The “cheaper to keep a client than get a new one” myth

I’ve heard this repeated dozens of times to focus an organization on client retention.   The trouble is, it isn’t always true and if an organization focuses too much on client retention when it isn’t true, it can hurt.

Most organizations would love to have 100% client retention, except maybe non-profits whose goal is providing temporary help.

In the real world, no organizations have 100% client retention.  Even the best lose clients. Sometimes clients die, move or change what they value or just discover they want something different.

Good organizations will have client retention in the 70% – 85% range.  Organizations with less than 65% to 70% retention might have the opportunity improve retention, depending on the nature of the business.

But, at some point above 70% retention (and this varies depending on the type of organization and service, etc.) you reach a retention rate where you run into the law of diminishing returns.  To increase the retention by another 1%-point, for example, is costlier than bringing in new clients who value what you offer.

Let me illustrate with an example.

I use to use a small plumber for my home plumbing needs.  He was good and reasonable and good enough, in fact, that sometimes I had to wait a few days for him to come out. Once this proved to be a problem, because I had a leak that couldn’t wait a few days to fix.

I called another company and found they also did good work and I didn’t have to wait a few days.  They could have someone out within two hours.  That convenience advantage, along with their good work and reasonable prices, was enough to get me to switch.

However, my previous plumber still has plenty of work.  Losing me didn’t cost him much business.

For him to change his business to satisfy folks like me would cost him a lot.  He’d need to hire enough plumbers to cover the demand 24/7 and invest in more trucks and equipment. He’d need to hire schedulers and manage a larger workforce.

But, he’s happy with the business and profits he earns from his set of loyal clients, who don’t place as much value on how quickly the plumber arrives.  Perhaps his customers are builders and commercial accounts who can schedule work in advance, or simply people who can get by for a few days with a leak.

Even in a market that appears as homogeneous to outside observers as plumbing, there are some key things that differentiate the value proposition of what different plumbing companies offer and it is difficult for any one company to satisfy all these value differences.

For my previous plumber, it is cheaper to let me go to the competitor that offers what I value while spending his resources on finding another client who values what he offers.

That holds true until you reach a point where fewer and fewer customer value what you have to offer.  At that point, the market (i.e. customers) is sending you a signal that you need to change what you offer, or go out of business.

Admittedly, there’s a fine line and art between knowing when you need to just focus on finding clients that value what you offer and when you need to change.

Based on these thoughts I have a few recommendations for businesses.

First, don’t always assume that increasing retention is cheaper than finding new clients. It’s actually not very difficult to estimate the costs of each for any business.  Try it and see if you can compare the acquisition and incremental retention cost per client.

Second, if your retention is stable within a few percentage points, plus or minus, then that’s likely a sign that it’s just as effective to keep focus on both finding new clients and retention.  You should not favor one over the other.  You need both.

Third, be prepared for when retention does start to plummet.  Consumer preferences do change in unpredictable ways.  One way to prepare your organization for such changes is to run small experiments with various business model approaches and see which ones resonate. Also, keep and eye on what your competitors are doing differently and understand why that may or may not work for you.

I’ve seen too many organizations who only focus on their bread-and-butter value proposition and get caught by surprise when consumer preferences change.  That puts them in a dangerous position of throwing hail mary’s when preferences change rapidly. The chances of hail mary’s succeeding are less than the chances of small, unforced experiments.

I’ve also seen organizations who move too rapidly to change their business model even when it’s doing fine.  In the process, they often fundamentally lower the value proposition for existing clients.  New Coke is a good example.

Starbucks irked some of its faithful recently be introducing a light roast.  But, they didn’t repeat the mistake of New Coke, by replacing dark roast with light roast, they just added the new light roast to the existing product line.  Starbucks’ faithful will get over it, because they can still get the products they love and now more of their friends (the 40% of coffee drinkers who prefer lighter roasts) will come with them.

Fourth, develop a deep understanding of the value proposition your organization offers. Why do customers use your product or service?  Ask them and ask them again.  Don’t take their first answer as the real answer. There is probably four to ten reasons why they use you. Also, don’t just look for the answers you think are right. Some of the worst business strategy blunders come from folks who impose their own incorrect view of the value proposition on the organization.

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