Grace Butland asks the question bedeviling large corporations and newspaper carriers alike: “Do you direct more of your marketing time and money toward attracting new customers, or keeping the ones you already have?” If you’re like most businesses, Butland ventures, “you work hard at attracting new buyers, while paying little attention to your regulars.” Correcting this oversight is what goes by the name of Customer Relationship Management these days.
It takes 10 dollars of new business to replace one dollar of lost business, Butland says, a figure commonly accepted in corporate circles — sometimes expressed in the saying “It’s 10 times more expensive to get a new customer than retain an existing one.” Butland points out that since businesses typically lose 15 to 20 percent of their customers each year, if those defections can be cut in half, you’ve more than doubled your company’s growth rate.
Writing in the Harvard Business Review, management consultants Frederick Reichheld and Earl Sasser estimate that “companies can boost profits by almost 100 percent by retaining just five percent more of their customers,” whether you are a Big Six accounting firm, Microsoft, or Olga’s Blintz and Borscht Parlor.
Butland explains that “the lifetime value of a loyal customer can be astronomical. If you’ve never calculated the lifetime value of a loyal customer,” she says, “try this formula:”
Average Sale x Number of Sales per Year x Years expected to be in business = Lifetime Value of Customer
For example, Butland says, figure out the value of a wholesale customer who orders from you three times a year, with an average order of x, over a period of 10 years. This gives a clear example of how much losing that customer, or client, or account after the first year costs.
Also, no matter what size shop you’re running, operating costs decline as customers use a business service more often. Customers who are familiar with your business and products know the procedures and have fewer questions, Butland points out: “You can be more efficient because less paperwork is required with subsequent transactions, credit references don’t have to be checked, and the increased advertising costs and special promotions usually associated with attracting new customers don’t always apply to existing ones.” For example, she says, mailing a new product brochure to existing customers will result in a much higher response rate than mailing the same brochure to a list of prospects.
All customers tend to buy more as they become more familiar with a business and its products, whether it be ice cream cones or tractor-trailers. “Until they’ve had a chance to ‘test’ the product,” she says, “customers usually purchase conservatively. Think of all the first-time buyers who have asked, ‘What’s your minimum order,’ and stuck as close to that as possible.
Yet as those customers become comfortable with your products’ quality and salability, Butland observes, they tend to purchase more of the original product, as well as related products, resulting in higher sales and lower costs for you.
Next week: How to keep the customer satisfied.
