Denice R. Preston
Today, startups are focused on growth and will do anything to achieve it. This practice often compromises the health of a business. This article examines the benefits of focusing on retention from the very beginning and how it can be achieved in the long term.
Retention increases revenue
Keep customers longer, and you can make a significant impact on your bottom line. As shown in the above chart, benefits are not immediately realized. This is important because, as a founder, it takes a lot of grit to explain that so much time and effort are being spent on maintaining existing customers. Your “new customer” numbers will suffer a little. This is fine! You’ll see the payoff within 12-24 months, which might seem distant but isn’t when you consider the average lifespan of a business.
Real-life cases and examples support the findings of these studies. In a recent Report based on a global survey of 300 CEOs, media and retail executives, and other key stakeholders, one of the most important findings is that Retailers and Publishers who increased their expenditure on retention over the past 1-3 years were more likely to increase their market share by nearly 200% in the previous year than those who spent more on acquisition.
Three factors are responsible for the increased revenue potential that comes from focusing on retention.
By focusing on retention, you can reduce churn and increase your customer base with fewer customers.
Loyal customers spend more per order.
Loyal customers have a higher lifetime value.
Retention Focus Reduces Churn
Focusing on retention can increase long-term revenue in two ways. The first is by reducing churn. Churn is the term used to describe customer loss or attrition.
Controlling a company’s churn can be important, as it is easier to keep existing customers than acquire new ones. In my model, a lower churn rate was one of the main drivers of success for the retention-focused approach (Chart 2).
Other industry studies have also confirmed the findings of my model. Sailthru’s study states that “45% of [retention focused companies] have not seen an increase in churn in the past year, as compared to only 33% of acquisition-focused firms.”
Good customer service and a reduction in churn are sure-fire ways to increase revenue. Recent HBR research found that positive experiences with customers are associated with a strong increase in future revenue.
Despite the fact that this seems so obvious, many startups fail to focus on it. While they grow their businesses, many struggle to reduce churn. This is often due to an obsession with growth over company health.
A retention-focused approach will, in the end, reduce churn. Lower churn leads to more returning customers, which results in better long-term growth.
Loyal customers spend more.
Loyal customers are more likely to spend than new ones.
Researchers found in a study conducted by Echo for American Express that “customers spend more money with companies who provide excellent customer service.”
Two-thirds of consumers say they would be willing to spend more on a company that provides them with excellent customer service. This is a slight increase from the seven out of ten who said this in 2011 (66% were in 2012 and 70% in 2011).
On average, they are willing to spend an additional 13%.
Similar to last year, three out of four consumers said they had spent more money with a particular company due to a positive history of customer service experiences. (75% in 2012 compared to 73% in 2011).
This is based on several other studies. a Bain & Company study found, for example, that “Repeat buyers spend more and generate bigger transactions.” Our study found that the longer a customer has been with an online retailer, the more money they spend in a certain period.
This highlights an important point: Loyal (or new) customers will spend more on each order. It means that you will get a higher average dollar per order per customer if you ensure that they come back again.
Loyal customers spend WAY more over their lifetime as a customer
The lifetime value of a customer is another important reason for focusing on retention.
Customer lifetime value is the value that a customer has accrued throughout their relationship with your business. Focusing on retention will result in lower churn, as mentioned above. This leads to a longer customer lifetime. This leads to a higher customer lifetime value.
The difference between loyal customers and those who aren’t can be quite significant.
In the RJ metrics study, one of the main findings was that the top 1% of eCommerce customers spent 30x more than average. These customers’ lifetime value is not just a little bit better; it’s significantly better.
It is amazing to see the difference between loyal customers and non-loyal ones. It shows that loyal customers do not just spend more money with you throughout their lifetime. They buy MUCH more. As customers grow more loyal to you, they tend to become “addicted,” and their frequency of purchases will increase in a logarithmic fashion over time rather than linearly. This effect is compounded, of course, by the fact loyal customers tend to spend more per order (as described above).
Retention increases profitability
The section above focused on how a strategy that focuses on retention can help you generate more revenue in the long term. The other side of the coin, however, is that a strategy aimed at retaining customers can also help increase your company’s profitability.
Three main reasons are given for this:
Retention-focused strategies help you control your fixed costs.
Your customer acquisition costs will decrease as loyal customers spread the word.
Upselling to loyal customers is easier than upselling to new customers.
Retention is the key to keeping your fixed expenses in check
The effect that a strategy focusing on retention has on the fixed costs of your business is one of the most important things I’ve discovered.
A strategy that focuses on acquiring new clients quickly can often lead to the need for a quick sales team. The problem is that labor costs a lot! Your best asset is also your most costly. Employees are the largest expense in many startups. Try slowing down the growth of your sales team to match your turnover rate. You should avoid hiring salespeople to achieve the same revenue growth figures.
You may be scaling before you have reached Product-Market Fit if you focus too much on growth (at all costs). Building a sales force for a product that customers don’t stick with is a waste of time. Please be careful and thoughtful as a founder to avoid falling into this trap.
You could hire salespeople from large companies like Oracle, Goldman Sachs, or Target. Let’s assume your new sales team is actually achieving the goals and metrics of bringing in more business. Due to churn, you are losing customers and may overlook the importance of your churn rates in determining whether your business is built to last.
When you’re looking to scale, don’t hire salespeople just because that’s “what you do.” To build a lasting company, I would strongly recommend that founders focus on their company’s health, their product, and their immediate team.
