I was reminded recently of the Sebastian Junger book, The Perfect Storm. If you’ve not read the book, I highly recommend it. (The movie? Not so much). The book recounts what has since been called, “the storm of the century” following the destructive path a Nor’easter tore up the eastern seaboard in the fall of 1991. Junger goes into great detail about the fishing industry, weather patterns and sailing, among other topics. As someone who likes to keep their feet firmly planted on the ground, the book retells several harrowing accounts; some of which are of survival, while others aren’t.
What has always stayed with me is the idea that being even one degree off your navigation can have a long lasting, negative impact on just about everything. The longer your off course, the longer and harder it is to course correct. (Only natural). BUT, take this idea and apply it revenue and customer retention, and the same philosophy applies.
All too often we see businesses, while managing competing priorities, settle for a “fine” or "average" retention rates when, with just a small shift in resources, companies could see a significant impact on their bottom from as little as a 1% increase in customer retention.
A research report conducted by Aberdeen Group, found that Best in Class Customer Experience Management (CEM) Companies – the top 20% - averaged 82% customer retention. Now, the customer retention rate of the cross industry average (the middle 50% CEM companies) was 77% while laggard CEM companies averaged only 24% customer retention.
Perhaps you have a 90% or greater retention rate. Whenever someone tells us they have a great retention rate, we’re always curious to hear their definition of “great.” Is the industry average of 77% retention great? How about Apple’s 83%? More importantly what’s it worth to improve your retention rate by 1%, 5%, or even 10%? What’s it worth to improve your retention rate to world class standards?
I like to say, the numbers don't lie, so here they are:
Your average annual retention rate equals (the number of customers you have at the end of the year minus the number of new customers added during the year) divided by (the number of customers you started the year with). Your average tenure can be calculated as one divided by your annual retention rate, for example:
If you have an 80% retention rate, by definition that means you lose 20% of your customers annually. If the company loses 20% a year, then the average customer stays five years.
By turning customers over, a business is constantly spending money to acquire a new logo to take the place of the one they lost. Raising retention to 85% doesn’t gain the company in this example much; the average tenure is still only 6.7 years. But look what happens with 90% retention. The curve begins a dramatic ascent. Tenure increases dramatically at 90% retention.
So, if your satisfied with a “fine” or "average" retention, you might want to think again. Look at the money you’re leaving on the table by not getting to 91%, 92% or even 93%. If they can get even better than that, the economics become incredibly powerful.
It ought to be clear by now that implementing a retention strategy makes extremely good fiscal sense. Don’t believe me? Check out our Impact Calculator. It depicts in dollars and tenure the impact to your bottom line increasing your customer retention rates can have – even by the smallest percent.
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