Retain 5% More Customers, Reap 35-95% More Profit

Did you know that if you keep 5% more of your customers, you will make 35-95% more profit? Those were the findings of a Harvard researcher* when he investigated the financial impact of keeping customers around. The chart above demonstrates how a 5% increase in retention rates increased profit across a variety of industries. The equation is simple: make us stick around (usually by making us happier) and we’ll make you more money. Cut out support, services, make it difficult to talk to you, etc, and while you might save in the short, you’ll lose in the long-term.

[via The Value Creation Process in Customer Relationship Management (PDF)]
* Reichheld, F. F. and Sasser, W. E. Jr. “Zero Defections: Quality Comes to Services”, Harvard Business Review, September-October, 1990, pp. 105-111.

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  1. Aladdyn says:

    Wait that makes no sense. Why would happy customers spend more money on your business. Thats crazy talk.

  2. CurbRunner says:

    The airlines should take notice of this as an opportunity to stop treating passengers like shit and increase their profit.

  3. sleze69 says:

    This is business school 101. It is why Nordstroms is so successful and why Circuit City and Sears blow alluva sudden.

  4. RuralRob says:

    It might have been business 101 back when you were in business school, but apparently today’s business school teaches that you must cut costs NO MATTER WHAT, and that next quarter’s numbers are all that matters.

  5. RottNDude says:

    This is known as “quality cost”, and while typically applied to a physical product or service, it can be equally important from a customer service or operational standpoint. It is amazing how many large companies don’t get this simple concept.

  6. MisterE says:

    This is another study to prove what the rest of us already know. Too bad big businesses are not paying attention.

  7. FLConsumer says:

    Gee, who’d a thunk it? Good customer service = more repeat customers??!? Brilliant!

  8. JustAGuy2 says:

    Thirdhand information is always dangerous. The original article (which is cited in the linked article) is actually a lot more nuanced. Clearly, retention is very valuable, but some customers are worth more than others, meaning that the amount of effort and money spent retaining them needs to be differentiated too.

    If you’re a credit card company, and you have someone who doesn’t use the card much at all, never runs a balance, and calls customer service twice a month to ask questions about his bills, the best call you could get from that customer is a threat to leave.

    If, on the other hand, you have a customer with a large balance who pays the minimum reliably every month, and calls in asking to waive a fee for a payment that was a day late, it makes a lot of sense to waive that fee.

    Retention matters, but not at any cost, and not for every customer.

  9. SacraBos says:

    @JustAGuy2: Yeah, the only problem is those “non-profits” also influence other people, like family members, associates, etc. Part of the reason that 5% makes you so much money is the viral marketing (or loss for bad marketting). You can even see it here as people talk about crappy service from various banks – and suggest local credit unions.

    If you give good service to a “non-profit”, you might be able to turn them into a “profit” by having them put money in savings, investments, and other financial products that a credit-laden “profit” can’t afford.

  10. mkguitar says:

    This study was published 18 years ago.
    I would love to see a similar current study looking at the cellphone industry, cable, satellite etc.

    I continually find myself “churning” as I am of more value ( seemingly) as new business than I am as a continuing customer.

    My ATT cell contract is about to end and each of the other companies has much more attractive offers to move my business.

    ( same thing happened with my previous cell contract, when I moved to ATT, and when I went to Directv from Dish)

    Wacky!

    Is it that somehow they want to show results for their advertising efforts? Rather than the bottom line advantages of retaining customers?

    MK

  11. dazette says:

    Gee, too bad Macy’s didn’t hear about this before it disenfranchised and drove away all those loyal hometown department store customers from the establishments it converted to Macymart.

  12. Rando says:

    @dazette: That was ALMOST a good 1…macymart.

  13. mac-phisto says:

    @mkguitar: you bring up an excellent point. the problem with the industries that you refer to revolves around a business model that is based on the idea that there are more new customers out there than existing ones. that may be true for satellite providers, but the cell market reached its saturation point a few years ago.

    in the case of cellphones, people mostly leave b/c the deals on phones are better for new customers over existing. often that price difference is $150-$200. maintaining the average cell contract (~$60/mo.) for 1 year = ~$700 in revenue (or ~$1400 for 2 years).

    & when it comes to services like cable/satellite, cell phones, etc., most people HATE switching. so why are they so unwilling to pay a measly $200 to retain a customer that doesn’t want to leave?

    who knows?

  14. TechnoDestructo says:

    The article talks about the cost of acquiring new customers…while I am sure that matters, particularly if your products or services don’t speak for themselves, there are more obvious causes, too.

    Those last 5 percent, if you’re already making a profit, depending on the industry, are mostly profit, or at least are more profit than the first 5 percent. Fixed costs don’t change so marginal profit is greater than marginal cost. I mean I don’t think I took any business or accounting classes on this particular topic past the 200 level and that’s obvious.

    Maybe neither did the companies that try to get rid of all the “non-profits.” First of all, some of them (Chase, with me) would have much lower costs for us low-value customers if they stopped trying to screw us. If they weren’t constantly introducing intentional billing errors and trying to force late payment or default, there would be less (in my case, zero, apart from lost or destroyed cards) time spent on the phone, and they’d keep raking in merchant charges without any trouble. So we wouldn’t make them much profit, but we wouldn’t cost them anything, either
    But wait…we’re actually helping them make a profit on their sucker customers, because we’re still paying for their infrastructure.

    Maybe someone is getting bonuses based on the average customer profitability. I dunno.

  15. RogerDucky says:

    @CurbRunner: Unfortunately, airlines, phone, etc. have a problem: They’re oligopolies . That means, there are only a few choices when it comes to your plane travel and telecommunications needs. So, if all the companies involved gives you the same amount of (bad) service, then they all save money and retain their respective market shares. The customers would have no choice but to accept it, since everyone else is equivalent.

  16. csdiego says:

    Don’t give them any ideas: they’ll try even harder to keep us on the phone for hours, sitting through 500 sales spiels about why we should stay and asking questions like “Do you agree with the previous representative’s argument that the value of our service cannot be less than the cost of switching, or would you prefer to keep to keep your service with us?” when we try to cancel our service.

    What, did you think businesses would respond by trying to retain us with better customer service? Hee. Hee hee ha ho ho.

  17. lemur says:

    @ruralrob: Quite right. All that theory about retaining customers would work if companies were managed to take the long term into account but that’s not the case. The only thing which matters to the executives is what they can do to reap short term benefits. Who cares about the long term effects?

    If executives are able to maximize profits in the short term, then it does not matter if the long term consequences are disastrous because they won’t be there to deal with it. Most likely, they’ll be fired before the disaster fully unfolds. At that time, they’ll get a nice severance bonus and when they’ll look for a job elsewhere they’ll be able to point to the short term changes which temporarily boosted the bottom line.

    I think a lot of the crappy customer service is due to lack of interest in the long term success of companies. And I don’t think telling executives about customer retention is going to change anything.

  18. mac-phisto says:

    @lemur: perhaps you’re in favor of something more drastic? i’ve read some interesting material lately on passing voting rights from shareholders to stakeholders. maybe if people who actually cared about the company were making the important strategic decisions, everyone would profit.

    nah! crazy talk!

  19. JustAGuy2 says:

    @mac-phisto:

    At the same time, why don’t we let your mechanic have a say in what maintenance you decide to do to your car, and let your grocery store decide which brand of breakfast cereal you’re going to buy.

    There’s no reason to believe that “stakeholders” are going to act in the interests of the company either. Employees will want more money, communities will want more tax revenue and more freebies, customers will want lower prices, etc.

  20. Truthie says:

    How is this news? This is a 18 year old paper for chrissakes! It’s also something almost everyone who goes to a decent business school learns in marketing class.

  21. @truthie: Sure, they teach this in business school, but no one really listens. I go to a fairly reputable business school and the students’ focus is more along the lines of, “Money is better than people. People can not be exchanged for luxury consumer products or lucrative investment portfolios!”

    They can’t see past the bottom line, and can’t understand how a small increase today drives greater benefits tomorrow. They want to get rich quick, retire early, and any leftover problems are the next guy’s responsibility.

  22. mac-phisto says:

    @JustAGuy2: & obviously, running a successful company requires you to address all those desires & find a balance that works for everybody. instead, it seems as if some of these companies have a magic 8-ball making the important decisions.

    maybe you have an idea…or do you think the current system works?

  23. zolielo says:

    Repeat dealings, reciprocity, and demographic research are all one need to know.

  24. brokeincollege says:

    This is the reason I’m going to law school. Because MBA students don’t seem to understand the fact that it costs more money to get a customer than to keep an existing one.

  25. JustAGuy2 says:

    @mac-phisto:

    Corporate earnings have been doing quite well – I think it works, in that the purpose of the company is to make money for its shareholders.

    Most of the complaints about “thinking too much of the short term” are from people who want the company to make less money in the near term, either customers/suppliers/”stakeholders” who want heavier spending, or management teams who want to build empires.

    For the people who actually own the company, timing matters. A $1.1BN investment today that will yield $100MM/year forever is a lousy investment, when the time value of money is considered.

  26. ogman says:

    @That Plain Boy: +5 insightful

  27. ogman says:

    @brokeincollege: True. I read that for every $1 saved in cutting customer service it costs $6 to get back the customer they lost. Circuit City is just one classic example.

  28. FLConsumer says:

    @MisterE: The problem is that big businesses are too focused on their shareholders & stocks (read: short term) than their actual product. This is a total paradigm shift in the history of business. For the first time

    @JustAGuy2: Are some customers “worth” more than others to a business? Yes. However, you never really know how much an individual customer is worth due to referrals and future business. Sure, I’ve never carried a balance on my credit cards, but that doesn’t mean that I won’t at some point. Similar for customer service. Similarly, if I have a bad customer service experience with a company (let’s say a computer company and I run into trouble getting them to honor a warranty), when it comes time to buy things for a business or project, guess who I won’t be using in the future? Treat every customer as if they were your best customer. You never know — they very well might be it.