If we were to walk through your company's front door and go up to anyone in your sales department and ask them what their customer retention rate is, would they know the percentage? We challenge you to do just that. It’s shocking the number of times we’ve done this, and someone couldn’t give us an accurate percentage. Why is that?
There is no average retention rate; it truly all depends on your business. For example, if you’re a SaaS company, you’ll want your retention rate to be as high at 90% - 95% and then some. But for other companies, they can sell you one large piece of capital equipment or enterprise software, and then that’s it. Chances are companies that will make these types of purchases and won’t need to buy again for five years.
In that case, those types of companies are always in the pursuit of more customers. Lastly, some companies have resellers or partners that are constantly ordering products or services. Those companies want to have a high retention rate of customers who will continue to order from them and not switch to a competitor. A reasonable retention rate varies on the company, but it has endless possibilities.
This time of the year, people are preparing for 2020. Questions they often ask before planning are:
But with all the attention looking towards the future, they forget to think about their current customers. They should also ask the question, “Are we hanging onto the customers we have already?” Those are the easiest people to sell to, according to Small Business Trends, “The probability of selling to an existing customer is 60-70 percent. The probability of selling to a new prospect is 5-20 percent.” The existing customer knows your product, you’ve already established your credibility with them, and chances are they like you (hopefully).
You’ll want to make sure you’re protecting the customers you already have. If you add on 10% new customers as well as lose 10% of current customers, you’re net-neutral, and that’s not where you want to be. Even if you are successful at adding on new people but, you still have a leaky bucket, it’s always going to hurt your company.
When doing some analysis with one of our clients, we found that they had added 120 new customers a year. Their strategy going forward was to add even more because that was working. However, when we helped them dig deeper, we found that they were also losing 120 customers a year. That 120 loss were customers that bought from the company in the previous year, but not again this current year in an industry where continual ordering is the norm. Not good.
We did the math, and if they would’ve just kept those 120 customers, they would’ve retained $1.5 M in revenue. But instead, they had to “make up that money first” before they could get any growth. According to Bain & Company “A 5% increase in customer retention correlates with at least a 25% increase in profit.” Just imagine if this client would’ve kept even half their previous customers.
Another client of ours was doing great at getting new customers. They were a startup SaaS company and said they needed to hire more salespeople because the current team was signing up new customers at a great pace, and they wanted to maximize that effort. However, as the number of customers continued to grow, the company couldn’t keep up with them, so the customers were starting to drop off – that's a customer retention issue. If they had continued to invest in new sales, that retention issue would have only gotten worse.
Comparing all the customers that had ordered from you in 2017 then compare those same customers to 2018. Did they order more? Or less? Or did they go away completely? Do the same from 2018 to 2019. What trends do you see? Do they reduce? Did they increase one year and then suddenly drop off? What do you see happening?
Why those trends are happening. Is it us? Are you not paying enough attention to them and bringing them value? Are you not top of mind? Are you not contacting them on a frequent enough basis? Is there a service or product issue that they are experiencing? Is competition sneaking in? Is someone targeting your customers?
Once you know why those trends are happening, you’ll need to put a plan into place to address the issues or opportunities. Depending on what you determined from step 2, your methods would be different, but you need to make it part of the 2020 strategy (find more on strategic planning here). Do we have a retention problem that needs to be addressed first, or are you good plowing ahead with potential new client growth opportunities?
Customer retention is vital to the growth of a company and the overall revenue. The more customers you’re able to retain, the stronger your company will be. So, remember to analyze and make sure everyone on your team is aware of the importance of retention and how your company is performing. Recognize why you may have a leaky bucket, and lastly, plan on how you can fix this problem.