The main focus of all sales and marketing departments is to increase the company revenue, which typically implies acquiring new customers. As a result, many salespeople emphasize the importance of new clients and forget a crucial stream of revenue – existing clients.
However, according to Marketing Metrics, the success rate of selling to a new customer is only 5-20%, which pales in comparison with the success rate of 60-70% when it comes to selling to existing clients.
More importantly, the existing clients provide as much revenue as new client acquisitions, according to Super Office. This means that most businesses may be overlooking their main stream of revenue by forgetting about their existing consumers.
Many business think that a great product or service is enough to ensure a high customer retention rate, but this couldn’t be farther from the truth. Of course, offering a high-quality product certainly helps retain customers, but it’s far from the decisive factor.
In fact, the main reason businesses lose existing clients has very little to do with the product or service that they offer. In the overwhelming majority of cases, the primary factor that made clients leave a company comes down to the feeling of importance and worth that the businesses fail to instil into their customers.
Now, it’s clear that customer retention is an essential part of modern business and that it requires special attention. In the following article, we will first define customer retention, its metrics and characteristics, as well as explain how businesses can grow their revenues by simply working with their existing clients.
What is customer retention?
Customer retention refers to all activities and actions that companies and organizations take to retain their customers and establish a lasting relationship between the company and its clients.
The goal of customer retention strategies and techniques is to reduce customer churn through various loyalty programs and initiatives. This means that customer retention should begin with the first contact that the client makes with the company and lasts for as long as the customer continues to use the company products or services.
Customer retention metrics
Businesses often implement customer retention tactics to increase their profits, while minimizing their expenditures. In fact, one study recently found that it can cost up to five times more to acquire a new customer than to retain and sell to an existing one.
Customer retention metrics come down to two simple factors: the attrition rate and the retention rate. The attrition rate represents the percentage of customers that the business has lost over a given period of time. As such, it represents the exact opposite of the customer retention rate.
Calculating the customer retention rate requires basic knowledge of mathematics. In fact, the following formula will give you the exact retention rate:
{(CE-CN)/CS} X 100, where
CE = Number of customers at the end of any given time period
CN = Number of new customers acquired during the time period
CS = Number of customers you had in the beginning of the time period
For example, if you want to calculate your customer retention rate for the last financial year, your formula could look like this:
{(600-200)/500} X 100 = 80
Here, CE = 600, CN = 200 and CS = 500. This returns the customer retention rate of 80% for the last financial year.
Why you should invest in customer retention
Customer retention is not only more affordable than customer acquisition, but it also provides companies with an additional source of revenue. Here, we will list out a few reasons why you should invest in customer retention.
Provides better conversion rates
Existing clients have already gone through the entire sales cycle. Unless their purchase experience was negative, you’ve already built up trust and confidence in your product or service. You’ve established a relationship with them and gathered information about their preferences, needs and desires.
In other words, you have more information at your disposal, which allows you to tailor a personalized approach for each specific customer. More personalization equals better conversion rates.
We have already explained how CRMs improve the customer experience by allowing businesses to create a unique approach for virtually every client.
On top of all that, businesses that improve their conversion rate by just 5% can potentially increase their profits anywhere from 25% to 95%. This means that you may be missing out on an additional source of revenue that could easily double your business’ growth, if you don’t work on your existing clients.
Requires less marketing resources
We’ve already mentioned that upselling to existing customers requires less financial resources than acquiring a new client. In fact, it may take up to 16 times more resources to acquire a new customer than to establish a productive long-term relationship with an existing consumer.
In other words, loyal customers are the lifeblood of each business. They require minimal investment and generate significant incomes.
Offers room for improvement
By listening to customer feedback and assessing your service on a regular basis, you will be able to identify the potential improvements to create a better service for your customers.
As explained in an earlier post, CRMs are the ideal solution for collecting customer data and feedback. These systems don’t just store the most important information, but they also represent it in a user-friendly way, allowing company representatives to develop and execute data-driven business strategies.
A better service equals a better customer experience, which in turn means higher revenues.
One of the best ways to improve your customer experience is to offer generous refunds or returns. A friendly returns policy will keep your clients coming back for more and it could even boost your sales numbers. A recent study found that companies with no refund or returns policies may be losing up to 10% of their net sales.
Final words
Although new clients are the driving source of growth, companies cannot afford to lose existing customers either. The global value of a single lost customer is $243 and the number is even higher for most tech companies.
The existing customers are a fantastic opportunity to generate more revenue, as they are the most likely to make purchases.
However, that’s not an easy task, especially if your business does not rely on any advanced technologies to monitor and follow your existing clients. Without a clear system, many business opportunities are bound to be lost.
That’s why a customer relationship management system, like Simply CRM, is vital for the success of any growing business. If your company needs better organization and communication, you should consider using a free trial and testing first-hand what Simply CRM can do for you.