RETAIN PROFITABLE CUSTOMERS - TO GROW?
There are two contrasting ways to
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:
margin dollars(last 3 months)
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
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?
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.
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.
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
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
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
“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.
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