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Monday, July 1, 2013

Customer Retention Instead of Customer Acquisition


Marketing departments often exhaust their time and energy looking for new customers to attract. But once a base of customers is built, focusing on retention is a more efficient practice for long-term goals.

One of the large benefits of retention is the ability to calculate the customer lifetime value (CLV). There are very complicated and also very simple formulas for CLV, but it boils down to the estimated revenue coming back to your company over a customer's duration with you. Bernd Leger, VP of Marketing at Localytics does a nice job of breaking down this term and helping readers understand it in a modern setting—like with his widgets, for instance. That initial purchase is great, but working with customers to keep buying widgets is even better.

Retention analysis is by no means a hard and fast truth in terms of profit prediction, but it's a start. Customer investment would certainly vary dramatically from company to company, depending on the product. A publisher like Hearst Magazines tries its hardest to get readers to continue buying issues, or better yet to subscribe for a year and guarantee that support. Compare that to an automaker like Hyundai—declared by JD Power and Associates as the auto brand with the best customer retention in 2012—and a line graph showing customer investments would look very different. The publisher's profit would appear fairly steady and plateaued, while the automaker would have sharp increases shown with several dormant years in between. With a customer retention rate of 64 percent in 2012, Hyundai can reasonably plan ahead financially.

Now, of course startups and relatively young companies have to first acquire customers before any sort of retention study is done. But once a base is built, retention helps your business plan ahead and look towards the future instead of the less predictable focus to acquire new customers.

Photo courtesy INPIVIC/Flickr

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