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What is Customer Retention Optimization?

By University Alliance
What is Customer Retention Optimization?

There is a popular expression frequently cited by marketers that neatly encapsulates one of their critical objectives: “Your next best customer is the one you already have.”

It’s great when a business is able to drive in a steady flow of new customers. Keeping those customers coming back, however, can pay much larger dividends. One study showed that customer acquisition costs five times as much as retention. And another study by the Harvard Business School found that increasing retention rates by a mere 5% can catapult profits by as much as 95%.

The ability to realize the benefits of retention marketing begins with analytics that establish the lifetime value each customer creates for the business, which gives a guideline on how much should be spent to retain them. This is how customer retention is optimized.

Understanding Customer Lifetime Value

The customer lifetime value (CLV) is the amount of revenue earned from each customer throughout their lifetime as a customer of the company. There are several formulas that can be used to measure this. Management Accounting Quarterly combines contribution margin, marketing cost and probability of purchase. Others use a combination of equations, averaging the results for the final CLV.  Most calculations, however, incorporate some combination of customer lifespan, customer retention rate, and profit margin per customer.

The analytics should also factor in such variables as business type, industry and customer profiles, as all of these can make a difference in the final CLV. Because there are so many variables, it becomes important to find reliable formulas that use relevant metrics.

It can also be helpful to apply lifetime value (LTV) calculations to customer segments to better understand the value of a good customer versus an average one.  It’s likely that the acquisition costs are higher for good customers, but they are also likely to come back again and again, ending up much more profitable to the company.

Best Practices to Improve Retention

Once the CLV is established and an understanding of the marketing retention budget is finalized, the retention marketing program can be fully developed. A variety of best practices can be put into play, but it’s critical to understand that LTV is best boosted by increasing customer satisfaction. One study by customer analytics firm KISSmetrics found that 68% of potentially loyal customers will leave because of poor treatment while only 14% cite their dissatisfaction with products or services as a reason to leave.

In addition to stepping up training and performance expectations for customer support teams, it’s important to set up outreach initiatives that reinforce a strong relationship with customers. More importantly, this can provide valuable insights to management of points of disconnect that might cause customers to leave. Surveys at various touch points, like the cash register, when registering a warranty or upon completion of calls to customer service representatives, should ask customers about their experience, what worked and what didn’t and what could be improved upon in the future. If they are leaving, ask why.

Customer loyalty programs can also be helpful in solidifying relationships and establishing lines of communication. These can be set up any number of ways, depending on the business’ nature and needs. Rewards for accumulated purchases are one common option, for example.

Whether the business is in e-commerce or the company website is simply an online brochure acquainting customers with products and services, it is helpful to monitor Internet traffic to the website to make sure it is doing the job as a productive touch point. What pages are getting the most traffic? How long do visitors stay on specific FAQ pages? Do these need freshening? And is there a feedback form or “contact us” information that can be easily found?

Ultimately, the key to retention marketing is to under-promise and over-deliver. By setting expectations early and never failing to meet them, long-term customer loyalty can be earned. Businesses must always keep in mind that customer profitability typically increases over the life of a retained customer. This gives extra incentive to work hard to understand the lifetime value of customers across multiple segments and allocate appropriate resources to developing meaningful customer retention strategies.

Category: Marketing