RETENTION COST
Retention costs are the marketing costs (or marketing investments) that are designed to increase customer loyalty (or decrease switching)
The intention is to increase the length of time that a customer remains a customer of the firm or brand
Acquisition cost
The acquisition is important to draw in new customers and expand the base
Retention is normally less costly and builds loyalty and the brand
Customer retention cost
Customer retention cost (CRC) is how much you spend to keep one customer buying from you for as long as possible
CRC is the cost of customer retention over a specific time
Customer retention cost includes
1) providing training/tutorials and professional service for customer success
2) costs related to customer services such as salaries for customer service agents, renewal team members, engineers, and executives
3) various examples of customer loyalty programs
4) account management teams’ cost
5) programs and tools for customer engagement such as chatbots and adopting new features
6) customer usage of your product, software, features, etc
Improving customer retention rate
1) request regular feedback from your customers regarding how they use your service or product
2) use this feedback to improve your product’s market fit continuously
3) provide easy-to-understand onboarding materials and training to reduce the need of recurrent training
4) automate your customer success processes where possible
5) create a customer-centric pricing tier based on cost per customer
6) charge a customer according to the cost of supporting their needs
7) you can then segment these customers into sustainable pricing tiers to improve your margins and profit
Retention cost formula
1) total retention costs incurred during the year (or another period applicable)
2) number of customers retained in the following year (or another period applicable)
Formula is
(Total retention cost) / (number of customers retained)
Customer retention cost per customer
(average annual cost to retain a customer) / (annualized customer retention cost by the total number of active customers
Strategy for spending customer relation
75% strategy
According to YFS magazine, you should dedicate at least 75% of your marketing budget to customer relation
Standard customer retention rate
For most industries, CRR sits below 20%
The media and finance customer retention rate is about 25%
Online businesses like e-commerce and SaaS companies have a customer retention rate that hovers higher at around 35%
Ways to improve your customer retention rate
1) make it easy for customers to get in touch with you
2) check your online presence
3) quickly answer customer questions, solve their problems and keep them as customers longer
4) something you can do to make things easier for a new customer ie welcome email, view demo, free trial, contact us
5) consider running a price sensitivity test to determine what the right price should be
6) something you could do to inspire more loyalty and increase CRR ie. an odd surprise gift
7) zoom in on your competition
8) look at your product ie your product is the first place you should check for ways to improve
9) look for trends, both good and bad in the reviews people for you, if possible, ask old customers about their experiences and find out why they left
10) it is important to be strategic about changes you make, recheck decisions and focus on sustained, manageable improvement and optimization
Customer lifetime value
It is equal to = (average purchase value – average purchase frequency) X (average customer life span)
Average purchase value
It is equal to = (total revenue) / (number of purchases)
Average purchase frequency
It is equal to = (number of purchases) / (unique customers)
Average customer lifespan
It is equal to = (customer lifespan total) / (number of customers used in equation)
Product return rate (PRR)
How often are products being returned
E-commerce businesses use this metric as an indicator for the quality of products and customer service they offer
Churn rate
Basically the rate at which you are loosing customers or users (make it as low as possible)
Customers loyalty
Customers commitment or attachment to a brand, store, manufacturer, service provider or other entity
1) a behavior towards the product
2) an attitude to behave
Behavioral brand loyalty
Measured by the proportion of the purchase
1) undivided loyalty
2) occasional switcher
3) switched loyalty
4) divided loyalty
5) indifference
Churn rate or attrition rate
The rate at which new customers try a product or service and then stop using it in a given period of time
Retention rate = 1 – the churn or attrition rate
Problems with behavioral approach
1) a customer may be making a repeat purchase not because of any true loyalty or commitment
2) but because of convenience, price, availability, or inertia due to habit
3) inertia suggests a low sensitivity to the brand since purchases are made without a real motive for the choice
Attitudinal brand loyalty
Include a favorable attitude that reflects a preference or commitment expressed over time, emotional attachment, evaluation
1) no loyalty
2) inertial loyalty or spurious loyalty
3) latent loyalty
Relationship commitment
1) an enduring desire to maintain a valued relationship
2) loyal customers, high repeat purchase behavior, and strong attitude
Emotional Bonding
1) brand affect, brand equity
2) company attachment
3) establish feelings of closeness, affection, trust, and respect
4) IT may limit emotional bonds
5) personal contacts, non-verbal signals, friendships, and personal interactions are critical elements
Trust
1) willingness of customers to rely on the organization
2) reduces uncertainty/risk
3) honest, fair, and responsible
Choice reduction and habit
1) people have a tendency to reduce choice
2) there can be a switch cost associated with the change to the unfamiliar, untried or the new
3) there may be costly in time, money, and risk
Reasons for customer loss
1) dissatisfaction
2) relative advantages
3) conflicts
4) loss of trust
5) cease to need
6) novelty seeking
Customer retention strategies
1) welcome
The organization’s appreciation for the initiation of a relationship ie making a good first impression
2) reliability
The organization can repeat the exchange time and time again with the same satisfying results
3) responsiveness
The organization shows customers it really cares about their needs and feelings
4) recognition
Recognition and appreciation helps to maintain and reinforce relationships
5) personalization
Use CRM system to tailor promotions and products to the specific customers
6) reward strategies
Compiled by
Avinash Kulkarni
Chartered Engineer, Govt Regd Valuer, IBBI Regd Valuer