NEWS

Customer value increases over time, so the longer you keep your customers the more profitable you become. Based on over 30 years of research, Harvard Business School concluded that the biggest single difference between the most and least profitable companies in the same industry sector is how successful they are at keeping their customers.

Customer spend, increases over time because of related sales. Long standing, customers learn more about what your company does and, provided they have had good service in the past, gradually start to buy more things from your product / service range.

Your sales and profit also increase over time because of referrals. Customers who have had good experiences with your company start to trust you and recommend you to others and research shows that the best customers are the ones you get through referrals, not the ones you get from advertising or sales efforts. That’s because people tend to associate with people like themselves, so new customers from referrals are usually like other customers that are a good-fit for your business offering.

Your profit increases over time because of lower costs. New customers are much more costly than long standing ones, consuming a lot of staff time as things have to be explained to them etc. The longer you keep your customers the more they learn how your business operates so the less time they consume. You can even accelerate this process by making deliberate efforts to ‘train customers’ about the best ways to deal with you, though obviously, the advice needs to be good for them not just less costly for you. The cost of servicing customers also reduces over time because longer standing customers tend to be more satisfied and therefore complain less. By far the least profitable customers to have are new customers who are dissatisfied as they consume a lot of resources if they have problems to resolve, especially if they make formal complaints.

Your most loyal customers are less price-sensitive. 9% less (on average) according to Harvard. That’s because they value their relationship with you and they trust you – in other words when they do business with you they feel confident that they’ll be satisfied with the outcome. And that’s worth money, especially in a recession. There’s evidence that customers are more risk averse than usual in the recession, and changing to a new supplier is a risk that’s probably not worth it just for a small price advantage.

Not all customers are good customers. Some customers may never be a good fit with your business, so losing those customers should not be a concern – in fact it is likely to be good for profits. But, it should only be a small percentage – any more than 5% (though this varies by industry) and there must be something wrong with your customer service or your customer recruitment methods.

Zero defections of good-fit customers is therefore the goal for most businesses, and this is much more important to your future profitability than winning new customers. You therefore need systems that give you as much warning as possible about unhappy customers so you can take action before customers defect. You should go overboard in encouraging customers to communicate with you, especially if they have the slightest problem with anything. It’s often said that “a complaint is a gift”, and it is, because it gives you a chance to save a customer who might otherwise have defected. So put your complaints system under the microscope. Are you really doing everything possible to make it easy for customers to tell you if they’re even the slightest bit dissatisfied.