12 Nov The Miracle of Client Retention – Part 2
The Miracle of Client Retention – Part 2
What does it take to make a miracle?
Well, defining the magnitude of the miracle available to your company requires an objective and thorough analysis of the true costs involved in both selling and losing clients as the portfolio evolves. Most firms, depending on their industry, will find that it takes somewhere between three and eight new clients to replace the profit from each mature client lost in a given year. Keeping clients, who might otherwise have been lost, accomplishes growth in the base that is compounded for every year the client remains.
Our conclusion is that many firms, in the mistaken belief that growth comes from the next new client they sell, have drifted in to a drastic imbalance between their acquisition and retention investments. Indeed, truth be told, many firms are not really investing anything at all against retention believing that investments in service capabilities are the same thing. Big mistake. These firms are confusing programmatic retention investments with satisfaction tools and, when pressed, are unable to differentiate between the two.
Most firms would create superior – even miraculous – returns by redirecting existing funds from new business development (sales and marketing) to client retention (investing in the base business).
An example of the leverage available …
One of Tenacity’s clients is a publicly traded service management firm with revenues exceeding $1 billion. Their industry is highly competitive and easily entered. They have several hundred clients in their portfolio. Their average client tenure is about ten years with a year-over-year retention rate of 92%. Thanks to an aggressive business development program, skilled operations teams and tight overhead control, they have consistently grown annual profitability within a range of 10 – 13% per year.
Despite their success – the leverage available to them is enormous. Improving retention to 95% (an increase of just over 3 points) produces year over year economic profit gains of 24% (more than double their existing historical results), with no increase in their new business acquisition rate. This is the essence of leverage and it takes us part of the way to their miracle.
The rest of the miracle is in understanding that the deployment of funds necessary to leverage this profit growth is miniscule by comparison – in fact – their investment in Tenacity’s Clients for Life® client retention process was repaid in full when retention increased less than one percentage point. The economic benefits are annuitized – the account you didn’t lose continues to contribute incremental profits year after year.
The byproducts of improved client retention …
By the way, this particular miracle comes complete with a whole host of sub-miracles. Substantive improvements in retention directly facilitate the efficiency of the new business development process. Increased retention fosters a palpable increase in the morale of the entire organization through validation of their efforts. Last, but not least, better retention undergirds the firm’s positive reputation. Most observers agree that the company that keeps the most clients enjoys a superior reputation compared to the one that sells the most.
“If you leave client retention to chance, the chances are that you will lose clients.”
Instead, invest in the miracle of client retention. You will have taken the most important and cost effective step you can take to build long-term stakeholder value for your company.
Are there any other examples of client retention ‘dividends’ that you might like to share? If so, please leave a comment!