Forget Acquisition; Win Your Current Customers First
The most common misnomer in business is that customer acquisition is king. While it’s clearly important to drive cost-efficient acquisition, if the client leaves shortly after they’re acquired, it’s money down the drain.
This is common knowledge, right? It’s vastly more expensive to acquire a new client, costing as much as 10 times more than holding onto one, dependent on the industry. Companies can spend just a fraction of their customer acquisition budget to reduce customer churn dramatically—and yet, despite this widely-known and demonstrated fact, businesses continue to pour financial resources into acquisition while woefully under spending on retention.
The Value of Retention
There are a number of reasons to prioritize customer retention over acquisition—or, at the very least, to treat the two with equal importance. For one, holding onto your existing clients can have a significant impact on your bottom line. A study conducted by Bain & Company and the Harvard Business School demonstrated that raising customer retention rates by 5 percent could increase revenue by anywhere from 25 percent to 95 percent. Recently at Hyperwallet, we were able to leverage our loyalty programs for our clients’ payees and reduce attrition by between 10-15 percent. This translated to a 50 percent increase in profitability within the sample set, indicating that delighted payees were more inclined to make repeat purchases from our clients.
That relationship comes with another benefit, too: referrals. Good or bad, customers are more than happy to share their opinion of your company with others—and, in this age of social media, word-of-mouth travels far beyond earshot. Today we know that consumers both a) trust the opinions of family, friends, coworkers, and even digital strangers more than advertisements; and b) tend to seek out those opinions online before making buying decisions. A satisfied client base is likely to project that satisfaction outwards to other potential customers. So, in a round about way, focusing on retention can actually help drive client acquisition.
And then there’s prospect depletion. Years ago I was running the credit card portfolio for a top 10 issuer and we realized it wouldn’t be long before every American had one of our cards, leaving a rapidly diminishing pool of customers to market towards. Meanwhile, we were attriting away a portfolio the size of one of our smaller competitors. We shifted a lot of our top talent (not to mention sizeable budget) to the customer management side of the business. This grew our bottom line through reduced attrition—and as we lowered our expensive acquisition channels, we were able to hit the same revenue numbers.
Improving Customer Management
There’s no shortage of strategies for reducing client churn, but I’d like to focus on two that can—at the same time—help your company drive revenue: incentives and personalization.
1 - Incentives
People like getting things for free. It’s a fundamental part of our nature: studies have shown that bargains make us feel good about ourselves on a biochemical level. As a provider, our goal is to provide the highest perceived value to our customer at the lowest actual cost. Incentives offer a strategic way to satisfy both parties, giving companies a method of delighting their customers with complimentary goods and services while simultaneously earning money.
Rather than simply handing your clients free value in hopes of improving their opinion of your company, use incentives to reward them for performing certain actions or behaving in a certain way. At Hyperwallet, we created a travel incentive program to drive payees to use their prepaid cards. Payees get huge rewards for something they’d likely do anyway (i.e., spend their money), while Hyperwallet earns additional revenue on the card spend and our client sees attrition reduction and higher sales.
2 - Personalization
Of course, the above example requires that the consumers actually want the incentive being offered. You can promise me all the travel rewards you want, but if I’m afraid of flying, it’s a moot point; I’m not interested. This is where personalization comes in. The emergence of big data has given us a wealth of information on all consumers, but on our clients’ existing payees in particular. Harnessing this resource to deliver personalized customer experiences is key to retention in the new economy.
Let’s revisit our prepaid card incentive program. Instead of offering travel discounts to payees who use our prepaid card, we could give them a range of reward choices personalized according to the unique information we know about them. In the card world, we have transaction data to help guide our targeting and segmentation; in your business, it could be demographic, psychographic, propensity, or other itemized shopping behavior. By leveraging this data, custom promotions that meet the aspirations of your client/cardholder can lead to meaningful profitability for your business through more consumer actions and higher rates of retention.
Retention is a Relationship
While acquisition is about making a sale, retention is about building a relationship—and, like any healthy relationship, you need to work at it if it’s going to last. Show your customers that you care about their business and they’ll respond with loyalty. Give your customers a reason to be excited about your company and they’ll help that excitement spread. Use incentives and personalization to truly win your customers and your business will reap the long-term rewards.