RETENTION COST-ALL YOU NEED TO KNOW

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

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