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Increasing Profits: Why Customer Retention Could Be Better than Acquisition

If you're ready to gain more value from your existing customer base here's how to start.


Last update: November 4, 2014

Everything is ready to launch — from advertising to your carefully thought-out pricing strategy. You’re ready to let the world, and prospective customers, know why your company is an obvious choice in your industry.

You cannot rule out the need to constantly gain new customers to expand your business, but it is easy to forget that almost 50 percent of the revenue that most businesses generate is due to 20 percent of the customers that they retain.

This is why experts often emphasize that you shouldn’t discount the hidden potential in your existing customers, as opposed to putting all pf your energy in gaining new ones. After all, if you don’t offer a reason for your customers to stay, your competitors will give them reasons to stray.

If you’re ready to gain more value from your existing customer base here’s how to start:

 

1. Find out your customer acquisition cost.

How do you acquire new customers? Do you use traditional methods such as cold calls, banner ads or online marketing? Whichever tactics you employ it’s important to know your precise customer acquisition costs — the cost to acquire a new customer.

These costs include marketing and incentives, to introduce new customers to your products and services. Decipher your true acquisition costs by dividing total acquisition costs by total new customers over a set period of time, or use this helpful online calculator.

If your customer acquisition cost is comparably higher than efforts used to develop your current customer base you may want to focus on retention instead.

 

2. Focus on loyalty.

Having made the purchase from you at least once, your current customer base is well aware of your “niche” in the market, your unique selling proposition (USP).  At the very least they have accepted it before, so it’s not likely that you’ll need to start from scratch and build a new relationship.

 

3. Consider a customers’ lifetime value.

The first purchase made by a customer is just the beginning. The true value lies in subsequent purchases made in the future. Small businesses can encourage this by cross-selling and generating back-end sales — offer your customer (who has already purchasing something from you before) the opportunity to purchase something else at a discount or bundled incentive.

This is how you convert a $100 sale into a $1,000 sale and then a $10,000 sale without any extra cost. Maximizing the lifetime value of your customers (i.e. the total value of business you get from a customer for the complete lifetime of their relationship with your company) can do wonders for your business in the long run.

How much do you spend to retain existing customers? How does it compare to your strategy for generating new customers? Let me know in the comments section below.

 

This article has been edited and condensed.

Brenda Lyttle is a small business finance blogger and representative of Free Credit Reports Instantly, a company that provides monthly free credit scores and financial assessments of your business.

 

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