Merrifield Consulting Group

















RETAIN PROFITABLE CUSTOMERS - TO GROW?

 

            There are two contrasting ways to grow sales:

                        1.         Dig for new business volume faster than you lose old business; or,

                        2.         Retain old business at a greater rate than your competition.

 

            Consider some account turnover statistics that are quoted in the grocery store industry. The average store supposedly loses 25% of their customers every year of which 11% are offset, because people die and move away, but new customers are born or move in to the store's trading area. Still, a net of 14% switch to some other store. What if a store was so good at keeping customers that it lost only 4% of its regular customers while the competition was losing 14%? The better store would grow 10% a year, which is a great rate considering that food consumption will grow only 0.7% per year.

 

            The traditional strategy of hustling new accounts has declined in appeal for several reasons. In the slow-growth, consolidating industries that most distributors are in, the entrenched competition doesn't give up business easily and usually gets last look to counter any new competitive proposals. So, a prospecting firm must invest extra marketing dollars to build a case and if you then land the account, the margin dollars captured may be less than the cost of servicing the account. Military wisdom estimates that you must have a three-to-one firepower advantage (and manpower losses!) to dislodge an entrenched competitor. Continue to look for new business on a targeted and opportunistic basis, but take a closer look at a formal account retention program.

 

            Most firms measurement systems and marketing programs are still biased towards new business. From 1946 to 1981 this bias worked as we were filling up and growing up with America. Now population growth has flattened and 75% of Americans admit that they have more possessions and activities to do then they have time or need for.

 

            We should worry less about how many new credit applications per month we are processing, and start measuring customer retention rates.

 

            How do we measure customer retention rates? You might start with a monthly set of reports for each sales territory, profit-center, and the firm overall in which you compute and rank accounts by the following ratio:

                                                Gross margin dollars(last 3 months)     

                                                Gross margin dollars(months 4-6 trailing)

 

            This ratio would let you determine if the last three months of business for an account were trending up, down, or flat over the three months prior to that. If all the accounts were ranked from high to low, you should look carefully at both top and bottom accounts. Up accounts should be so because of new programs that you have been working on and not because your competition has put them on credit hold. Look for down accounts that are desirable, but may have decided to switch their business elsewhere and try to save them. This is a reactive way to retain accounts, but it is better than discovering a switch a year later. You can also compare overall ratios for each territory and profit center to: flag those ones for which the overall trend is sliding; determine the structural reasons; and address them.

 

            This remedial ranking report helps to measure how many horses have recently left the barn, so that we can hopefully catch them before they get to far away. How can we preventatively keep them from leaving to begin with?

 

 

1.         Work towards zero errors, 100% on-time delivery, etc., which will give customers fewer reasons to be alienated. Then, each time a customer does complain, work on “heroic recoveries” to turn negatives into positives; keep and grow loyalty.

2.         Identify your most profitable class of accounts and give them some extra attention and services beyond the basic perfect service the rest get. Make sure that all employees know by heart the top ten who pay a big percent of their wages.

3.         Don't wait for customers to complain about the last straw as they are taking their business elsewhere. Go to them proactively and preventatively to smoke out growing sources of dissatisfaction and nip them in the bud. Twice a year send surveys out to the top 100+ customers. Ask them to anonymously rate your service/value capability against the competition.

     Make the survey one page; enclose a dollar for their effort and a pre-addressed, stamped envelope; identify them as one of your best customers in the letter and sell them on their vested interest in writing in any and all candid complaints and compliments; assure them that all scores and comments will be use constructively and discretely; consider having the return address go to your accountant's office to add to the air of anonymity. The cost of these types of surveys are minimal to the amount of helpful, preventative-loss information that you will glean. Case studies find that the most active accounts take the request seriously and a high percent return the surveys with much thoughtful input.

 

4.         Motivate customers to complain about unsatisfactory service. Most of us have gone to a restaurant; not been satisfied; left without complaining; never gone back; and given negative reviews to a number of our friends. Restaurant managers assume that for every customer that complains perhaps 20 felt the same way and left quietly.

     How do we get 10 to 15 out of 20 dissatisfied customers to complain so that we can cure them to keep them, and then use the negative feedback to rethink our service delivery to prevent future failures? We can all advertise our eagerness to hear about any service complaints, and then not be defensiveness when some customer does offer a thoughtful criticism. Another powerful method is to offer an unconditional service guarantee on measurable elements that are important to the customer and which will focus and motivate our employees.

    Something like, “we guarantee zero errors and on-time delivery or you get $X off on the spot.” It has worked well for Federal Express. The whens, hows, and whys of “unconditional service guarantees” is another topic, but you can bet that more customers would be giving you feedback with a chance to save the account and fine-tune the organization.

 

5.         Keep good employees from turning over. All service firms are having a tough time keeping good employees, and new ones make more mistakes and have no initial rapport with best customers. Employee turnover costs may be greater than paying good ones higher wages to stay. Good employees keep customers, and happy customers keep employees; conversely, complaining customers depress good employees into leaving. Get a positive spiral going between these two groups.

 

            In this slow-growth, post-consumer era, the time has arrived in which customer retention programs are more important than new business efforts. Consider measuring how well you are retaining customers, especially the key ones. Spend more of your discretionary marketing resources on retention and less on prospecting. Look further into the technology of “perfect service, heroic recoveries, and unconditional guarantees,” and then act.

 

© Merrifield Consulting Group, Inc. Article # 3.3