We released our first Customers That Stick infographic this past Monday: When Customers Stick — Customer Retention by the Numbers. In the infographic, we included numerous studies that show that increased retention leads to increased profitability.
One aspect of this phenomenon that our infographic did not explore, however, was the following: Why does customer retention lead to increased profitability?
In their 1990 study — Value Managed Relationship: The Key to Customer Retention and Profitability — R. Buchanan and C. Gilles assert that the increased profitability associated with customer retention efforts occurs because:
- The cost of acquisition occurs only at the beginning of a relationship: the longer the relationship, the lower the amortized cost.
- Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
- Long term customers tend to be less inclined to switch and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
- Long term customers may initiate free word of mouth promotions and referrals.
- Long term customers are more likely to purchase ancillary products and high-margin supplemental products.
- Long term customers tend to be satisfied with their relationship with the company and are less likely to switch to competitors, making market entry or competitors’ market share gains difficult.
- Regular customers tend to be less expensive to service because they are familiar with the processes involved, require less “education,” and are consistent in their order placement.
- Increased customer retention and loyalty makes the employees’ jobs easier and more satisfying. In turn, happy employees feed back into higher customer satisfaction in a virtuous circle.
Of course, the above findings assume that the relationship with the customer is profitable in and of itself.
How to Retain Customers with the Power of Why
Assuming the core relationship is profitable, the reasons above provide managers and owners a roadmap for maximizing the profitability of retained customers.
For instance, Item 4 reminds us that one of the most important aspects of existing customers is their ability to evangelize our brands and to help us attain new customers through word of mouth. What are you doing to make customer referrals as easy as possible and even to incentivize them? Perhaps a loyalty program would be a worthwhile investment?
Item 5 reminds us that existing customers are more likely to buy ancillary or supplemental products. What are you doing to get other products in front of your exisitng customers, without being too salesly?
We know that retained customers mean more profit to our departments and organizations. Understanding the reasons behind that fact can help provide us guidance on how to maximize our retention and our profitability.
Citation: Buchanan, R. and Gilles, C. (1990) “Value managed relationship: The key to customer retention and profitability”, European Management Journal, vol 8, no 4, 1990. Excerpt taken here (pdf).