For customer retention, which of the following do vendors commonly perform:
- Provide outstanding service and loyalty benefits
- Impose switching costs through technological impediments and contractual restrictions
- Engineer convoluted pathways for customers who want to terminate services
- All of these
The correct answer, of course, is All of these. Every enterprise must retain customers. It’s a strategic challenge, and the path can be rocky. But two things are clear: 1) vendors have multiple tools at their disposal, and 2) customers don’t always benefit.
There’s a lot of confusion about customer retention. Some people ask, “which is better: acquisition or retention?”, implying that the matter is either-or. Some argue that companies invest too much on acquisition and too little on retention. Some assert that retention is preferable to acquisition because retention costs less. And finally, some mistakenly believe that retention tactics create only benign outcomes for customers.
With zealots on both sides, it’s easy to fall into the either-or trap, but it’s a false dichotomy. Without acquisition, there’s no retention. No business can survive long-term without acquiring and keeping customers. And as a practical matter, churn is inevitable: Business needs change, customers become insolvent, or they get acquired. Because revenue contribution from each customer is uncertain, companies must build sales pipelines to keep new opportunities flowing. On the other hand, profit margins from existing customers are generally higher than for new ones, so keeping customers is also very important.
In fact, every effective customer strategy involves:
- Account acquisition: how do we identify, cultivate, and capture new opportunities?
- Account retention: how do we keep our customers?
- Account revenue growth: how do we facilitate increased spending or “share-of-wallet”?
- Account win-back: how do we resuscitate past clients that can continue to benefit from our product or service?
- Account divestment: how do we jettison customers that we can no longer support profitably?
At startup companies, acquisition and retention are immediate concerns. But as companies mature, customer strategies become more complex. Businesses can alter their core offerings or delivery models. In addition, customers can stop buying for many reasons – some preventable, some not. Along the way, once-lucrative accounts can become financially less attractive. Customer strategy isn’t complete unless it addresses all five challenges.
A key business development challenge for every organization is matching its capabilities with external opportunities, and customer strategy must address this mission. That defies relying on “industry standards” for guidance. I searched for “customer strategy best practices,” hoping for insight like “on average, machine tools manufacturers dedicate 28% of their marketing spend on capture, and 72% on retention.” Nothing. Nada.
It’s not hard to understand why. Customer strategies are based on corporate strategies, which are influenced by present and future product portfolios, competitive market position, market share, operating costs, cost of capital, risk capacity, risk tolerance, economic and regulatory forecasts, and industry maturity and growth rate – to name a few. Does Company X spend too much on customer acquisition and too little on retention? Devoid of context, it’s impossible to judge. The most useful clue is whether Company X achieved its quarterly revenue target. If so, they possibly had the right proportion of acquisition and retention. When you have next quarter’s achievement percentage, ask me again. There might be a different answer.
Even without industry standards, I took a swing at generalizations:
Acquisition-intensive companies tend to be –
- New business ventures
- Companies that are pivoting their business model
- Operating in young or emerging industries
- Selling capital goods with low potential for add-on sales
- Expanding into new markets
- Services companies that recognize a large portion of revenue at the time of contract signing
Retention-intensive companies tend to be –
- Software-as-a-service (SaaS) companies
- Offering other subscription-based products or services
- Providing a low-cost entry product or service that can be readily expanded
- Selling a product or service with high potential for ongoing consumption
- Dedicated to supporting a key client or small number of clients
- Expanding into new markets or developing products targeted toward their legacy accounts
Most companies are in between, confounding our ability to compliment – or assail – their approaches. Blue Apron, for example, must be equally rabid about acquiring new customers and preserving those they’ve signed. It’s a conundrum: for troubled Blue Apron, client retention depends on gaining economies of scale. And how do you achieve economies of scale? By acquiring new clients! Acquisition and retention, therefore, exist in a mutually supportive relationship. I know – it’s complicated. But it’s hardly rare.
Flawed accounting? For most companies, acquiring customers consumes a sizable chunk of the marketing budget. In B2B, buying lead times can drag on for months or years, and conversion rates (ratio of prospects who become customers) can be frustratingly low. “Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one,” wrote Amy Gallo in Harvard Business Review (The Value of Keeping the Right Customers, May 2014). In fact, every executive I spoke with for this article shared that their company’s customer acquisition costs consistently exceed retention costs.
But “cost analysis regarding retention requires sophistication, and results vary widely between companies,” CFO-turned-novelist Pat Kelly told me. “There are many [retention] cost drivers,” and not all of them are aggregated into overall retention costs. For example, much of what companies spend on software development and logistics operations are crucial for customer retention, but most companies don’t categorize them as retention costs. On the other hand, marketing, sales, and lead generation are easier to parse. Many companies know their cost/lead down to the penny. Little wonder that spending on acquisition appears so lopsided. “It’s worth the effort to get better at tracking retention costs, but companies will never get to the right answer,” Kelly said, adding “it’s more important to be directionally accurate.” That’s solid advice. We can endlessly debate the accuracy of acquisition-retention multipliers, but acquisition almost always costs more than retention. Still, for most companies, whatever benefit precision provides doesn’t change the fundamental fact that you still can’t retain a customer that you haven’t first acquired.
- Balance is key. Companies that get heavily invested in a single component of customer strategy risk harming stakeholders. Comcast abused a customer that they clearly couldn’t afford to relinquish. Solar energy companies inflated acquisition numbers to appear more attractive to investors. And American Express Foreign Exchange offered impossibly low rates to prospects, only to raise them without proper disclosure.
- Never use cost considerations as the dominant rationale for favoring retention. Acquisition, retention, growth, win-back, and divestment strategies must first align with the strategies of the organization.
- When defining your customer strategy, consider the right measurements. These should include minimum churn rate, expected churn rate, industry growth rate, enterprise revenue growth target, actual revenue-per-account, forecast revenue-per-account, economic forecasts, and foreign exchange rates (for international companies).
- Know the right customer for your company, and if that’s too difficult, at least know the wrong one. “Think about the customers you want to serve up front and focus on acquiring the right customers. The goal is to bring in and keep customers who you can provide value to and who are valuable to you,” said Jill Avery of Harvard Business School.
“If you do a good job, your customers will refer new customers, and that’s vital for every organization,” another CFO, Stan Krejci, shared with me today. But he cautioned executives not to see retention as isolated policies, processes and procedures. “Retention is a performance issue,” he said. A company’s obligation to its customers is to consistently fulfill its promises and to provide ongoing reciprocal value. A company that can do those things won’t likely resort to staffing customer call centers with Retention Specialists, and contriving technological and contractual handcuffs to reduce churn.
Acquisition, retention, growth, win-back, divestment. The elements of customer strategy are inter-dependent. “Retention feeds acquisition, and acquisition feeds retention.” Krejci said. “It’s circular.”