Focus on Retention: The Cost of Not Delighting Your Customers

Tami Wessley
Posted by Tami Wessley on April 17, 2015


When was the last time you critically reviewed your slate of customers and evaluated how healthy your relationship is with them? If you’re like many businesses, the answer is probably “never." In most cases, as long as there are enough customers in the database and the orders are rolling in at an acceptable rate, companies tend to feel their customers are loyal and healthy. Unfortunately, that’s not always true.

Chances are, even if you have a lot of really healthy relationships, there's also a fraction that would fall into one of these four categories if you asked them:

  • "We're not thrilled by working with you, but we don’t currently have a viable alternative."

  • "The only thing keeping us with you is the energy-zapping, complex effort it takes to switch partners."

  • "Our relationship looked great on paper, but now, the relationship is strained." In addition, your team is frustrated, and you'd rather not take their calls.
  • "We love you! We'll never leave!" But, they don't pay much—and their work orders are a continuous drain on your staff.

The first two categories represent risk in that they could potentially create a significant financial hole at any time, without you even seeing it coming. The second two problems—while not as immediate—are unhealthy to your business morale and profitability. All four of these customer relationships have negative, long-term financial impact.

A good, objective review of every customer should be part of your ongoing business analysis to understand where retention efforts are needed, or where customer churn might actually be desirable and worth the cost of acquiring replacements.

The Value of Retaining Poor Customers vs. Finding New Customers

Depending on the industry, it can cost from 3–30x more to acquire a new customer than it does to keep an existing customer. In financial terms, that's extremely expensive.

Let’s assume for demonstration purposes that Company A’s annual churn rate is 10% and they just happen to have 100 customers. So, they have to replace 10 customers every year to remain whole. Let’s also say keeping a customer costs $1 and acquiring a customer costs $15 (15x). If they have to replace all 10 customers, their cost is $150—versus $10 if they keep their at-risk customers. Even if they manage to keep just 5 of their at-risk customers, their total costs are cut by nearly half!

When that cost is incurred to replace a valuable customer, it can be a real hit financially, and it's frustrating for your team to find a comparable company to add to your roster. But, keep in mind if a customer is costing you on a regular basis, a true analysis should be reviewed—it might be worth the replacement cost.

Chances are your acquisition/retention costs are significantly greater than the $15 vs. $1.00 example used above; that can really add up! Even retaining 5% of your otherwise lost customers can have a significant impact on your bottom line.

Understanding Customer Relationship vs. Going with Your Gut

You can’t analyze what you can’t measure. To evaluate your customers and get a true reading of your best and worst, you’ll need more than you gut. Sure, you likely have a good feel for which customers are truly healthy but identifying what really makes a healthy customer for your business and prioritizing those components is extremely important for keeping your at-risk customers positive.

Begin by asking yourself a few questions:

  • What are the best indicators of loyalty? These might include things like years as a customer, budget trends, orders/SKUs purchased, engagement with your company or referrals.

  • What are best indicators of profitability? Just because a customer spends a lot with you, doesn’t mean they’re profitable. As mentioned above, if your team is spending an inordinate amount of time with a customer or other opportunities are being lost because of them they aren’t truly profitable. If you can identify and quantify profitability indicators, those will play an important part in their overall health rating.

  • What red flags are clear signs of an issue? If a customer is often engaged with your customer care department, lodges frequent complaints, has demonstrated an adversarial attitude or, conversely, stopped engaging with you all together, chances are this customer is in need of intensive rescue. Your customer facing and financial departments are likely the best go-to sources for identifying these important red flags.

Assigning a Health Index

Once you’ve fully identified what constitutes a healthy customer for your business based on real, measurable attributes, you should assign a heath index to each. This will allow you to easily see which customers are scoring highly meaning they’re happy, managed well and are low risk for churn, those on the bottom of the scale needing attention and everyone in-between.

But, keep in mind a comprehensive index score should take into account both what you see in their behavior, and what they have to say. A one-sided ranking really won’t give you the full picture. A Voice of the Customer program should be in place to regularly gain insights directly from your customers. Just like every relationship, there are always two sides and each may have a very different perspective. Through your VoC, you’ll be able gain an understanding of what your customers value most from you and where you may have some opportunities to improve the overall health of the relationship. One of the most important components to factor into the health index is the Net Promoter Score (NPS) they give you.

Proactively Managing the Index

Like any other index, it doesn’t mean much if you don’t have a process defined for action requirements based on the scores. Managing the index means identifying:

  • Where effort and attention should be exerted

  • Where effort and attention could be redirected or streamlined

  • Where attrition may be welcomed or even potentially firing customers

  • What ratings add a customer to a watch list and may require further scrutiny

Defining that process can be a big undertaking, but when assigning real costs to those customers, it's clearly worth the time and effort.

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Topics: Marketing Automation

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