Happens every day.
I see small (and not so small) businesses waste one of their most valuable assets: Their existing customers.
Let’s say you have 1000 customers and you average $1000 per sale per year for each of those customers. That’s a total of $1,000,000 per year. Let’s assume your costs are 34% of sales. More onÂ that shortly.
Studies have shown that across a random selection of industries, businesses lose 19% of their customers (on average) each year for an assortment of reasons.Â That’s 190 customers per year for the company mentioned above.
And you’re thinking “No flippin’ way”.
Here’s the analysis:
- 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
That’s 32% of the reasons they’ve left your business. The other 68% of the customers go somewhere else for some other reason (probably not the one you suspect).
The other 68% percent of customers 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 about if the quoted research is only half right?
Think about your own experiences. Can you argue with these numbers? Even if your reasons are different HALF of the time, that still makes 34% of the changes due to indifference. Seems like a lot to me.
If that 19% of customers lost per year number is accurate, that also means that a pretty strong 19% gain in new customer acquisition is just treading water.
You’re better than average, right?
Let’s assume that since you read this, you probably do other things to keep your business in better shape than the average. I’ll give you credit for 5% less loss than the average.
That’s still 140 customers. You’re now down to 860 customers not counting new ones that you have to spend marketing money to gain. At $1000 per year, per customer – your revenue has dropped from $1,000,000 to $860,000.
$140,000 feels like a lot, doesn’t it? That doesn’t even count how the economy might be affecting you (if it is).
On the other hand, that’s $50000 more revenue than the average competitor (5% = 100 customers/year times 5) who is losing 19% of their customers per year.
The good news
So if that was the bad news, let’s look at what a little effort might gain you in the way of good news.
Let’s try a 2% improvement on that 14% number. That takes us from a 14% loss to losing 12% of your customers.
It’s a small improvement, so how much meaning does it have?
2% of 1000 is 20 customers. 20 customers times $1000 per year per customer is $20000 in increased revenue from retained customers.
If you run a $1,000,000 per year business, that 2% is a week’s revenue.
Profit: The number that matters
As a percentage of annual revenue, it’s just a 2% gain, but there’s more to it than that.
A 2% gain in retained customers (ie: retained sales of $20000) at 66% profit/34% cost means a $13,200 profit increase of $660,000 to $673,200.
Over 5 years, that’s a total of $100,000 gross revenue increase and $66,000 net profit increase.
That’s a net profit change over 5 years from $566,000 to $500,000 – and that doesn’t count any other growth except to maintain that 1000 customer level. Doesn’t include lower marketing costs to retain customers vs. getting new ones.
For these numbers, a 2% gain in customer retention produces a profit increase of 13.2%.
2% seems like almost nothing, until you look at the bank account.
What can you do to make a measly 2% gain?