Customer Retention is Important for the Bottom Line
It’s clear to most small business owners that the driving force behind their continued existence is customer sales. Without customers (or simply limitless wealth), you don’t have a business. Every new business starts out with the goal of attracting new customers, but what happens if you’ve been around for a while? How important are new customers compared to repeat customers? It should come as no surprise that repeat business is extremely important for your company’s bottom line. Indeed, as much as 25 to 40% of all business comes from existing customers.[1] But how much time and money should you spend on customer retention versus attracting new customers?
The Cost of New Customers vs. Repeat Customers
Repeat customers don’t just help you in the short-term at the check-out stand. They also help keep your business afloat during lean times and amplify success during the good times.
There’s an old marketing pillar that suggests that new customers cost much more than existing customers. There is plenty of truth to this idea. One study even suggested that you could spend as much as 6 or 7 times more for new customers than you would for existing ones.[2] But, why is there such a discrepancy?
To put it simply, existing customers are less prone to price watching, less in need of explanation, and less likely to defect to competitors if you continue offering quality service. New customers, on the other hand, are not going to be keen on making big purchases and it will cost you a lot in marketing, logistics, and account setup. After all that time and money you spend on new customers, they may end up doing business with a competitor for their next purchase.
On top of that, repeat customers spend big. One study showed that spending from existing customers is 67% (a full two-thirds) more than that of new customers.[3] Another study indicated that new customers spent an average of $24.50 on ecommerce compared to an average of $52.50 for repeat customers.[4] Money talks, and when you’re getting considerably more of it from existing customers, you may be inclined to listen.
The Long-Term Value of Customer Retention
Repeat customers don’t just help you in the short-term at the check-out stand. They also help keep your business afloat during lean times and amplify success during the good times. One study showed that an increase in customer retention of a mere 5% could produce profits as high as 95% in some cases.[5] Another study conducted by the Gartner Group showed that 80% of your upcoming revenue will be produced by 20% of your returning customers.[6]
Again, existing customers are more likely to spend more at checkout, but they’re also more likely to spend that kind of cash more often. Likewise, you can’t discount the effect of referrals. Even if one existing customer only helps you convert a single sale, it’s a sale on which you didn’t waste you marketing budget.
Where to Put Your Marketing Budget
You shouldn’t take these statistics as a license to avoid culling new clients. After all, every existing customer was once just a potential consumer. What you should do, however, is place a greater importance on customer retention. Some statistics show that the standard customer “lifespan” is about 2.5 years. But, even if you can retain a customer an extra month beyond that, you can experience a 3% net annual growth.[7]
But, how do you go about keeping clients happy? The simplest answer is, of course, providing quality customer service. One poll indicated that 52.7% of consumers would rather shop at a small business because they can provide personalized service, and over 61% of respondents indicated that they’d be willing to pay more for that experience.[8] Even so, a survey conducted by Bain and Co. revealed that 80% of businesses rated their customer service as exemplary while only 8% of their customers concurred.[9]
Quality customer service isn’t the only thing you can do to retain customers. You still have to indicate value, and you can do that with personalized emails, letters, or other marketing material. If your business relies heavily on service, then you may not need these added touches. But, if you are product-based business, then it’s always a good idea to keep in touch with your existing clients.
Clearly, the ROI for marketing to existing customers is going to be greater than the one for marketing to new customers. Again, you can spend 6 to 7 times more for new customers than you would for existing customers. Thus, it’s vital to devote part of your marketing budget toward consistent, lifetime customer retention.
