August 17, 2021 9 min read
This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.
Opinions expressed by Entrepreneur contributors are their own.
A few years after starting my life as a business coach, my good friend Esteban invited me to join a coaching firm. I would be the retention “director” and he would be the commercial.
From my training, the value of customer retention was clear, that is: How long do they stay with you? How many years of life does a client have, having you as their supplier?
And we were also clear about what in principle has to be done to ensure that a client stays with you for a long time:
- Great service
- Meet and exceed expectations
- Wow effects (surprising little details)
- Deliver results, etc.
So the plan was simple: he would bring in clients, and I would make them stay with us for a long time.
So we were working on the plan, developing strategies to acquire and retain customers. The day soon came when we had to present our plan to the firm’s board.
In the presentation to Esteban it was incredible, his plan was approved and his budget too.
It didn’t go well for me.
The president of the council, a very capable and wise man, told me: “This is all very interesting, Victor, but it is not clear to me how it is going to help us. I don’t see the impact of all these strategies on the income statement, all I see are expenses. Could you explain to me how much the utility will improve if we do all this you mention? “
And I started:
Me – Well, if we do all this we can have happier customers and then we will have a higher retention and …
Don Alejandro – Yes, I do understand that Victor, better service equals greater retention.
I – Ok.
Don Alejandro – What I do not understand is how much money we are going to have a retention department and invest all that money that you mention necessary for the different activities to achieve a better service that in the end will give me a better retention, what would be the return on that investment, Victor?
I was speechless.
The only thing I managed to say was:
I – Ok, I got it, let me see how I can get such a projection and I will present it to you.
Don Alejandro – Perfect. Is it okay for you to see each other in a few weeks?
Me – Yes, perfect.
I felt like a bedbug . First, because my incredible plans that I had detailed with such care had blown me away. Second, because Don Alejandro was right .
On paper it is very good to have good service and to have happy and happy customers. But, if what is done to achieve customer happiness DOES NOT POSITIVELY IMPACT THE PROFITS OF THE BUSINESS, then WHAT IS IT DONE FOR?
For a couple of weeks the only thing that existed in my mind was this puzzle: How can I mathematically show that good “customer service” affects business profits?
The keyword here is MATHEMATICALLY . Anyone can say that it is obvious, but not everyone can prove it with pesos and cents, and that was exactly what Don Alejandro wanted. A kind of formula that would justify any investment in “customer service.”
At the end of three weeks without sleep (my future at the firm depended on it, if I did not manage to give that demonstration my position would not make sense!) I managed to find something half crude, but functional.
Sales in any business depend on several factors:
- The number of clients
- The average amount (what each customer buys on average, average ticket) and the frequency of purchase each when they make a purchase with you.
Talking about clients is talking about ACTIVE CUSTOMERS; Having 1,000 consumers who no longer buy from you doesn’t do you much good; what works are active customers.
Now, I can affect sales if I increase the average amount, the frequency or the number of ACTIVE CUSTOMERS.
And I can increase the number of active clients in two ways: I enter new clients and / or increase the useful life of each client.
That was where I focused until I came to this formula:
CA = VI x Ret
ACTIVE CUSTOMERS = INCOME RATE X RETENTION.
Where the speed of entry is the number of (new) clients that you manage to attract in a period of time. Retention is the number of time units an average customer lasts.
Example:
- You have a business and you have your salespeople who are in charge of getting new customers mainly.
- You know that in an average month five new clients enter. This is your speed of entry (five new clients every month).
- And you know that normally your clients last with you for a year or 12 months.
- Since we said we have to use the same unit of time, we will use 12 months.
- Following the formula then we would have that you have on average 5×12 = 60
- This business has an average of 60 active clients.
Like any mathematical formula, we can also solve for and find other values.
- Suppose you have a business that has 100 active clients, and you don’t know what the retention is, but you do know how many new clients enter each month, and let’s say 2 new clients enter each month.
- If we solve, then we will have that R = C / VI (Retention = Active Customers / Entry Speed).
- In our case 100/2 = 50 months.
- Our average retention is 50 months.
The discovery of this formula completely changed my approach to any business for one main reason.
It’s cheaper.
You have to invest less money to conserve and increase the life of your clients than to invest to enter new clients.
Since then I have seen dozens of businesses that have a great speed of entry 10, 40, 100 new clients per month. But that they were still unprofitable businesses, the reason? clients lasted weeks instead of years.
On one occasion I had a restaurant as a customer, we began to ask if it was the first time that diners had visited us. It turned out that 60% of the customers were new, which may be good news, but in this case it was bad news because the restaurant was already four years old and its sales had not grown in the last two years.
Look at it this way: You have a barrel that you are pouring new water into every day. After a while this barrel will undoubtedly fill up. Unless… he had a leak.
And that was exactly what was happening with the restaurant, new customers entered but did not return, they “ran away.”
After a while this barrel will undoubtedly fill up. Unless… it had a leak / Image: Depositphotos.com
So all the effort that could be being put into marketing and promotions was not working! We were pouring water into a leaky barrel.
What is the solution? Well plug the hole.
But this is just one example of the power I got after understanding this formula. A business grows when its barrel is not leaky. When your retention far exceeds the industry average. And it is much cheaper to train your team to give a good service (from just smiling) than to pay for an ad in Google AdWords or elsewhere.
Finally, the true richness of understanding this formula comes later:
- A client who stays with you for many years is a client who sees a lot of value in the relationship they have with your company.
- A client who stays a few years does not find that value, or finds someone else who gives him that value.
What do you think happens to a customer who becomes a fan of your service? Who do you think I recommend?
The secondary impact is that having a high retention indirectly increases the number of new customers, simply because they recommend you more.
Conclusions
- A business grows faster when it is able to retain its customers (the keg fills faster if it is not leaking).
- It is cheaper to retain than to get new clients.
- A business that has high retention has more fans than one that does not.
- Only a fanatic customer will be able to recommend you as a supplier.
This article is from Entrepreneur.com
