Focusing on Customer Retention is Profitable

In order to grow the customer base in your business, you should focus on retaining your existing customers as well as attracting new ones.

If you would like to increase the number of customers your business has, the default thinking is to add more new customers. This is your customer acquisition rate.

If you start the year with 1,000 customers and your acquisition rate is 15%, you can’t assume your customer count will go up to 1,150. The reason is that you also will lose customers during the year. This is typically called the attrition rate.

The opposite of the attrition rate is your retention rate. If your attrition rate is 20%, your retention rate is 80%.

Your customer base is, therefore, a function of the new customers you add but reduced by the existing customers you fail to retain (attrition).

To grow your customer base, you should focus on ‘retaining’ your existing customers as well as attracting new ones.

When you compare the cost of acquiring new customers to the cost of keeping your existing customers, the estimates range from $6 or $7 to acquire a new customer, or $1 you could spend retaining your existing customers.

To properly measure your efforts to attract and/or retain customers, it is best to start by determining three things (typically for a fiscal year):

  1.       The current number of customers you started the fiscal year with
  2.       The number of new customers you obtained (your acquisition rate)
  3.       The number of existing customers that left (your attrition rate)

Focus on reducing attrition

Since we determined the most profitable way to increase the number of customers is to reduce the attrition rate, I would focus time and efforts on reducing attrition. If you’re unsure why the customers are leaving, it would be a good thing to research.

An old-fashioned telephone call from the business owner might be a good place to start.

I think there is a lot to discover from this effort, with very little additional cost invested. You already invested the money to attract the customer in the first place, so why not spend a little more and keep them around?

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