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Why customer retention is vital to your business

Written by Ian Renton on 12/12/2013 4:47:00 AM 0 Comment

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In all of my years in business, one of the most under-rated activities I see is client retention. It rates very low on the priority of many businesses and this is to their detriment. There are numerous statistics which show that a small increase in customer retention will result in a large increase in profit for your business. This is what a recent report from Frederick Reichheld of Bain & Company discovered.

 
  1. Acquiring a new customer can cost up to 7 times more than retaining an existing customer.
  2. If you do nothing to retain your current clients, then over a period of five years, you could expect to lose as many as 50% of your customers.
  3. If you can increase your customer retention rate by as little as 5%, then your increase in profits will range from 5% to 95%.

Source: http://www.businessfast4ward.com/small-business-marketing-strategies-customer-retention-vs-customer-acquisition/

One of the most important things you can do to improve the long term profitability of your business is to increase the Lifetime Value of your customers. This is defined as follows:

Average Sale * Number of Sales Per annum * Number of Years as a Customer.

The final part of the equation is critical to the value of your database. For example, if you were able to retain more customers so they stayed on average with your business for five years instead of four, then you have just increased the lifetime value of your customers by 25%.

It is a little tricky to measure your customer retention rate but here is my formula.

After you have determined your relevant time period, here is how you measure customer retention. It is:

Retained Customers = Number Of Customers Today – New Customers Acquired During This Time Period.

Customer Retention Rate = Retained Customers/Customers At Beginning of Time Period

Here is an example:

Suppose a business considers that a customer is lapsed if that person or organisation has not placed an order for one year.

Customers Today = 2,600. Customers One Year Ago = 2,500. New Customers in Last Year = 600.

Retained Customers = 2,600 – 600 = 2,000

Customer Retention Rate = 2,000/2500 = 80%.

Also, Growth in Terms of Customers = 2600/2500 – 1 = 4%

Now, a customer retention rate of 80% is quite good. It is almost impossible to retain 100% of your customers. However, if this business only retained 70% of its customers, then it would now have only 2,350 customers (0.7*2500 + 600) and this would mean that this business would have shrunk by 6% (2350/2500 – 1) in terms of its customer base.

As a relatively new member to Bartercard, there are three things I have noticed about my customers who choose to pay for their goods with Bartercard.

  1. They buy more than one product. Cross-selling is quite common with Bartercard members.
  2. They make regular repeat sales, often quite large.
  3. Most importantly, they are loyal. My customer retention rate for Bartercard members is close to 100%. Rather than leave, Bartercard customers just want to buy more and more.

There are four ways to increase customer retention.

1.    Improve your products and services.
2.    Improve your customer service.
3.    Improve your marketing.
4.    Improve your customer relationships.

Again, you can use Bartercard suppliers to improve your marketing and retain more clients. You can use Bartercard for radio advertising, to access printers and signage companies, advertise in magazines or even on buses, improve your website, get more traffic to your website, get publicists and much more.

Similarly, you can improve your relationships with your customers by sending your customers corporate gifts, calendars, fridge magnets, Christmas cards, birthday cards, e-cards and much more. Again, these products can also be obtained on Bartercard.

It is vital that you have procedures in place to increase your customer retention levels as it will have an enormous impact on your future growth and even your viability as a business in the future. The first step is to take the time to measure your customer retention. Then strive to increase it each year.


Ian Renton
Managing Director
Australian Christmas Cards
sales@austchristmascards.com.au
www.austchristmascards.com.au

Ian Renton is the owner of four businesses, Australian Credit Stationers, Australian Christmas Cards, Renton's Labels and Renton's Printing. His businesses provide account stickers, Christmas stickers, corporate Christmas cards and e-cards, corporate birthday cards, thank you cards, calendars, custom labels and general printing to thousands of businesses in Australia and New Zealand.

Ian's ideas on debt collection whereby the next sale is just as important as the collection of the debt have been featured in The Australian Financial Review.

Ian is the author of Debt Collection Made Easy, an easy guide to collecting your money quickly and efficiently as well as a thorough look at the local court system and how it can be easily used to collect money yourself at minimum cost to you.

His next book about Customer Retention is due to be published in 2014.

Ian Renton is also the writer of his fortnightly ezine, SmallBizTips, now read by approximately 10,000 subscribers and his monthly printed newsletter, Customers For Life.

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Topics: customer retention, Bartercard

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