Why is Customer Retention Important?

The purpose of this piece is to suggest a cost-effective way to leverage a new customer from whatever means used, whether it is by direct mail, news paper advertisement, radio, phone book or some other resource. Customer retention has been a central concern of just about every marketing strategy since the Stone Age. The only difference between then and now is we use fewer clubs, hopefully.

Customer Retention = Higher Profit

The simple answer to the title question above is: customer retention leads to greater profits. In other words, keeping customers leads to selling more services or products. Cultivating an existing customer is far less expensive than seeking a single purchase customer. This is the most obvious advantage of customer retention because value is added through effective services or quality products that creates customer satisfaction. Repeat business benefits both the provider of the service or product and the customer through lower cost to the business, while the customer reduces their expenditure of time and money by not having to switch vendors.
Your business can directly benefit in a number of other ways when you and your employees focus on a customer retention strategy.

New Customers Cost More Than Repeat Business

Obtaining new customers can, depending upon the type of business, cost you five times more than satisfying and retaining existing customers. Obtaining new customers has certain costs associated with the effort. These include advertising, follow up, sales demonstrations, travel and meeting cost, to name just a few. Repeat customers already know your products or services, are aware of the order or renewal process, and can anticipate the quality of the transaction. All of this reduces the costs of attracting and servicing a new customer.
Further, repeat customers enhance the potential for other channels of advertising your business, for example, word of mouth. Word of mouth advertising is actually satisfied customers recommending you to their friends and neighbors.

Increase Your Customer Base

Increasing your customer base through development of repeat customers allows you the opportunity of building a relation with your customers that focuses upon meeting their specific needs and requirements. Thus, you have expanded your marketability while offering a service to your customers. As you gain a better understanding of your customers’ expectations, you will better able to meet their product or service needs. Thus, fostering an effective retention strategy will allow you to serve more satisfied customers. A number of studies have demonstrated how customer retention programs lead to improved relationships and increased sales through long term patterns of use of the same vendor.
Finally, customer retention has a direct impact upon your business’ profitability. Several studies have shown that a two (2%) percent increase in customer retention has the same effect on profit as cutting costs by as much as ten (10%) percent!
Service companies differ from retail businesses in terms of the average number of customers lost per year or service cycle, i.e., the number of useful years a product or service has before it must be replaced. The reality is that every business losses a substantial portion of new customers every year. A reduction of 5% a year in customers lost can represent an increase in profits as much as 25 to 125 percent, depending upon the type of business.
The bottom line is this: customer profitability rates tend to increase over the time you retain a customer.