and the distribution of digital products.
The Noonification: Anchor-based Large Language Models (10/11/2024)
It’s no secret that earning new customers is expensive. But have you ever considered just how costly losing existing ones can be? Then consider this: a 5% increase in customer retention can lead to a 25% to 95% boost in profits. Yet, many businesses continue to pour resources into acquisition without giving proper attention to retention. As Bain & Company points out, “Many firms today are wasting half their marketing expenses on disloyal customers who will never stick around long enough to pay back the acquisition investment.”
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Businesses that focus solely on customer acquisition are overlooking a crucial profit driver. By prioritizing retention, companies can lower costs, boost profitability, and build long-term customer relationships that serve as a protective moat around the business, helping it weather market challenges.
\ Retention is a powerful profit driver, and in this article, we’ll uncover why and how you can turn it into your most effective growth hack.
The Impact of Retention on ProfitabilityPrioritizing earning new customers without insuring retention is high, is much like filling a bucket of water with a hole and compensating for the lost water by traveling faster. It’s inefficient. Here are some stats that will bring this point to life.
Stats You Should TweetAcquiring new customers is 5x more expensive than retaining existing customers.
Businesses have a 60-70% chance of selling to an existing customer again.
Businesses have a mere 5-20% chance to close a new customer.
Customer-centric companies are 60% more profitable than companies that aren’t. –HubSpot
Great customer experiences increase the chances of repurchases and renewals by 82%\–Gartner
66% of salespeople say the highest quality leads come from existing customers. \n –HubSpot
“For a mature company, a 2-3% increase in retention rates can lead to a double-digit increase in revenue and operating income in just a few years.
-KPMG
Increasing customer retention rates by just 5% can increase profits by 25% to 95%.
\ If the connection between retention and profitability is so obvious, why aren’t more companies investing in it? In the short-term, it appears unprofitable. But next, we’ll review the long-term cost of neglecting retention and related customer experience.
The True Cost of Low Retention\
- 67% of customer churn is preventableif the issue is resolved in the first interaction. \n –HubSpot
- On average, a business loses $243each time a customer leaves. \n –Neil Patel
- 81% of customers would make another purchase after a positive experience, while 61% would switchafter just one bad experience. \n –Zendesk
- Making it difficult for customers to return products will cost 84% of shoppers and sales. –Klarna
\ The reason customer service often deteriorates for many businesses is that, in the short term, it appears profitable to cut corners. However, in the long run, this approach leads to massive lost opportunities. It requires a mindset shift from being short-sighted to seeing the big picture—a shift encapsulated in an acronym you’ll want to remember by the end of this article.
Understanding the Real Cost of Low Retention: The Customer Lifetime Value (CLTV)Understanding your CLTV is essential for making informed decisions about customer acquisition and beyond. It’s not just a metric for calculating PPC bids—it’s a strategic tool that influences every aspect of your business, from sales and marketing to product development and customer service.
Customer Lifetime Value (CLTV) = Customer Value x Average Customer Lifespan\
\ Customer Value = Average Purchase Value x Average Number of Purchases
\ CLTV helps answer critical questions like:
- How much should you invest to acquire a new customer?
- What products and services will resonate most with your top customers?
- How much should you allocate to ensure customers keep coming back?
- Which customer segments are worth the most investment?
\ When you can accurately assess CLTV, you unlock valuable insights into the long-term returns of your marketing and sales efforts. It requires a shift away from short-term thinking toward a longer-term business strategy. Many of the fastest-growing companies have recognized that customer relationships may not break-even or becoming profitable within the first transaction, but the investment in retention pays off significantly when the business plays the long-game.
\ Now you may be wondering exactly why. Fortunately, the answer is simple.
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Stronger adoption of new products: Existing customers are 50% more likely to try your new products.
More revenue per account: Current customers spend 31% more than new customers. Thus retained accounts on average drive more revenue than new accounts.
Time to profitability: Many SaaS companies see a multi-year payback period with new customers.
Lower cost-per-sale: Selling to a new customer costs anywhere from 4-5X more than expanding existing relationships.
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\ \ Here’s some good news: 62% of businesses said that customer acquisition is the primary marketing goal versus 20% that said it was customer retention. If you’re changing gears to prioritize on customer retention strategies like the minority, you’ve got an advantage over 80% of your competition so long as you do something about it.
\ But where to begin? That’s next.
Solutions for Boosting Customer RetentionModify customer-acquisition incentives
- Reward sales and marketing teams for acquiring customers that stick.
- Consider bonus or commission adjustments based on whether customers stay or defect within 18 months. \n –Bain & Company
\ Reallocate marketing investments
- Systematically rank customer acquisition campaigns based on how well they attract loyal customers.
- Shift resources toward campaigns that yield the highest retention rates. \n –Bain & Company
\ Incorporate or continuously develop your existing mobile app or email marketing approach
Brands use either mobile apps (44%) or email marketing (52%)** \n -SEMrush**
\ Build brand loyalty by investing more in the customer experience
70% of consumers reported that friendly customer support, convenience and speed are the three most important factors that contribute to loyalty toward a business.
-PWC
75% of customers say speed of response is most important, followed by 55% consistency across channels.
\ ==Invest in overdelivery== within the customer experience
- Create a memorable customer experience by giving more than expected.
- By exceeding customer expectations, you build emotional connections that foster long-term loyalty. \n –Bain & Company
- Have a phone support line: 3 in 4 customers prefer speaking with a customer support specialist over the phone rather than online.\–---Customer Center Satisfaction Index (CCSI)
\ Understand your loyalty drivers - they’ll translate into referrals
- 86% of loyal customers recommend your brand to their friends, and 66% will write a positive review. \n –KPMG
\ Pay attention to what complimentary products and services contributes to growing your CLTV
– Look at sales data for complimentary products or service that could be given as a free trial or surprise “thanks for your business” bonus. There’s nearly a 70% chance that a customer may want to pay for it after trying it!
\ Know your highest CLTV traffic sources and campaigns - then relentlessly grow them
“Many firms today are wasting half their marketing expenses on disloyal customers who will never stick around long enough to pay back the acquisition investment.” \n –Bain & Company
\ Improve “Time-to-value” (TTV) customer onboarding
Understand the shortest distance to “time-to-value” for your customers and craft onboarding processes that speed this up. Customers who experience value quickly are more likely to stay.
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LEARN MORE: 30 Growth Hacking Examples to Accelerate Your Business
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Customer Retention Metrics You Need to Know to Track Customer Retention Leading indicators\ Churn rate – Measure the rate at which customers stop doing business with you. Lowering churn leads to a direct increase in profits.
\ User experience (UX) score – A metric that evaluates the overall user experience of a product or service, often considering usability, design, and user satisfaction.
\ Early renewal / cancellation rate – The percentage of customers who renew or cancel a service before the expected contract or subscription period ends.
\ Time-to-value (TTV) – The amount of time it takes your new customers to get value from your product or service.
Activation rate – The percentage of users who complete key onboarding actions that are essential for fully utilizing a product or service.
\ Product feature use – The frequency or extent to which customers engage with specific features of a product, indicating feature popularity and user behavior. Was product feature A used first for higher retention customers or was it feature B or C?
\ Unsolved tickets – Customer support requests or issues that have not yet been resolved, often tracked in a ticketing system. You want this low and turned around fast.
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Customer Retention Lagging indicatorsNet revenue retention rate – A metric that shows the percentage of recurring revenue retained from existing customers, including any upgrades or expansions, minus downgrades and churn.
\ Gross revenue retention rate – A metric that measures the total revenue retained from existing customers over a period, excluding any revenue from new customers or expansions.
\ Renewal rate or Repeat purchase rate – This tracks how often existing customers return to make another purchase. The higher this number, the stronger your retention strategy.
\ Customer satisfaction – A measure of how well a product or service meets or exceeds customer expectations, typically evaluated through surveys or feedback.
\ Contraction events – Instances where existing customers reduce their spending or downgrade their service level, resulting in lower revenue.
\ YoY ARR growth – Year-over-Year Annual Recurring Revenue Growth; a measure of the increase or decrease in recurring revenue from one year to the next.
\ Net promoter score (NPS) – A metric that measures customer loyalty by asking how likely customers are to recommend a product or service to others, typically on a scale from 0 to 10.
\ Virality Coefficient – A measure of how many new users are generated by each existing user, indicating the viral spread of a product or service.
\ Churn reason – The specific reason why a customer decides to stop using a product or service, often gathered through exit surveys or customer feedback.
\ Customer Lifetime Value (CLTV) – Use this metric to understand how much each customer is worth to your business over their entire relationship with you.
Conclusion: Retention is the Future of ProfitabilityBusinesses that focus solely on customer acquisition are overlooking a crucial profit driver. By prioritizing retention, companies can lower costs, boost profitability, and build long-term customer relationships that serve as a protective moat around the business, helping it weather market challenges. As Bain & Company wisely observed, "Companies that focus on building loyal relationships… are far better positioned to remain strong in the face of market turbulence."
\ Now that you understand the profound impact customer retention can have on your bottom line, how will you take action? Will you start by reevaluating your acquisition strategies or by investing in an onboarding experience that accelerates your customers' time-to-value? Leave a comment or question below and let me know!
\ The bottom line is that every business is unique, and each has its own low-hanging fruit when it comes to retention opportunities. Regardless, the time to prioritize retention is now. Focus on maximizing the value you provide to your current customers, and they’ll reward you with more referrals, increased lifetime value, driving sustainable profitability for your business.