Increasing the customer retention rate by just 5% can generate an increase in profits of between 25% and 95% for companies. Therefore, keeping the cost of retention under control is critical to the long-term success of companies.
In today's article, we discuss the most important questions about the cost of customer retention: what is it? , how to calculate it? , how to reduce it?
What is the cost of customer retention?
When we calculate the cost of retaining customers, as we can deduce from their own name, what we do is measure the necessary expense that a company involves keep existing customers for a set period of time. Not investing in customer retention, thinking that you have a good attraction and acquisition strategy, is a mistake: Retaining existing customers generally requires fewer resources than attracting and convincing new customers (what is known as the acquisition cost). In fact, according to a report from Bain & Company, acquiring a new customer can cost between 5 and 25 times more than retaining an existing one.
At this point, we can deduce that retaining existing customers is essential for a company's growth and stability. Loyal customers tend to spend more, recommend the company to others and be less price sensitive, which can lead to higher revenues in the long term. But, in addition to the cost of customer retention, there are other metrics that can provide additional information about the health of the relationship with customers, such as the customer retention rate (percentage of customers who remain for a specific period), the customer's lifetime value (revenue generated by a customer throughout their relationship with the company) and customer satisfaction.
How to calculate it?
The cost of retention is sum of all expenses (both direct and indirect) related to those activities aimed at retaining current customers. This may include, but is not limited to:
- Loyalty programs: Including membership cards, exclusive discounts, reward points, gifts or special bonuses. This item will include both the costs of developing and maintaining the programs themselves, as well as the costs of the rewards provided to customers.
- Marketing to existing customers: This item will include expenses related to marketing campaigns designed specifically to keep current customers. Including the cost of advertising in media aimed at existing customers, sending emails, newsletters or newsletters, making follow-up phone calls or other promotional actions.
- Customer Service: This item covers the costs of providing efficient and quality support to existing customers. Including, the salaries and benefits of the company's staff dedicated to customer service, training costs, software and other tools used to manage customer service, as well as any other expense associated with resolving customer inquiries, complaints, or problems.
- Maintaining the relationship with the customer: Expenses related to maintaining a strong relationship with existing customers will include, but are not limited to, activities such as special customer events, sending gifts or samples, or invitations to loyalty programs.
- Customer Research and Analysis: Understanding the needs, preferences and behavior of existing customers is essential to retaining them. This item includes all costs associated with researching and analyzing existing customers through conducting surveys, analyzing customer data, using market analysis tools, etc.
It's important to note that the items mentioned above may vary depending on the company and its customer retention strategy. Some companies may include other specific expenses that are relevant to their industry or business model.
To calculate the average cost of retaining a customer, for a specific period of time, we only need divide the total sum of the above-mentioned items by the number of customers that the company has managed to retain during that period of time. In addition, it is possible to carry out more detailed analysis, considering different customer segments and specific time periods.
Why is customer retention important?
Customer retention is especially important for startups for several reasons. As we've already mentioned, acquiring new customers is often much more expensive than retaining existing ones. Therefore, by focusing on customer retention, startups can Save high costs derived from the marketing and advertising necessary to attract new customers. In addition, retaining current customers allows startups to generate recurring revenues through repeat purchases or subscriptions and maintain their Low churn rate, with all the benefits that this implies. As we explained in previous articles, keeping the churn rate low allows us to have a solid and predictable income base, which is essential for the sustainability and growth of the startup (especially for all those with SaaS business models). In addition, keeping existing customers favors building a strong reputation. Satisfied customers are more likely to recommend the company to others and share their positive experiences and this, especially in the early stages of a startup, when reputation and positive word of mouth can make a big difference, is essential to generate additional momentum in acquiring new customers through referrals and recommendations, and therefore for the growth of the startup. Last but not least, retaining customers for the long term increases the customer's lifetime value (CLV), which represents the total revenue expected to be earned by a customer over the course of their relationship with the company. As customers continue to buy or use the startup's products or services, their CLV increases, contributing to profitability and long-term success of the company.
At this point, we know the importance of retaining existing customers, but...
How much should we invest in customer retention?
Having a high cost of customer retention means that a company is spending a significant amount of resources to maintain its existing customers, which can result in a excessive pressure on profit margins, the need for additional income to compensate for these expenses (through an increase in the prices of products or services, which may ultimately affect the company's competitiveness in the market) or the resource limitations for acquiring new customers (which can hinder the growth of the customer base, since the company cannot invest enough in marketing strategies, advertising or other methods of attracting potential customers), among others.
Therefore, while customer retention is important, a high cost can have negative implications for company profitability and efficiency. In general, while it's important to invest in customer retention, it's crucial to find a balance between the cost and the benefit obtained. For this purpose, most companies choose to assign a specific budget for all those actions aimed at retaining existing customers. In this sense, taking into account other metrics such as return on investment or customer lifetime value, allows us to find the amount of investment needed to keep its existing customers without compromising profitability and the ability to acquire new customers. As is logical to think, there is no ideal value of the cost that a company should entail for retaining its existing customers. In some highly competitive industries or with tight margins, a low cost of customer retention may be essential to ensure the financial viability of the startup. Whereas in other cases, where long-term customer value is high, it may be justifiable to invest more in retention to maintain and expand that lucrative relationship.
How to reduce the cost of customer retention?
If needed, a company can implement several strategies to reduce your customer retention cost, among others:
- Customer Segmentation: Identifying and segmenting customers according to their value and behavior can allow the company to focus its efforts and resources on the most profitable customers with the highest retention potential. To do this, we must start by identifying loyal and high-value customers and offering them preferential treatment and, in turn, reducing the resources invested in those less profitable customers.
- Effective loyalty programs: It's important to evaluate and adjust existing loyalty programs to ensure they're generating an adequate return on investment. This involves offering rewards and benefits that are valuable to customers and that truly encourage their loyalty.
- Continuous measurement and optimization: Continuous optimization helps improve efficiency and reduce unnecessary customer retention costs. To do this, key customer retention metrics should be regularly monitored and the results analyzed to identify areas for improvement.
Nowadays, technology and automation can play a key role in almost any area of the company. As far as retention cost is concerned, achieving efficient customer relationship management, thanks to the use of CRMs, automating marketing campaigns, or the use of chatbots to improve customer service and data analysis techniques and predictive models to identify patterns and trends in customer behavior, allows companies to reduce customer retention costs by increasing efficiency and improving the effectiveness of retention strategies. However, it is recommended to test and experiment with different approaches to determine which strategies work best for the particular company.
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