Accelerate - June 2014

Ten times more costly to gain than retain customers

Research from the University of Victoria in Wellington shows that customer retention can have a huge impact on business costs

Researchers from Victoria University of Wellington and the United States collaborated on a study to find out the answer to the question: is it worth it for businesses to try and win customers back or should they rather spend their money and effort to get new ones?

Dr Annie Liu from Victoria University of Wellington and Mark Leach from Loyola Marymount University in the United States evaluated customer reacquisition in business-to-business markets and propose a formula that sales companies can use to evaluate whether to invest time in wooing lost customers.

According to Dr Liu, a senior lecturer in the School of Marketing and International Business, previous research shows it is seven to 10 times more costly to gain a new customer than to retain one. “It’s very important to hold on to what you’ve got rather than invest energy in finding new customers.”

Sales executive and sales account managers from 98 New Zealand companies and 50 firms in the United States were interviewed to find out what methods they had found most successful in winning back customers. “We found that only about 10% of sales companies have a formal procedure when they lose an account,” says Dr Liu. “Without guidelines, most account executives end up going with their instincts, but our research advocates a formal process.”

The first step, says Dr Liu, is to make contact with the customer and assess the likelihood of winning them back. It is important to know who or what is responsible for losing the customer, and to identify what type of customer they are.

“Generally, there are four different types of customer: those who are unhappy because of negative experience or perception; those who have been bought away by another company; those who have decided to move to a competitor that is more aligned with their values; or those who don’t need your product or service anymore.”

We found that only about 10% of sales companies have a formal procedure when they lose an account.

There is no one-size-fits-all solution. “For instance, unhappy customers may require an apology and a price discount to restore good faith, whereas those customers seeking different values may lead you to re-evaluate your strategy, which could lead to long-term success.”

Dr Liu says customers that are motivated by getting the cheapest deal may not always be the most desirable. “If they are easily bought away and can be easily bought back, how much do you want to play this price war game? If they are a high maintenance customer that calls every day and wants everything customised, low price, and special delivery, it might be better to let them go – however, if they bring in a lot of money for your business or connect you to other customers it’s worth going the extra mile.”

Dr Liu says active engagement with customers is essential to resolve any issues before they reach crisis point. “It’s important to maintain good relationships so you understand your customer’s needs. Also, you need to be aware of their purchasing patterns – if you see a decrease you need to find out why before you completely lose them.”

Source: www.victoria.ac.nz

Updated: 4 September 2015