The Importance of Customer Retention: Why Your Marketing Budget May Be Upside Down
Here’s a marketing exercise for you: Imagine that around 80 percent of your company’s revenue in the future is going to come from just 20 percent of its current customers. Then, think about how you can best allocate your marketing dollars. Would you spend the bulk of your budget trying to acquire new customers when the big payday lies in keeping the existing ones, and keeping them happy? Or would you invest in customer retention as a top priority?
If that sounds like a no-brainer, then how do you explain the fact that online merchants do indeed continue to funnel 80 percent of their marketing budget into acquisition, rather than on building the relationships with the customers they already have?
That’s the surprising reality, as extensive research regarding the importance of customer retention makes clear. For one thing, the studies show, a business can shift the focus to keeping the customer they already have for only one-fifth of the cost of reeling in a new one. And doing that increases brand loyalty and advocacy, and maximizes customer lifetime value.
The numbers tell the story
It’s certainly in the ballpark to say that many online merchants would find a three-percent conversion rate at or near a solid target. But the cost of attracting 100 people to a site in order to turn three of them into buyers is never insignificant, whether that means paying Facebook or Google for clicks or staffing a strategic marketing campaign. In many cases, the revenue from the new customers may not even cover the cost of acquiring them.
Hence, the importance of customer retention, even before factoring in the reality that some considerable portion of the three percent will churn, making only that single purchase – before disappearing forever.
The clear lesson is that companies need to treat each existing customer as the special individual he or she actually is – because the company’s fortunes will rise or fall on how well it does that. That’s always been true, but never so much as today, when customers expect a personalized experience, and choose the merchants they continue to patronize based largely on how well the businesses deliver it. To put another number to it, the White House Office of Consumer Affairs estimates that a loyal customer is going to spend over time ten times as much as the value of their original purchase
Today, when customers do abandon a business it’s far more likely to be a reaction to a poor customer experience than to any other factor, price included. In fact, one study revealed that customers are willing to pay more for high quality, personalized service.
Customer retention results from customer satisfaction
It’s a straightforward equation. A customer who feels personally valued and respected is one who is most likely to become a returning customer and, over time, a loyal, long-term, and highly profitable customer. But the question is, how does a company establish a close personal relationship with a customer they only encounter in cyberspace?
The welcome answer is that today’s cutting-edge technology makes it not only possible but simple to monitor, analyze, and optimize every touchpoint on the customer’s journey. Never before have businesses had ability to understand their customers’ desires, expectations, and emotional responses with such depth and specificity, the knowledge that enables a company to design and deliver exceptional customer service.
High-tech, it turns out (perhaps ironically, but powerfully nonetheless), is proving to be the key to humanizing the online customer experience.
Putting it all in perspective
None of this is to suggest that marketers don’t need to allocate money in their budgets to identify, entice, and – hopefully – seal the deal with new customers, on an ongoing basis. Every business needs to replenish the customer pool along the way, so acquisition strategies are always appropriate and necessary. Besides, in a data-driven profession, it can be difficult to overlook the fact that each new customer brought in shows up in ROI calculations, while the ROI of retaining customers in order to enhance longer term profitability can be a lot trickier to determine.
But budgeting also needs to reflect the true relative value of customer acquisition vs. customer retention. Rather than devoting a giant piece of the pie to acquisition, and some part of what’s left over to customer retention, many marketers today are taking a close look at the numbers and rethinking their budgeting priorities.
They are realizing that the acquisition emphasis, as common as it is, takes for granted the very people a business should value most – their best customers and most vocal brand ambassadors. It only makes sense to shower those consumers with a lot more attention and appreciation than many businesses do.