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Follow the 5 / 75 Percent Rule to Turn Customer Retention Into Profit

October 13, 2010

For years, Jason has been an avid exerciser. Running and weight lifting frequent his routine. With such an active exercise regimen, energizing music is definitely required. A few years back, those clunky, skip-prone CD walkmans were the newest craze, but just didn’t cut it for exercise!

Finally, the iPod Shuffle came along. “Wow! All my music on this little stick! This is great!” Jason thought. “But, hmmm…. I’d like more flexibility.” He knew he would upgrade to the newest iPod.

Soon, it was time to replace his PC. “I was ‘pulling my hair out’ dealing with the viruses that had plagued our poor computer! My co-worker had been excitedly telling me all about his iMac. I had to check it out. What did I find? More features, free training, free support and better quality than I had expected. More value for my money than anything else I had compared.” Now, Jason owns not only one, but two Macs and an iPhone.

Yes, Jason has become a loyal Apple (News - Alert) fan. But, they’ve earned his loyalty!

Times Have Changed

Recent reports of economic indicators hint at modest, yet sluggish signs of economic recovery in GDP, consumer spending and corporate profits. The good news is, the economy is beginning to grow. The not-so-good-news is that growth will be slow, taking longer for your profits to recover. 

In good times, customers were almost a dime-a-dozen. In this climate, customers are more like ‘few-and-far between.’ Keeping the customers you have is more important than ever.

Follow the 5% / 75% Rule

Research finds that a modest increase in customer retention can turn into big profits! Successful companies report that a retention rate of even 5% can pay back as much as 75% in profits over the life of the customer relationship.

How does that work? Over time, loyal customers will continue to buy and even spend more across your product lines, just like Jason. Meanwhile, the cost to serve and retain those loyal customers decreases. As a result, profits and overall customer lifetime value increase exponentially.

How do companies achieve results like these? How do successful companies extend the customer lifetime value of their retention investments?

Successful companies have a clear understanding of how they add VALUE to create strong, loyal customer relationships.

Turning Retention into Profits

Understanding how to add real value to customer relationships begins with seeking meaningful customer insights, allowing you to set the right priorities that return significant payback.

Value relates directly to what customers care most about. And, what customers care most about is directly related to what they need from you. For consumers, value often means providing products and services that “make my life easier.”   Business-to-business relationships need partnerships. Your goal is to help clients successfully serve their customers to grow their companies. Ultimately, your customers’ experiences will determine your ability to retain the relationship and grow lifetime profitability.

Let’s look at a simple example.

Are you a coffee lover?   If so, you may frequent Starbucks or your favorite local coffee shop. Coffee lovers demand high quality flavor and freshness, a mouth-watering aroma, and want their coffee served piping hot. But, convenience, without sacrificing the quality of each cup of coffee, is also important. These are fundamental requirements for coffee lovers.

What would make you pay a premium price for a cup of coffee and return again and again? First, Starbucks knows it must nail these fundamental requirements every time. But, Starbucks also knows they must take these customer requirements a step further, giving you something more that will keep you coming back.  

To hook you, Starbucks has created a powerfully unique multi-dimensional customer experience. You know that ‘this cup of coffee was made for me just the way I like it”. And, you’re served in a friendly, respectful and ‘glad you are here’ environment. Starbucks takes each Value Producing Opportunity (VPO) and delivers them consistently across each critical dimension.

When focus is on ‘customer first’, strong business results follow. Starbucks is the model of service and loyalty for not only coffee shops, but for many other companies and industries worldwide.

What are your VPOs?

What can you do to add “real value” and move customers along the continuum from “engagement” to “satisfaction” to “loyalty”?

Start with a seven point assessment to help pinpoint your loyalty and Value Producing Opportunities (VPOs). You probably don’t have the answers readily available. Assemble the right team of leaders to champion this self-assessment. Customer interviews and an honest self-examination will be key to your process.

1.      How are satisfaction and loyalty defined or characterized by your customers? 

2.      What does value mean to your customers?

3.      What are customers’ expectations of you? 

4.      How does your actual performance compare to customer expectations? 

5.      What are the factors that contribute to your current performance levels? 

6.      How do you compare to the competition in the eyes of your customers?

7.      What are your significant value producing gaps?

Answers to these questions are fundamental to the future potential of your company. These insights will reveal your Value Producing Opportunities. Use these insights to determine where to focus your resources for potentially groundbreaking growth.

As you identify your VPO gaps and focus your improvement efforts, make sure you:

·         Prioritize your Value Producing Opportunities – pick 2 priorities to focus on

·         Select the right project team – assign senior leaders as champions

·         Establish a project discipline & accountability - Lean Six Sigma principles provide a consistent project structure to help you drive progress. 

Keep your eye on the target: Follow the 5% / 75% Rule

Follow these simple reminders to turn your retention efforts into big profits.

·         Be a valuable resource – Stay focused on what customers need from you and be relentless in exceeding their expectations

·         Be easy to do business with – Don’t make customers jump through hoops. Ensure your business processes are simple and high quality.

·         Be timely – Don’t make customers wait. Prevent long waiting lines. Be on time for scheduled deliveries and service calls. Schedule appointments at times convenient for customers.

Your customers are your most valuable assets.   Your most efficient way to grow is to keep the ones you have. Customers vote with their feet…. they take their pocketbooks where they get the greatest “value” for their money. Make sure they continue to vote with you!

TMCnet publishes expert commentary on various telecommunications, IT, call center, CRM and other technology-related topics. Are you an expert in one of these fields, and interested in having your perspective published on a site that gets several million unique visitors each month? Get in touch.

Edited by Chris DiMarco

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