The Importance Of Customer Retention

Keeping an existing customer is much cheaper than signing a new customer, around 5X cheaper in 2018. But the amount of effort that goes into retaining customers is less than half of that which goes into signing new ones. But why is this the case? Surely it’d be better to aim to keep customers than get new ones?

Despite how expensive it is to sign a new customer to any service from a business, most companies put their effort into getting new ones. This is mostly because of one simple matter; growth potential. For most businesses, even though it’s cheaper to keep old customers, there is no room for growth by keeping the original client base.

Take a mobile phone network as an example, such as TalkTalk or O2. Their existing clients are bound by a contract, usually 1-2 years, and after that they are free to either renew or cancel. Now this is a small window where the client will not have a usable network, so focussing on client retention year round is a very large resource cost for a small demographic. The company would bring in more money by seeking new customers, because although they are more expensive, it’s a year round campaign bringing in money.

Most companies are always seeking growth, because growth means not only more profits, but works towards a stable client base and brand recognition. It’s rare that a business in an emerging market will avoid seeking new clients, and those industries are usually high earning ones. Lawyers and accountants are the main examples here, where their service quality is a direct consequence of how many clients they have. Too many, and they cannot cater to everyones needs. Too few, and staff will have nothing to do at times. It’s a delicate balancing act for these businesses, but it does mean that they tend to retain their clients for a long time.

The industry measurement for the value of a client is simple, but many companies still choose to go against the recommendations. Customer Lifetime Value (CLV) is an estimate of how much the customer would spend with the company over a set period of time, usually their potential life using the business or to retirement. This gives an accurate representation of how much you could expect from that person if they stayed with your service. However, this measurement doesn’t include overheads and costs associated with keeping this customer. Even though the CLV of a person may be in the thousands for a mobile phone network (example used above), it is still more cost efficient to find new customers for a few years and then lose them.

For many businesses, it’s simply not possible to retain a customer for more than a few years. With the advent of price comparison websites and such, it’s easy for the customer to try and find a better deal on their services, and most people will value savings over loyalty. This is again different in service driven businesses, as service can be seen as a worthy investment. But for product driven services, it’s better for the customer to get a deal on the same product.

The simple fact is that in todays world with multiple possible vendors for services and products, client retention is much harder than it’s ever been. Keeping an extra 5% of clients can raise profits by 25-70%, but the amount of money that goes into keeping these clients adds up over time to make it no longer viable. Most businesses will offer a small discount to existing customers, but they won’t go out of their way to save you when they could be finding new customers to grow their client base. Some customers always stay on with a service, and that’s more than enough for most companies.