Happens almost every day.
I run across small (and not so small) businesses who are wasting one of their most valuable assets: Their current customers.
If you have 1000 customers and you average $1000 per sale per year for each of those customers, your business is raking in $1,000,000 per year.
Regular studies have shown that across a random selection of retail and service sectors, businesses lose 19% of their customers (on average) each year for an assortment of reasons.
That’s 190 customers per year for the company mentioned above.
If you’re thinking “That doesn’t apply to MY business”, please play along OK?
Here’s why customers leave a business and the percentage of time each reason is given:
- 1% die
- 3% move away
- 5% leave because of a recommendation from a friend or relative
- 9% leave because they perceive that another company has better products, service or prices
- 14% leave because they are dissatisfied with your product or service
Ok, so far we’ve identified the littlereasons given for the loss of 32% of the customers you lost in the last year.
The other 68% of the customers gave another reason for going somewhere else – and it’s probably not the one you suspect.
68% percent start doing business with another company leave because of a feeling of indifference on the part of the vendor (or their staff), leaving them feeling taken for granted.
What if the research that provided these numbers is only half right?
That is, maybe only 34% stop being your customers due to perceived indifference on the part of your business/employees, rather than 68%.
Think about your own situation as a customer and why you change from one vendor to another.
Think about the reasons *you* might give for the last few businesses you vowed to stop working with.
Can you argue with the numbers? Sure, they might be a few percentage points off here and there, but I suspect they’re pretty accurate overall.
Even if your reasons are different HALF of the time, that still makes 34% of the changes due to indifference. Doesn’t that seem like an awful lot?
If that 19% of customers lost per year number is accurate, that also means that a pretty strong 19% gain in new customers is just treading water.
Let’s assume you’re better than average. Are you five percent better? That means you only lose 14% per year instead of 19%.
Even at an above average 14% loss per year, you’re down by 140 customers. That leaves you with 860 customers plus whatever new ones you get by spending marketing money (noting that marketing money spent right will help with retention)
The bad news is that at $1000 per year, per customer – your business income has fallen from $1 million to $860K.
That feels like a lot too, even if it is $50000 more revenue than the average competitor who is losing 19% of their customers per year.
The good news
So if that was the bad news, I wonder what even a little bit of effort on this will gain you.
Our evil plan? To go from losing 14% of our customers per year to “only” losing 12%.
Two percent. Woooooo, right? How much could that possibly improve things?
Two percent of 1000 is 20 customers. 20 customers times $1000 per year per customer is $20000 in increased revenue from your retained customers.
If you run a $1,000,000 per year business, that’s a week’s worth of sales.
Profit is what really matters
Two percent of average revenue doesn’t seem like much, but let’s do the math anyway.
A two percent gain in retained customers in a business with 66% profit / 34% cost means a $13,200 profit increase of $660,000 to $673,200.
Even if the numbers are reversed (34% profit, 66% cost), that’s a $6,600 profit increase. We’ll be conservative and go with those.
Over five years, you’d see a $33K increase in profit by cutting just two percent of your customer attrition each year and without any growth, except to maintain that “typical 1000 customers”.
That’s how two percent equals 6.6%. Surely you can find a way to keep just two percent more each year.
Want to learn more about Mark or ask him to write about a business, operations or marketing problem? See Mark’s site or contact him via email at mriffey at flatheadbeacon.com.