What is your customer retention ratio?

You have most likely heard the adage, “It costs less to retain a customer than it does to replace a customer.” Yet, after a thousand phone inquiries I’m still waiting to hear, “We need help with a retention program.” Have you calculated your customer retention ratio?

Depending on your industry, it costs three to 10 times as much to replace a customer than it does to retain them. This may be common knowledge, nonetheless, most companies direct more resources toward acquisition strategies than retention efforts.

Rule No. 1 of customer service: The customer is always right. Rule No. 2: If the customer is wrong, refer back to rule No. 1. The point is, even when a customer is wrong, pointing that out won’t make you right?or profitable.

These statistics (from a recent Customer Experience Report by RightNow Media) identify the reasons customers leave:

  • Customer moves or dies, 4 percent.
  • A friend provides the service, 5 percent.
  • Switches to a competitor, 9 percent.
  • Product dissatisfaction, 14 percent.
  • Lack of customer contact, 68 percent.

Competition has less to do with customer attrition than communications. In other words, we’re not losing most of our customers to brand X, we’re just letting them go.

Lean customer-centric manufacturers do continual quality process improvement. They constantly look for ways to increase productivity and quality while decreasing inventories and scrap rates. These quality and productivity principles apply to all businesses, regardless of size or sector.

Follow their “lean” sequence to develop a winning customer retention strategy: analysis, objectives, strategies (better include regular customer contact) and measurement.

Analysis: Before you decide where you are going, you need to know where you’re at. Start by establishing a baseline. What is your current retention ratio? What percentage of your customers are you retaining vs. losing (on an annual basis)? Another important metric is the life cycle of a customer. A customer, like any other asset, has value. That value is measured by the lifetime market value (LMV) of your average customer. Extending the LMV of a customer is the most cost-efficient way to increase revenues.

Objectives: After you’ve calculated your baselines, establish (and document) realistic performance targets, e.g. increase customer retention ratio by X percent by X date, and increase the LMV by Y by Y date. Your targets should be broken out into milestones. This way, you’ll be able to intervene and take corrective action if you are not pacing as planned. Be sure to communicate baselines and targets to your staff and stakeholders.

Strategies: Now that you know where you are going, the question is, how do you determine the best path to get there? The answer won’t be found in the boardroom. Ask your customers (including those you recently lost) and front-line staff?they know where the problems and opportunities reside. Gathering feedback, however, is only useful if you act on it. One way to improve customer service is to remove functional silos. Everyone in your organization, regardless of position, should be a customer-service ambassador.

Measurement: As you implement your retention strategies, continually track results. Your tracking milestones should coincide with your regularly scheduled staff meetings. During the report outs, discuss progress and things your team can do to improve performance and outcomes. Concentrate on the most effective strategies and drop or modify those that aren’t moving the needle.

Although disseminating policy is important, outstanding customer service has more to do with culture than communications. Another business axiom, “Culture eats strategy for breakfast.” Management needs to actively lead by example. I’d opt for modeling over memos.

Recognition and reward are good ways to adopt a culture change and a more fervent focus on customer engagement. It is nearly impossible to have truly satisfied customers unless you have satisfied employees.

Happy customers stick around and refer their family, friends and associates to your business. So lowering customer attrition will, in effect, increase new customer acquisition. What it really boils down to is relationships, not policies.