rates.
Even a modest increase in cross-selling (+5%) and referrals (+2%) leads to big jumps in revenue between some retention and smart retention and twice the ROI!
By making strategic choices and investments in their best customers, this midsize Canadian Enterprise increases customer retention by 3% and generates a 120% increase in ROI and stands to make ~$300 thousand more in revenue in just one year (Scenario 3 – 1).
We like to say that the worst strategy is no strategy at all.
The team at New Territory can tell you exactly who your high-value and high-potential customers are (and why) so you can maximize the return on your investment to keep them.
Our modular program allows small and midsize businesses to gradually uncover and capture new opportunities to grow profitably beginning with an analysis of your current active customer base.
Module 1: Audit Performance is a multi-dimensional deep dive into the value of your customers to your business over time. Relative Revenue is one thing we look at, of course but we also consider Product Adoption, Net Return Revenue and Tenure.
We then analyze this data for the purpose of clustering customers into high, mid and low value “segments”. Each segment is then evaluated independently to identify characteristics that are common within it as the customer’s industry, geographic location, or maturity.
It’s this integrated information about the true long-term value of your customers that supports the execution of a stand-out customer retention strategy as described in Scenario 3 above.
We provide our clients with this incredibly useful information at a cost less than 3% of the Net Revenue calculated in Scenario 3 (smart retention) above.
Would you like to know more?
Book an introductory meeting with me today. I’d like to meet you, get to know your business and share more about what we do for Canadian Enterprises at New Territory.