Getting a new customer might feel more glamorous than retaining one, but your chance of making a new sale with an existing customer is 60-70%. That same statistic for a new prospect is just 5-20%. And yet, the never-ceasing search for the secret that will see your marketing connect to an ever increasing group of new customers is the ultimate goal for some.
What is the right way to prioritise?
Your existing customers have already bought into you to some degree, marketing to them is not only more likely to succeed, but you’re also increasing buy-in and trust: building fans. Too often, companies either assume that the new business marketing is enough for existing customers or just ignore them completely.
The trouble is, when existing customers are neglected they get itchy feet and are either lost or have to be offered a big discount to stay. Both are very expensive outcomes. Which is why you should market to them.
Before you start a marketing campaign aimed at existing clients, however, there are certain data points you need to establish to measure success.
Test and measure
There are three metrics that you should measure when it comes to existing customers: customer lifetime value (LTV), churn and cost per retention (CPR). Failing to measure your customer lifecycle metrics and leaving it to chance can be disastrous, and a high churn rate could cause your business to fail completely.
Data like this can build a picture of the scale of lost opportunities, help you build a strategic plan to keep your existing customers and define solid, tangible goals for doing so. Let’s take a look at each metric in more detail.
Customer lifetime value
In other words, the revenue you can realistically expect to achieve from a customer in the time you expect them to be with you. As an example, if your customer lifecycle is typically 18 months and the average customer spend is £1,000 per month, this leaves you with a lifetime value of £18,000.
Your business should have enough data on previous customers to begin measuring this right away. What have customers spent with you historically? Did they buy a cross section of your products or only one? Your customers won’t be with you forever and working out what they spent, why they left, and would they have brought more from you is vital. Once you know this you can begin work on a marketing strategy to increase the LTV.
Churn rate
Customers come, and customers go. This turnover rate is churn, and you want it as low as possible. While there are differing ways to measure churn (in 2004, shareholders of Netflix tried, unsuccessfully, to sue over their chosen method), a solid way to measure it comes down to the following mathematical exercise.
| Customers at the start of the month | 1000 | |
| Existing customers who left by the end of the month | 50 (50 / 1000 = 5%) | |
| New customers | 500 | |
| New customers who left | 12 | |
| Total leavers in the month | 50 + 12 = 62 | |
| Basic churn rate | 62 / 1000 = 6.2% |
There is some debate about an optimal churn rate (zero is a utopian dream, sorry), depending on the industry. In an article for Forbes, George Deeb, the Chicago-based strategic growth consultant proposes, “An optimal figure is 2.5 percent a month.” Others say less than 5% is acceptable. The real answer is, ‘as close to 0% as possible’.
As this figure rises it can have a disturbingly large effect on growth. The difference between churn rates of 2.5% per month and 5% per month is the difference between building a 50% larger business over 5 years.
The best way to reduce this rate is by marketing to your existing clients but you need to know your churn rate now, so you can measure those results.
Customer retention cost
Cost per retention is straight forward - basically, how much you spent on retaining customers, divided by the number of retained customers. So how do you use that figure in the real world?
If you combine this with the general rule that, in a B2B environment, it costs three times the amount to win a customer than to keep one, you should be investing around 33% of your budget on keeping existing customers.
You’ve got the metrics, now what?
You now know how long your customers stay with you, how much they spend during that time, how much it costs to keep them, and how many you will lose over time. Use this in your marketing to fine tune exactly what you're asking them to do and how effective that message is. You may think your marketing is strengthening your bonds with existing clients, but these metrics will prove it.
Time to test and measure. Failure to use this intelligence to your advantage will open the door for them to look elsewhere.
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