When it comes to Customer Retention, you can do better
Most companies retain 85% to 87% of their customers. That’s not bad. In school, you’d get a B+ for that kind of performance. But when you convert that retention rate into actual customer losses, you quickly see that there’s a “hidden problem” here.
After all, when you retain 87% of your customers, you lose 13%. And when you have a huge nationwide customer base, that means millions of customers are packing up all their accounts and heading for the door each year. (see Case Study for tips on how to improve).
That’s a lot of lost business. And it takes an extraordinary amount of effort and expense to acquire new customers to replace this customer attrition. In fact, GartnerG2, a division of Gartner Inc., says it costs nearly five times as much to acquire a new customer as it does to retain one. High value customers are even more expensive to replace.
Some attrition comes with the territory
That brings up the big question: “Why do customers leave in the first place?” There are a lot of reasons.
In banking for example, some customers move to areas where the company doesn’t operate any banking centers. Some find that they no longer need their services. And some, unfortunately, come to the end of their lives. Let’s face it. There is nothing you can do to keep a customer who dies or moves to Tahiti.
In addition, some banks close out accounts every year for valid risk management reasons. Add it all up, many banks lose about 6% of customers every year for reasons that they can’t – or shouldn’t – do anything about.
Keeping more customers can add millions to the bottom line
But what about the rest of the customer attrition? Most of the customers are lost for a host of reasons that companies CAN do something about.
Poor or inhospitable service, payment and deposit errors, inconvenience, the failure to provide the value people expect . . . if you work hard to correct these problems you can retain many of these customers. And if you do that, you can create an annuity revenue stream the size of the Mississippi.
Even a small increase pays big dividends
How big is the potential windfall? At a large bank, a 1% increase in overall customer retention was found to add about $70 million to the bottom line in the first year after improvement. At the two-year mark, the net present value (NPV) jumps to $200 million. After three years, the financial benefits – which multiply like compound interest – will reach approximately $400 million in NPV.
That’s a pretty big return for a marginal 1% improvement. And when you improve retention by 3% or more, you’re bringing in more than a billion in NPV.
And remember. These are conservative figures based on current business with these customers, not future opportunities. So the bottom line benefits could be even bigger as you keep more and more customers and increase your share of wallet. That’s why from a business perspective, retention is the gift that keeps on giving.
Frederick Reichheld put it this way in his classic, best-selling book The Loyalty Effect: “. . . even a tiny change in customer retention can cascade through a business system and multiply over time.” It’s also a dynamic way to gain market share.
The first step on the road to improvement
When you understand the enormous financial windfall that comes from improving . . . and sustaining . . . retention rates, it’s easy to see why so many companies today are aggressively looking for ways to keep their customers.
But how do you get your retention efforts off to a good start?
One way to do it is:
- Establish the right metric and track it
- Set a daring goal
- Identify the customers who represent the biggest attrition problem . . . and the biggest opportunity for improvement
- Utilize all of the measurement and improvement tools (six sigma, Lean, TQM, etc.) at your command to keep these vulnerable customers from leaving
- Engage your organization and get them behind the effort