What is the aim of your business?
I would hazard a guess that the response to that question will be dominated by the growth of turnover and profits. That the primary goal will be a financial metric.
This is very much the culture in the United Kingdom. Company boards are dominated by finance executives with backgrounds in banking and accountancy. When business journalists report on annual reports, when press releases are drafted, the headline is often about profit growth or an explanation as to why losses were incurred.
However, such a reliance on financial statistics can be misleading and it can mask the true health of a business. Carillion, the failed construction and public procurement firm posted profits year after year. When the firm collapsed, it was found that those profits were being generated by dodgy accounting practices, using subcontractors as a line of credit and by bullying subcontractors to accept payments far below the actual value of the contract. Carillion may have been profitable but its strategy of growth by always being the cheapest option backfired spectacularly. Contracts were drawn up in such a way that even the shortest delay in the completion of the work made contracts unviable.
Marketers view business differently and although we respect the need for financial prudence and the need for income generation, we also look to other metrics to define the health of a business.
Theodore Levitt, the long-time Professor of Marketing at Harvard University, said:
“The purpose of a business is to create and keep a customer”.
To many business leaders, that sentence ends at the word create: little or no attention is paid to the ‘keep a customer’ bit.
It is true that for a business to survive in the long-term it needs a constant stream of new customers but the business shouldn’t focus solely on new customer acquisition. Supporting and serving your existing customer base is as important.
The United Kingdom is a mature market. That means that for most businesses to gain new customers, the primary strategy is to take those new customers from your competitors. Market share is gained at the expense of your competitors.
Of course there are exemptions to this rule, particularly if you are dealing with new technology but most major market sectors, from automobiles to food, there will be an existing option available and your task is to take business from that option.
In his book, The Loyalty Effect, Frederick Reichfield looked at the results obtained when businesses lost fewer customers each year.
The book attracted a lot of interest amongst business leaders, until many of them discovered how difficult and costly customer retention can be. Many of these business leaders thought they could achieve the customer retention targets promoted by Levitt by tweaking existing tactics. They failed to recognise that increasing customer retention was a strategic issue which involved major changes in the way their companies operated.
Many of these businesses thought they could improve customer retention levels by automating their customer relationship management. They thought the focus was on reducing the cost of customer retention. They were wrong. Costs were reduced, the return on investment improved, but retention levels remained static.
However, businesses which treated customer retention as a strategic, not a tactical issue, and who gave customer retention priority, showed some startling results.
Where businesses set a target to increase customer retention by 5%:
- Credit card businesses increased profits by 120%
- Credit insurance, the lowest benefitting sector, showed a profit increase of 20%
- Other sectors examined showed a profit increase, on average, of 40%
This clearly showed that in a mature, sophisticated market, customer retention is critical to the generation of increased profits possibly more important than new customer acquisition.
As stated in previous blog entries, customers are fickle. They will only stay loyal to a business as long as a better offer is unavailable (or what they perceive to be a better offer). Customers will only stay with a business as long as they believe they are getting better value from that business than from its competitors. They must get their needs and wants satisfied in a way which answers the question; What’s in it for me?”
For example, when FairTrade promoted their offer as: Protecting the Environment; Trader Rights; and Animal Welfare: returns fell. But when the promoted their brand as: Healthier Food; Quality Food; and Child Friendly: results improved and the brand improved its customer retention.
So what are the steps involved in developing customer retention:
- Constantly add customer value. Products and services cannot be static in a dynamic market. There needs to be new reasons for customers to buy your product over that of your competitors. that is why washing powders and toothpastes are constantly being reformulated.
- You need to know what your customer base wants. Too many businesses assume they know what customers want and do not ask them.
- Satisfy customer needs and wants. Give customers what they actually need and want not what you think they need or want.
- Make sure that customer get more of what they need and want from your businees than from your competitor’s offer.
- Make sure customers Know that they will get more of what they need and want from your business than from those of your competitors.
And beware customer value migration. Consumer needs and wants will drift over time. Things that were highly valued five years ago, and seen as factors which differentiated your product from that of your competitors, may now be seen as generic and of lower worth.