It is a ‘truth’ universally acknowledged that it can cost five times more to recruit a new customer than it costs to retain an existing one. (Not only am I misquoting Austen here but I’m being rather casual with the word ‘truth’ too; how much it actually costs you to recruit a new customer will vary enormously, of course.) But, having looked at where your customers come from in my last blog, it seems logical to look how much effort you should put into hanging on to them next.
So does customer retention matter?
It should perhaps go without saying that there are many benefits in retaining customers, even aside from the financial ones. Loyal clients typically spend more, are more likely to hang around in uncertain times and may even become your advocates, recommending you to others. I’d also argue that loyal customers are more likely to tell you if something is up so they can also be early warning signallers if anything is going awry.
So, whether it’s five time more or not, the much over-used phrase does remind us not to forget our regulars. For larger organisations, particularly those who have Sales teams, the constant pressure to recruit more customers can mean losing sight of some other, perhaps more important measures and actions. Knowing the lifetime value of your customers (CLV) could inform decisions on where to focus your efforts most effectively, for example.
Big vs Small
The ‘new versus retained’ equation will vary for every business and every business model. But I’d dare to say that most small business probably haven’t even made a start on working out their own sums. Which is missing a trick because, when it comes to customer retention, I think small businesses actually have the edge over larger ones.
Why? Small business owners – generally – tend to know their customers personally. They are the people who recruited them in the first place and probably have the working relationship with them. In short, small business owners have the kind of customer relationships that multi-nationals would give their eye-teeth for but simply can’t manage because of their size. Small businesses should be leveraging that advantage!
Calculate your CLV
As I’ve already suggested, the answer to the question about how much effort you put into customer retention will depend on a number of factors but getting a handle on your Customer Lifetime Value is a good place to start. (Here comes the science bit…!)
How to calculate it? You’ll need three pieces of information: the average purchase (or invoice) value of your transactions; how often, on average, your clients purchase (the frequency) and; how long a typical customer continues to buy from you. You then multiply these together:
Average Purchase Value x Purchase Frequency x Customer Lifespan = your CLV
For example: If the average value per transaction is £150 x they buy monthly 12 x and typically stick around for 5 years = £150 x 12 x 5 = a CLV of £9000 per customer (on average).
It might be helpful to segment clients into groups that share similar traits and calculate your CLV by segment. For example, a florist might group wedding clients separately from regular clients. Wedding clients might bring in thousands for their wedding but not very much otherwise; a regular client, who buys flowers for their home or family perhaps once a month, might actually have a higher CLV.
Information is power!
Once you’ve played around with the maths, perhaps created separate customer segments and come up with a value(s), you have information that is very definitely actionable. I would argue that it doesn’t matter if it’s not 100% accurate; simply going through this process as a conscious one is incredibly useful. As long as the CLV number(s) you have come up with feel about right to you, they will be a great guide.
So, returning to our florist example, let’s say that the CLV of wedding clients is about £2,500. A wedding is a lot of work so they only take on 10 or 12 per year. Knowing that their maximum wedding income (not profit, remember) will not be much more than £25,000 might mean that they can be a bit choosier about which wedding fairs they are paying to attend. On the other hand, regular clients work out to have a CLV of about £6,000 and the effort required to fulfil their orders is more spaced out and less intense. So a nice bank of – say – 50 regular customers would actually bring in more than the wedding clients each year. Perhaps it would be worthwhile spending a little more (money or time) on keeping those regulars engaged?
How to retain customers
Once you understand what your customers are worth (financially or otherwise) and how long they’re likely to work with you, you are in a strong position to work out the right balance between sales vs retention activities. Here are some strategies that you should think about building in.
Set your customers’ expectations and always meet them – it’s not enough to make a good first impression, you need to be consistent with every interaction in order to build trust. And it’s not necessarily about delivering the highest quality; it’s about being clear on the level of quality (and price) you can provide and always meeting that.
Make it personal – as a small business, you know your customers better than most so use your insight to tailor communications, offers or support to their individual needs. The personal touch will let your customers know that you understand and value them. (That’s not to say that eshots or loyalty schemes aimed at your entire customer base might not be useful too, but they will have more impact if you can tailor or segment them to suit.)
Engage, educate and perhaps even entertain them – many businesses spend time onboarding new clients, explaining how their product or service works. But do they then continue to provide that level of support afterwards? Few do. However, useful updates, ideas, FAQs and so on provide value to your customers that will keep them coming back. (Quality communications could also an opportunity to upsell other products or services too).
Monitor activity and act on feedback – keep a handle on purchasing patterns so that you are aware if something is missed. A regular client not ordering (say) their usual anniversary bouquet could prompt a gentle “is everything OK?” message. This is either a) a useful reminder if the client has genuinely forgotten, b) is a thoughtful message if things turn out not to be OK, or c) elicits the useful feedback that a new florist has opened and they have given them a try this time instead. Either way, you’ve gained some information you can act on. Of course, you don’t have to wait until something is amiss to ask for feedback, but ask because you actually want to know, not because you feel you should ask.
So, should you put more effort into retaining your customers?
As I hope I’ve demonstrated, really only you (and perhaps your marketing professional) can answer that for your business. However, I’d say that putting customer retention at the heart of your marketing isn’t just smart, it’s sustainable. By delivering real value, listening carefully and maintaining a personal connection, you can grow a base of supporters who stay, spend and advocate for you. The result? Better stability, stronger growth and a business that people feel good about returning to.