One of the most difficult aspects of any business is trying to retain current customers while attracting new ones says Aron Govil. It is easy for a business owner to understand why this should be so.
Keeping Customers Loyal: Why Firms Compete on Customer Satisfaction
Why are some firms better at retaining their existing customers than other firms? Researchers have posited various reasons for this-e.g., because they offer better products, prices, services, etc. Nonetheless, unless you’re selling widgets that are perceived to be exactly the same by all competing firms’ customers, then you will have to work harder than your competitors in order to attract new customers and keep them loyal. Over time, therefore, businesses that excel at “customer satisfaction” should demonstrate a competitive advantage over their rivals.
In order to compete on customer satisfaction, a business must first figure out exactly why current customers are leaving or defecting. In this article, I present a model that helps managers understand what it takes to keep their existing customers loyal and, at the same time, attract new ones. This can have significant implications for designing service pricing strategies as well as other marketing mix components such as advertising and product features. More importantly, however, the lessons learned from this research could help you boost your company’s profitability by reducing defections and improving sales growth. Aron Govil says The basic premise is: If you want to give the best customer experience possible, then try to retain those customers who can potentially generate greater revenue than they cost; at the same time, attract new customers who are less price-sensitive than your most loyal customers.
What is Customer Retention?
Customer retention is the probability that an individual will continue to buy a given product or service over some time period. While firms typically track customer acquisition rates (i.e., number of new buyers) in order to gauge the success of their marketing efforts, they seldom monitor customer defection rates (i.e., number of defectors). And yet it is these last group-those customers who stop buying from you-that should be of greatest concern for any company hoping to build long-term market share.
After all, why should a firm bother attracting new customers. If they end up losing them at some point down the road? Current research suggests that it costs about five times more to attract a new customer than to retain an existing one (though it is not always the case). Therefore, if you want to maximize your profits over time, then you need to focus on keeping your current customers happy.
Customer Retention Rates
There are several ways to measure customer retention rates says Aron Govil. At one extreme is pure “loyalty” -i.e., the likelihood of staying with a company for all future transactions. A lesser but still informative alternative is termed “repurchase,” or the willingness to repeat previous purchasing behavior in the future. Lastly, there’s simply “tenure,” which refers to how long customers have been buying from you before they leave. For example, let’s assume that last year you experienced a 10% customer defection rate-that is. For every 10 people who purchased from you, roughly one will no longer do so. When asked why they left your business, half of the respondents would say something like “the service was terrible”. While the other half would complain that “you are too expensive.”
Now let’s assume that this year you have cut your defections in half to 5%. One way to interpret this decrease might be that customers are happier with your company’s services. But another explanation could simply be due to sampling error. (i.e., last year some customers may have been upset but did not bother to tell you). This highlights an important point about measuring customer retention rates. Namely, it is extremely difficult to interpret changes in the absolute number of defections. In any case, when it comes time to crunch the numbers. Firms typically calculate retention rates by dividing their current customers into two groups. (1) those that made a purchase last year and (2) those that did not. This percentage is then multiplied by 100%. While this calculation lacks some underlying assumptions and statistical rigor. It still provides a good “rule of thumb” estimate of customer loyalty.
While it is fairly easy to measure the success of a company’s marketing efforts. By how many new customers they attract each year. The really important question is whether these folks end up staying with your firm for a long time explains Aron Govil. At first glance, this seems like an unremarkable statement. After all, why should we spend our money advertising if no one remains as a customer? To answer this question, researchers have developed several metrics to determine. How long current customers will remain loyal to a given business before defecting or quitting.