Retaining customers is important for any company. For businesses structured around a recurring monthly revenue (RMR) model, however, the impact of customer defection is particularly acute. If your business relies on RMR, it’s important for you to know the financial cost of customer attrition, keep track of your retention rates, and implement more effective strategies to retain customers.
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Cost of Retention versus Defection
We all know the old axiom that it costs less to keep a loyal customer than to attract a new one. According to the Harvard Business Review, improving customer retention by a mere 5% can yield up to a 100% profit increase. The actual impact of customer defection on your company depends on a number of factors:
- The cost of incentives to attract new customers. Do you have to offer steep discounts to your subscription to pull people away from your competitors? What are you spending on your advertising and marketing campaigns?
- The cost of incentives to keep loyal customers. This could include product innovation, ongoing discounts, investment in customer service departments, and the development of VIP features.
- The reason customers are leaving. Are customers unhappy with your customer service? Do they prefer a competitor’s product? Is your pricing competitive? Or is it simply because individual customers periodically move away from your region, leading to regular turnover in your base?
The causes of customer defection is perhaps the most critical factor, leading to the next point…
Keep Track of Customer Defection
The first step in reducing your defection rate is to know what it is. Starting this month, begin tracking your average defection rate, including the average amount of time that you retain clients. Once you know your average, you can begin setting clear, achievable goals to improve retention.
Likewise, start reaching out to defected customers with short, simple surveys to determine why they’re leaving your company. Periodically reach out to current customers to determine why they stay. You need to know what you do well and where you can add value to your company’s brand so you know where to invest in improvements. For example, it would be foolish to throw a large amount of resources at diversifying your products when the real problem is that customers are dissatisfied with your billing system.
A Smarter Way to Reduce Customer Defection
Doing solid research into the buying patterns and motivations of your customer base enables you to implement a better retention strategy. However, even with this information, it can be difficult to determine which customers to target with incentive campaigns.
Recent research from Harvard Business School indicates that, in fact, businesses frequently miss the mark because they target the wrong group of customers. Instead of simply targeting the group of people most likely to defect, your company should consider which customers would be most valuable to retain. For example, high-quality customers include those likely to opt into expensive packages or purchase add-ons. When one of those customers defects, it costs your business more profits than the defection of a customer that only purchases the minimum subscription.
When constructing your defection reduction strategy, don’t forget to calculate who your most valuable customers are and include incentives aimed at that group.
At the end of the day, customer retention is about more than just profits. It’s about the value of your brand. When customers have positive feelings about your company – whether the quality of your product, the friendliness of your service, or frustration-free payment – they are more likely to stay loyal. Also, they’re more likely to refer their friends, leading to even more loyal customers!