Acquiring new customers is important, but retaining them is more profitable. In order for a business to survive, it needs money. To make money, you need customers. More specifically, you need happy and loyal customers. If your business focuses on customer satisfaction, it is more likely to keep these customers happy and returning.
Gaining a new customer is similar to making a new friend, as it is exciting and rewarding. Just because you’ve made a new friend, you wouldn’t ignore your old friends. The same applies with customers. The long-term customers add more value in the long run, than newer/single-deal customers. So, if we can keep a larger percentage of the long-term customers happy, we end up with more profitable and predictable customers.
The type of customers you want
The repeat/long-haul customers:
- Are loyal and satisfied
- Perhaps make multiple purchases/ continue to use your product
- Talk about your product/brand
- Would recommend your brand/product to a friend
Why these customers?
1. It is cheaper: A study from Invesp found that it costs five times as much to acquire a new customer than keep an existing customer.
2. Loyal customers purchase more: Current customers are up to 60-70% more likely to purchase again. Whereas, 5-20% of new prospects are likely to purchase. Big difference! By showing value to your current customers after their first purchase, they’ll likely follow up, giving you repeat business from customers who trust your brand/service.
3. Promotion of your product: Long-haul customers usually promote your product to friends and those in their network. After all, they have been using it for some time. Word of mouth is one of the most credible forms of advertising, not to mention, it is free!
4. More profitable in the long-term: By simply understanding your most valued customers, and providing exceptional service and support, you will help one another to thrive. (the more a long-haul purchases, the more they grow, thus more demand).
To put things into perspective, according to a study by 1Financial Training services, 96% of unhappy customers don’t complain, however 91% of those will simply leave and never come back. This means that knowing how your customers feel, is of great importance. How can you help if you don’t have a clue how unsatisfied they may be?
What is churn rate and why is it important?
To put it simply, customer that have churned are those who have cut ties/stopped using a product or company.
The reason why churn rate is so important, is because it measures the wellbeing of a business.
How do I measure churn rate?
Depending on the industry or product, churn rate is measured monthly, quarterly and/or yearly. This does differ for companies that price a product/service on a monthly/quarterly basis, such as SaaS companies, who need to check it more frequently.
As churn rate is the percentage of customers who end their relationship with your business at a certain point, calculating it, is fairly straightforward. There are multiple ways of calculating churn, however, the basic way, is to take the total number of customers who left your business in a certain period, and divide the total customers at the beginning of the period.
Example: Churn rate for month of April
April 1st: 6,000 current customers
April 30th: 5,490 current customers
Minus customers from start of the month and end of the month
6,000 – 5,490 = 51
Calculate churn rate: 510/6,000
Churn rate: 8.5%
The ideal churn rate is 5% or lower. So, if this example was a real churn rate, some drastic actions, to do with communication and onboarding would have to be taken, in order to reduce it, and keep valuable customers and improve customer satisfaction.
The bottom line
Of course, it’s important to acquire new customers, but the real value lies with the customers that you can provide value to, and who are valuable to you. By focusing on the value of these long-term customers, you’ll likely increase repeat sales, and build a customer base that you know and understand.
Author Bio
Natasha Hoke is the Marketing Manager at Upscope, the co-browsing customer support application. She enjoys content writing, anything tech related and design. Follow her on LinkedIn or Twitter to see more of her writing.
Trying to clarify the math used the article,…
This concept of “churn” is important, and the reasons articulated in the article for keeping good long-term customers are valid.
But, let’s add some detail under those two numbers used (6,000 and 5,490), by saying that 300 new customer numbers were added during that month of April. To accommodate that fact, the April 30th number of 5,490 must have only 5,190 repeating/long term customers. “Churn” is New/Total (300/5,490=5.4%)? The number illustrated in the article is Customer Base calculation of -8.5%, not Churn. That loss of monthly business volume should be investigated to understand what happened and why.
To be fair, customer “churn” is typically a longer term view, typically Annual, depending on the product or service and the industry so that seasonal patterns can be normalized and true “long-haul customers” can be recognized in the business. A business may get 4 transactions per year from a specific customer number, for many that would not happen in April, so it would be incorrect to “drop” them from the planning for customer attention.
“Churn” is the replacement of established customers with fresh/new customers (5.8% above), very different from the Customer Base calculation.
Now let’s assume that 4X/year purchase pattern, a strong second half business cycle, and a year-end fiscal year/analysis period. Instead of a business declining at 8.5%, let’s find that it is growing at 12%. With the same numbers for April, a straight-line Jan 1 Customer Base was 5,825 and the Dec 31 Customer Base will be 6,524 (+12%, 6,000 on Apr 1st). For sure there are than 699 new customers (6,524-5,825) inside the total of new customer numbers. Let’s say that April was typical for establishing new customers because of the promotions done in the 1st Quarter, so that the annual count of new customer numbers is 3,600.
6,524-3,600=2,924 long-er term customers in the 12% larger customer and “churn” (replacement in the base) of 3,600/6,524=55.2%.
One excellent way to “grow” the business is to reduce churn, retain existing customers. Improving that example 55.2% number to 40% “churn” (not easy) will produce a much larger year-end customer base of 9,000!
Now apply the 4X/year assumption and you can easily see the POWER of retaining long-haul customers, the main point of this article.
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