Published February 2003

It costs less to keep customers than
to replace them

Depending on your industry, it costs three to 10 times as much to replace a customer than it does to retain them. Common knowledge, yet most companies direct more resources toward acquisition strategies than retention.

Rule No. 1 of customer service: The customer is always right. Rule No. 2: If the customer is wrong, refer back to rule No. 1. The point is, even when a customer is wrong, pointing that out won’t make you right — or profitable.

These statistics (recent study by AMC Inc.) identify the reasons customers leave:

• Move or die, 4 percent.
• Friend at other company, 5 percent.
• Competition, 9 percent.
• Product dissatisfaction, 15 percent.
• Lack of customer contact, 67 percent.

Competition has less to do with customer attrition than communications. In other words, we’re not losing most of our business to brand X, we’re letting it go.

Customer-centric manufacturers do continual quality process improvement. They constantly look for ways to increase productivity and quality while decreasing inventories and scrap rates. Their quality principles apply to all businesses, regardless of size.

Follow their sequence to develop a winning customer retention strategy: analysis, objectives, strategies (better include regular customer contact) and measurement.

• Analysis: Before you decide where you are going, you need to know where you’re at. Start by establishing a baseline. What is your current retention ratio? What percentage of your customers are you retaining vs. losing (on an annual basis)? Another important metric is the life cycle of a customer. A customer, like any other asset, has equity. That equity is measured in the lifetime market value (LMV) of your average customer. Extending your LMV is the most cost-efficient way to increase revenues.
• Objectives: After you’ve calculated your baselines, establish (and document) realistic performance targets, e.g., increase customer retention ratio X percent by X date. Be sure to communicate baselines and targets to all stakeholders.
• Strategies: Now that you know where you’re going, how do you determine the best path to get there? The answer won’t be found in the boardroom. Ask your customers (including those you lost) and front-line staff — they know where the problems and opportunities reside. Gathering feedback, however, is only useful if you act on it. One way to improve customer service is to remove functional silos. Everyone in your organization, regardless of position, should be a customer-service emissary.
• Measurement: As you implement your retention strategies, continually track impact and outcomes. Concentrate on the most effective strategies and drop those that don’t move the needle.

Although disseminating policy is important, outstanding customer service has more to do with culture than communication. Management needs to lead by “front line” example. I’d opt for modeling over memos.

Recognition and reward are good ways to adopt a culture change. It is nearly impossible to have truly satisfied customers unless you have satisfied employees.

Happy customers stick around and refer their friends and associates to your business. So lowering customer attrition will, in effect, increase new customer acquisition. What it really boils down to is relationships, not policies.

Andrew Ballard, president of Marketing Solutions Inc. in Edmonds, develops brand leadership strategies for businesses and teaches strategic marketing through Edmonds Community College. He can be reached at 425-672-7218 or by e-mail to andrew@mktg-solutions.net.

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