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Issue Date: August 2004

Keep your customers, boost your profits

August 2004
Doug Leather

In today's economy, it is common knowledge that retaining customers can be up to 100% more profitable than acquiring new ones. Research by Gartner, Peppers & Rogers and others shows that it costs five times as much to find a new customer as it does to keep an old one. Despite this, customer acquisition still tends to get the lion's share of most marketing budgets, a reality that belies the customer management commitments many companies pay lip service to in their marketing brochures.

In today's economy, it is common knowledge that retaining customers can be up to 100% more profitable than acquiring new ones. Research by Gartner, Peppers & Rogers and others shows that it costs five times as much to find a new customer as it does to keep an old one. Despite this, customer acquisition still tends to get the lion's share of most marketing budgets, a reality that belies the customer management commitments many companies pay lip service to in their marketing brochures.
If, like me and millions of other South Africans, you are a long-time and frequent cellphone user, you are most likely to be nodding your head in agreement by now. You may be forgiven for being upset at the fact that most cellphone adverts and special promotions are aimed solely at new customers, with little thought given to those who every month spend thousands of rand with these service providers.
This point was brought home recently, when a friend reported noticing that one of our three cellular network operators was offering, for free, to new subscribers a Nokia 9210 with many attractive features. He had earlier contacted his own network service provider and asked what would be the cost involved for him to upgrade to this phone. He was informed that he would have to pay over R12 000 if he wished to upgrade to this phone.
This response indicates that acquisition-focused initiatives of this type are short-sighted and driven in response to the level of competition among network operators in this country. After all, acquisition marketing sends profits skywards in a short space of time, while the benefits of customer retention tend to be realised more slowly, and over a greater time period. It certainly cannot be driven by any genuine commitment to customer service.
It is also the kind of response that would motivate one to seek an alternative to his or her current network provider, but options are few and a cell number is a significant attribute and therefore a barrier to exit.
The point is, he is a high-value customer, which means that if he changes to a new service provider, his previous one will have to spend a substantial amount of money to replace him.
While I have chosen to highlight a negative experience with a network provider, similar tactics are common across many industries. Perhaps you are one of those lucky people who recently opened a clothing account and received a R500 voucher to spend. If on the other hand you have been a loyal customer of the store for 10 years, please do not expect any special favours.
Or can you remember The Star's subscription campaign a year or so ago when new subscribers were incentivised with season tickets to the Wanderers, while loyal subscribers were offered nothing?
Acquisition-focused strategies such as the ones I have mentioned ignore the customer lifecycle, a process that merely begins with acquisition, and then moves on to the more important areas of retention and cross- and up-selling - which is where customers become most profitable.
The implications for our economy are significant. If companies in this country are focused on attracting new customers at the expense of their existing clients, then much company growth can be attributed to market churn. Can the economy of a country such as South Africa cope with high levels of churn in which companies merely end up swapping customers until they run out of other options? For how long can profits continue to be derived from spikes in marketing activity? Should companies not be looking more deeply into ways of holding on to their existing customers and maximising their buy-in?
Customer retention marketing aims to sustain the profit stream from existing customers and thus reduce market churn. Companies in the telecommunications and financial services sectors expect their customers to provide a recurring revenue stream, with minimal additional marketing effort required by the service provider. However, the reality is that we operate today in a highly competitive environment. In industries where there is little perceived competitive differentiation, retention marketing can not only influence valuable customers, but also mean the difference between loyalty and defection.
Overseas analyses of customer loyalty programmes show a significant increase in profits when retention rates are shifted from 90% to 95% over the period of a year. It is clear then that driving customer retention should then be part of any solid business strategy.
Customer retention generates profits by holding on to customers, rather than merely replacing them with new ones. Marketing that acknowledges customer loyalty can generate significant profit for companies that experience high customer churn. Designed to have lasting impact, they can be structured to provide the highest rewards for the most valuable customers, and to motivate additional customer spend across the board.
Bear in mind that customer acquisition is a costly exercise. On its own, it can be highly unprofitable. Ideally, any acquisition drive should be carefully integrated with retention marketing so as to ensure that you are generating profit from your existing client base while keeping them happy. One of the supreme benefits customer retention has to offer, is greater predictability and the ability to gather invaluable information during customer interactions. And that is where you can improve the targeting of your offers and increase your sales rates.
*Doug Leather is CEO of REAP Consulting Group, e-mail: doug.leather@mweb.co.za


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