Customer Retention and You
Customer retention is one of the most critical challenges facing businesses today. From Fortune 500 companies to mom and pop storefronts, profits and profitability depend on the ability to create, and keep, customers for life.
It costs money to generate leads, create a recognizable brand, and get customers to make their initial purchase. Without customer retention, that time and money is wasted, constantly flowing out with only occasional purchases to provide some income.
Retention, on the other hand, puts those marketing investments to use and helps build momentum; not only through that customer, but with every other person that they tell about their experience.
Read on, or download the PDF guide here.
Why It Matters
Marketing can feel like a very personal endeavor. As a business owner, you invest time, money, and energy into strategies and campaigns that are geared toward attracting new clients and introducing them to your brand. What many businesses don’t realize is that the most important part of marketing comes after the first sale, when the focus switches to that of reducing churn and maximizing customer retention.
Monetary Value of Return Customers
The White House Office of Consumer Affairs has recently proved what business owners know to be true — that it’s up to seven times more expensive to attract a new customer than it is to retain an existing one. By focusing on repeat business, many companies are catching on to a retention strategy that promises to build momentum with current customers instead of chasing after the elusive first sale.
A positive relationship with customers is one of the most cost-effective strategies that your business can have. It is a fact of life that consumers prefer to do business with people they like and trust, and this likeability is even more influential than the cost of a product.
The 2010 RightNow Customer Experience Impact Report even found that 85 percent of Americans would be willing to spend more with companies that they believe provide excellent customer service. This is because the average customer’s focus has shifted from price to value. Value includes the price of the item, as well as the perceived value of the entire shopping experience. This is extremely important when it comes to your profit margins because it directly implies that a strong customer retention rate would allow you to charge more than your competitors, without risking the loss of customers.
This level of customer loyalty is created by the customer service and positive interactions your customer experiences after the initial sale. Undoubtedly, the quality of your customer service is measured by the kind of relationship that you establish with customers, and that relationship will determine how invested they are in your success. Evidence of this comes from research that shows happy customers are more likely to make repeat purchases and recommend your company to friends and family.
According to the marketing experts at Branderati, happy customers or brand advocates, on average, spend twice as much as the average customer with their preferred businesses. They are also more likely to spread the word about their experiences, which is invaluable because Branderati also found that marketing-induced, consumer-to-consumer word-of-mouth recommendations generate more than double the sales of paid advertising. This has the power to become a huge portion of your annual income, dramatically reducing your customer acquisition costs and increasing your sales.
Value of Loyal Customers
Beyond the cash value generated by repeat customers, there are social benefits to having a loyal following. The first of which is the power of brand advocates and referrals; once a customer becomes loyal to your brand, they are much more likely to come back to you for their large purchases and recommend your business to friends and family members. This is the main reason why a focus on customer retention can create brand advocates, and allow them to boost your referrals.
The social benefits of customer retention are perfectly illustrated by one of our clients, Shane Smith. Mr. Smith is the head of a large and widely successful personal injury law firm in Atlanta, Georgia. A few years ago, the firm was doing well, with several lawyers managing and winning a high volume of cases and clients for the firm every year. Despite this success, they were getting nearly zero referrals from all of those satisfied clients.
Shane was puzzled; they were doing great work, treating clients well, and winning a majority of their cases, yet their retention and referrals were almost non-existent. This lack of business from past clients was resulting in a very serious loss of cash flow for the firm. In order to figure out what was going wrong, Shane decided to personally call clients he had helped over the past year and ask them where the disconnect was.
Of the 100 people Shane called, virtually zero remembered him. In fact, most of them thought he was trying to solicit business from them. Shane had won a $100,000 settlement for one of these clients less than a year before, and even that (seemingly) satisfied customer hung up on Shane before he had the chance to explain himself. There was no bad blood from any of the clients — they simply couldn’t remember who in the world Shane Smith was.
Shane is a smart guy, so it didn’t take long for him to wonder how clients could possibly refer friends to a practice they couldn’t remember. At the end of this report, we’ll let you know what he did to make his business more memorable, thereby generating hundreds of referrals.
Encourage Word of Mouth
It only makes sense that customers have to remember your brand in order to promote it. On top of that, if they have a “wow” experience, they are much more likely to buy from you, and to refer their friends and family.
In 2014, brand advocacy and word-of-mouth marketing was identified by Forbes contributor Kimberly Whitler as the the most valuable form of marketing. Why? Because in a new study by Ogilvy, Google, and TNS, 74 percent of all consumers say that the opinions of family and friends are a key influencer in their decision-making. And once consumers get a recommendation from someone they trust, they are far more likely to become loyal customers as well.
Another study — this one by Van den Bulte, Skiera, and Schmitt — found that referred customers are 18 percent less likely to churn, even in the case of a negative experience. Van den Bulte, Skiera, and Schmitt also found that referred customers have approximately 25 percent higher lifetime values than non-referred customers.
This means that happy customers are spending more, referring more, and staying longer; which may be why a study by Bain & Company found that increasing customer retention rates by just 5 percent increases profits by anywhere from 25 percent to 95 percent. The marketing company, Branderati, supports this research; they found that customers who are referred by other customers boast a 37 percent higher retention rate than the average consumer.
Read on, or download the PDF guide here.
Common Barriers to Retention
Due to the monetary value and social benefits of retention, it is important to understand exactly why customers stray. That understanding comes from learning about customer preferences, and the factors that cause them to churn. Churn, or attrition, is one of the most devastating factors affecting profitability because it marks a loss of the investment that it took to attract each customer who is walking out the door, in addition to the loss of potential sales and referrals.
Even a 5 percent monthly churn rate means a 60 percent loss of customers over the course of the year. That statistic alone is scary enough but The White House Office of Consumer Affairs found that a customer that churns because of customer service issues will tell 9-15 people about their negative experience. Imagine if 60 percent of your customers were telling 9-15 of their friends about bad service they had received with your company? The numbers add up quickly and it’s clear to see why it’s so important to learn why people churn, and how to minimize it.
Lack of Relationships
When it comes to attrition-prevention, the effect of consumer-business relationships is truly astounding. According to the churn-specialist company Preact, the second biggest factor affecting customer-loss is ineffective relationship building. Relationship building can encompass many different things, but the most notable is the customer’s perception of their own importance to the company. They want exceptional customer service, appreciation, and a personal touch that helps them connect on a deeper level than your average business interaction.
Human beings are social creatures, and as the amount of our daily interpersonal interactions has shrunk, our desire for connection has grown. This has resulted in an incredible opportunity for business owners to close the gap, provide connection, and make a notable impact on their customer base. When they neglect these needs, the lack of a relationship with customers can leave businesses vulnerable to price wars, economic downturn, and competition. That’s because relationships and satisfaction are noted as the most important deciding factors when it comes to whether a customer will stay with your company or consider your competitors.
Relationships also help minimize the occurrence of the passive churn. Passive churn occurs when customers fail to continue services, without actively deciding to leave the company. One example of this is simply forgetting their options when it comes time to make a purchase.
A client of ours experienced this unfortunate type of churn through a decade-long misunderstanding with one of his clients. Jim Hoey is the President of SST, a telecommunications company that provides phone systems for business offices. His products are high-quality and require a hearty investment, which means that he may only re-sell to the same client once every couple of years. Because of that slow sales cycle, Jim struggled with his memorability, even after providing a true “wow” experience.
One day he got a frantic call from a client that their office had caught on fire, and they needed a new phone system immediately in order to keep their business alive. Jim lept into action, giving the client the phone system from his own office, and even setting it up that day so the client wouldn’t lose any business.
Because his phone systems are such high-quality, Jim didn’t hear anything from that client for a few years. That is, until one day when Jim got a call saying that the office had purchased new phones, and that he could come pick up his old ones. The problem with this picture is that Jim’s client had purchased a new phone system from a different company — even after Jim had done everything right to provide them with a wow experience. What was his mistake? Neglecting the relationship with that customer and trusting that they would remember his good deed after years of change within their office.
Industries that only see customers a few times a year (or even every few years) are especially susceptible to passive churn because customers may simply forget about their previous positive experiences. By connecting with consumers on a personal level, a consistent relationship serves as a foundation for memorability and staying top of mind.
Customer Service is King
In order to build relationships, encourage brand advocacy, and create lifelong customers, it is essential that businesses provide exceptional customer service. Looking through retention literature, it’s difficult to find a list of marketing statistics that doesn’t name bad customer service as the No. 1 problem leading to dissatisfaction and attrition. One study, by Bain & Company, even found that a customer is four times more likely to defect to a competitor if the problem is service related than price or product related.
The implications of these findings are incredible as they indicate that customers care more about the social aspect of a business than they do the personal cost, or even the quality of their purchase. Studies like this resoundingly show that people are now prioritizing quality of interaction over personal gain.
Commerce has become so much more than exchanging X for Y. Consumers now feel emotionally invested in their buying decisions, products, and the brands that they choose. While this provides an opportunity for businesses to foster connections, it can also be a double-edged sword. If customers feel ignored, mistreated, or generally dissatisfied, they are considerably more likely to take their business elsewhere, regardless of the quality of product.
The international management and consulting firm, McKinsey, found that customers’ emotions drive their decisions, and those emotions are strongly affected by their personal interactions with a business. McKinsey discovered that when an emotionally-charged interaction was resolved positively, 85 percent of customers increased their value to the company. Equally important is the fact that when those interactions were mishandled, more than 70 percent of customers reduced their commitment and investment with the business.
It’s incredible to think that our relationships play such an important role in retention, but more and more research is proving that they are the single most influential factor when it comes to choosing a business. An American Express Survey even discovered that 3 out of 5 customers would give up buying from a favorite brand in order to have a better service experience. This clearly indicates that experience outweighs pricing and even personal preference, but what else is causing customers to stray?
The Technological Catch
It is clear that customer service is a major cause of churn, but it is not the only reason. While technology has paved the way for cheap marketing and easy access to consumers, it has become a catch-22 when it comes to relationship building. The constant stream of advertisements, emails, notifications, and attention-getters has numbed many consumers to the effects of electronic marketing. Not to mention the Web has given anyone with an Internet connection the same sphere of influence as academics, professionals, and experts, resulting in a general distrust of information online.
Email and social media have taken the brunt of this desensitization, as evidenced by the Epsilon Email Marketing Research Center’s finding that business emails in the United States have an average open rate of only 21.6 percent. Once those emails are opened, the click-rates are even more sobering — a measly 4 percent.
So while technology has quickly become a preferred method of communication and advertising for many businesses, it has actually reduced our interpersonal relationships and ability to remain responsive. Instead of enabling interactions, people are engaging less, and businesses are starting to suffer the consequences. The aforementioned research, and others, seem to suggest that the Internet has become a dangerous place for marketers, where under-exposure leads to apathy, and overexposure leads to disengagement.
Need proof? Check out this Facebook thread by Lee Milter, a friend of Shaun Buck. The words of wisdom that followed did not come not from marketing professionals; they came from the common sense of the people who make or break a business — the consumer.
Read on, or download the PDF guide here.
How You Can Improve Retention
One way to change that mindset is to liken customer retention to creating a support network. Back in 2005, Entrepreneur.com posted an article called “5 Key Ways to Build Customer Relationships.” In this article, the author compares marketing to pushing a boulder uphill — you can either do it yourself, or you can recruit an army of enthusiastic customers to help you push your product to the top. The way you accomplish this is by building relationships with everyone that you do business with, and ensuring that their experience keeps them buzzing about your company.
The boulder metaphor is a great example because it really embodies the physical and emotional struggle of sales and marketing, which can sometimes feel like an uphill battle. It also shows how a strong relationship with customers can become a sales lifeline through retention and referrals.
Entrepreneur’s article puts it best when it says, “How do you turn networks of contacts into customers? Not by hoping they’ll remember meeting you six months ago at that networking event. Networking is a long-term investment. Do it right by adding value to the relationship, and that contact you just made can really pay off. Communicate like your business’s life depends on it (hint: And it does!).”
There is no simple equation for making customers stay, but there are several strategies businesses can focus on in order to minimize their attrition rates, increase their retention value, and boost referrals. Retention involves changing the marketing mindset from short-sighted acquisition (focused on the one-time sale) to customer retention which measures the CLV (customer lifetime value) and potential profit as a whole.
Build Relationships That Matter: Personal, Professional, Powerful
Remember Shane Smith from earlier? He was the lawyer who was struggling to create relationships with his clients, and his business was suffering as a result. After calling 100 previous clients and realizing that no one knew his name, he decided to try mailing a monthly newsletter.
Within six months, his newsletter campaign was boasting the highest ROI of any of his marketing strategies. He was getting dozens of referrals per month, and he was maintaining a good relationship with all of his previous clients. Business boomed, new cases started flooding in, and Shane became a celebrity in the world of personal injury attorneys. He jokingly admits that he even had issues walking his dog, Gizmo, down the street because an article in the newsletter that was ghostwritten in Gizmo’s voice had made the pup more popular than Shane himself.
Since the beginning of his campaign less than four years ago, Shane has more than tripled his newsletter mailing list. He has effectively solved his referral problem and now has a better relationship than ever with his past and current clients. He now recommends everyone do a newsletter campaign, and we tend to agree.
The goal of achieving personal, professional, and powerful relationships is so important that we made it our purpose here at The Newsletter Pro. We know that a lack of relationships is one of the major causes of churn, and that the solution lies in a more personal connection.
The Internet has provided consumers with more options than ever before, so it falls on business owners to stand out — in a good way. The best way to do that is to let customers see the people behind the brand. You can do that by becoming high touch over high-tech. Exceptional customer service, likability, and loyalty all play into the central theme of relationship building, which often takes repeated exposures to a brand over time.
Stop Forcing the Sale
It sounds counter-intuitive but one of the best ways to make a sale is to stop focusing on income, and start thinking about your impact. Take a break from the sales pitch and focus on helping your customer; they are much more likely to be a loyal brand advocate if you make a difference in their life, rather than just a dent in their wallet.
This is partially due to a psychological principle known as reciprocity, which basically states that we are hardwired to return favors after they have been done for us. In the business world, this translates into brand advocates and customer loyalty in exchange for exceptional care and service.
One of the most interesting research studies proving this effect was done in 1974 by the sociologist Phillip Kunz. Kunz mailed out handwritten Christmas cards with a note and a picture of him with his family to approximately 600 strangers who were chosen at random. Interestingly enough, even though people had no idea who Phillip Kunz was, he received nearly 200 replies. This one experiment led to dozens of marketing tactics which played on people’s inherent desire for reciprocity.
The free mint with your check at a restaurant? Found to increase tips up to 20 percent. The free mailing labels sent out by the Disabled American Veterans Charity? Responsible for nearly doubling the number of people who decided to contribute to the cause — from 18 percent to 35 percent. All of these studies show that people are programmed to want some kind of relationship with the people that they do business with.
Whether it be through thoughtful gestures (like the free gifts) or exceptional customer service, the point is that people love to be appreciated, and they feel obligated to return the favor.
So instead of going in with the goal of making money, go into every transaction wondering what you can do to improve that customer’s life, change their day, or make something easier for them. This is one of the key ways to ensure that customer service goes beyond the sale, and it also improves your chances of transitioning prospects into customers because it allows you to invest in people even before they generate income.
Direct is Best
The big question then is how to do all of these things. How can a marketing strategy improve customer retention, create brand advocates, and foster genuine relationships? The simple answer is direct mail. That’s because while society has evolved to the digital age, our brain has not. We are biologically, and socially, programmed to appreciate physical mail, which is why it has remained as the most effective long-term marketing strategy of all time.
Direct mail is six times more effective than all digital channels combined, according to the Direct Marketing Association Response Rate Report 2015. It sounds too good to be true, but it’s hard to argue with the numbers.
And while over-exposure through email has actually been shown to detract from a brand’s image, monthly mailers are the perfect, consistent advertising strategy that can help set that psychological hook. Epsilon Targeting, a world-class marketing and surveying firm, found that consumers overwhelmingly prefer direct mail to other marketing tactics such as email. In fact, their survey found that 73 percent of consumers reported deleting emails without ever opening them. Coincidentally, when asked why they chose mailbox over inbox, 73 percent also said that they preferred physical mail because they can read the info when it is convenient.
This preference for convenient access leads to a longer shelf life, and one other very important attribute: In the Epsilon survey, a full 40 percent of consumers reported that they prefered direct mail because they could easily transport the information to different places.
What you should be reading between the lines of this report is this:
- With direct mail, people are MUCH more likely to read the information you are sending them.
- People actually enjoy reading their direct mail (according to 59 percent of respondents), and they refer back to it for additional information.
- Your readers enjoy their direct mail so much that 40 percent want to take it with them and potentially share it with other people.
Evidence of Success
Direct mail has been the go-to method of marketing since the invention of the written word. Over the past few years, marketing firms have been researching the cause of this success and have been trying to figure out why direct mail has such tremendous staying power.
GKIC co-founder Dan Kennedy is quoted as saying, “I am here to assert that NOTHING ELSE can deliver the riches that direct mail can and does when it is fully understood and properly deployed.” He also says “wealth is tied to postage stamps” and that his own personal wealth is firmly rooted in, and built on, direct mail.
(Case Study) Direct Mail is Alive and Well:
The Sony case study is a perfect example of the benefits of direct-mail marketing. As competition in the electronics market grew, Sony found that its sales were dropping and advertisements were bringing in fewer and fewer new customers. In a move of marketing genius, they realized that customer retention would be the best way to increase revenue and strengthen the brand. The trick would be to encourage customers, who had already made a large purchase, to make another purchase in a short period of time, while still maintaining a positive relationship with the brand. They decided to try direct mail, with an audacious goal to increase revenue on these repeat sales by 20 percent within 90 days.
To accomplish this feat, they sent a customized postcard out to customers within two weeks of a purchase. The mailer thanked them by name and referenced the product they bought, in addition to an offer for 10 percent off the purchase of a DVD player. Two weeks later, a second postcard offered a discount on a television. This strategy was cheap and easy, and the results exceeded Sony’s most optimistic calculations.
Here are the numbers: The revenue per thousand pieces was four times that of electronic campaigns, and the ROI was four times the company’s threshold. Remember that goal of a 20 percent increase? By the end of the campaign, Sony accomplished a 145 percent increase in repeat sales. The best part is that they meticulously tracked the campaign analytics and found that this growth was a direct result of the mail campaign.
Sony’s marketing venture proves that these same traits can be applied for marketing success by implementing a direct mail campaign focused on customer retention and brand building.
Through extensive research and analysis, we have discovered that the key to customer retention is to build relationships with meaning beyond the business transaction. Our research has also shown that direct mail is the best way to achieve that strategy, by providing customers with a consistent and friendly way to connect with businesses on a regular basis.
By utilizing a direct mail campaign, businesses have found tremendous success in increasing their retention rates, referrals, and, as a result, the overall lifetime value of clients. These mailers also provide businesses with a tremendous opportunity to build their brand, increase customer satisfaction, and distinguish themselves in an increasingly competitive market.
If you’re interested in not only building relationships, but using direct mail to increase retention, please pick up a complimentary copy of our book, Newsletter Marketing: Insider Secrets to Using Newsletters to Increase Profits, Get More New Customers, and Keep Customers Longer than You Ever Thought Possible by visiting newsletterpro.com/retentionguide.
Don’t be “that guy” — invest in relationships with your customers and they will invest in your success.
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