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The Relationship Between Customer Retention and Profitability Explained

Retaining current customers ultimately leads to higher profits.

Every business needs to be able to make and increase profits. We go to exhaustive lengths to find new ways to make our businesses more profitable, but sometimes the answer is right in front of your nose: if you want to raise profitability, retain customers over a lifetime. 

In today’s customer-centered economy, companies understand that keeping and retaining customers is key and as customers have the ability to choose at every point, you must keep them happy. It’s time to recognize and leverage the link between customer retention and profitability.

Exploring the Link Between Customer Retention and Profitability

Think about all the time and effort your marketing and sales teams put into gaining a single new customer. Why burn through these resources, over and over again? There’s a better way.

The longer you retain a customer, the more value you receive for your acquisition cost. According to a study by Frederick Reichheld of Bain & Company, for financial companies, even retaining 5% more customers can increase your profits 25% or more. And that means every customer you win is a customer you should try your hardest to retain. 

Simply put, if you raise customer retention, profitability will also increase. The moment a transaction is complete, your business must change its focus to customer retention. The transaction should be viewed as the first of many customer engagements, not as an end unto itself.

A customer’s purchases throughout their lifetime directly raise your profits. But don’t underestimate the value of positive word of mouth they spread about your brand and the prestige of having a loyal customer base. Happy, engaged customers will stay with you through good times and bad, willing to test new products and features and making high-value purchases. Overall, with a base of loyal customers, your profits will increase over time and you’ll spend less money on acquisition. 

Tips on Boosting Customer Retention

Start your journey to greater customer retention by making your business model more customer-centered, putting the customer and their needs first in all that you do. Build a lasting relationship with the customer by showing that you care about them. Be sure to clarify the customer success objective with the customer and keep notes on every customer interaction so you can understand what value they want to derive from your product. The more background information your customer success teams have, the better they will be able to personalize customer engagements. 

Here are some more ways to increase customer retention:

#1 Ensure the Sales Handover Goes Smoothly

When a customer is transferred from the sales team to the customer success team, it’s important to make sure all relevant information is properly communicated. It’s the responsibility of sales to explain the customer’s objectives to the customer success team: why did they buy the product, what are they hoping to achieve, and how soon?

This way, once the customer success team kicks off onboarding, they will already have a firm understanding of the customer. Customers will feel more satisfied right away knowing that the company knows their goals and that team members are communicating well. After the customer finishes the initial sales call, they shouldn’t have to repeat their needs or goals. 

#2: Make a Connection

When a new customer makes a purchase, you need to immediately start developing the customer relationship. Proceed as you would with any other relationship, treating the customer as the important person they are. Thank them for choosing to do business with you by sending an email or a note. Personalize the message as much as possible so that the customer will feel like a valued individual. 

In this first communication, engage the customer in a way that makes it clear that you understand their business and care about their goals. A good handoff involves personalized communications. The point is to show your appreciation and make a human connection. Next, offer the customer useful information, such as a how-to tutorial or FAQs. Continue to monitor their product use during onboarding and help them fully adopt the product

#3: Be Responsive

When a customer contacts you for any reason, be responsive! If your team is quick and attentive in replying to customer contacts, your business can make significant progress in increasing customer retention and profitability. Why? Because customers are waiting to see how you will respond and if you will help them find the positive resolution they want. 

Listen to customer concerns and criticism with an open mind. If the customer has an escalation, try to understand the customer’s predicament from their point of view. Make sure your team is available to answer customer contacts and respond as soon as possible. Similarly, make sure you resolve their issues in a timely manner. 

#4: Maintain an Ongoing Conversation

Once you’ve established a bond with a customer, maintain that bond with ongoing engagements. This means keeping in touch with customers and finding a reason to contact them even when they don’t need you, just to make sure your brand has a presence in their lives.

You could work on establishing communities that will help customers connect with and help each other. When there are new product releases or updates, be sure your customers know. No matter the form, always follow-up with customers to check in on their experience and reward loyalty. While you’re there, ask for feedback. This will help you understand how to improve the customer journey and show customers you care about their opinions. In short, nurture a conversation and always listen to customers, no matter what they have to say.

Increase Customer Retention and Profitability with the Right Software

If you want to increase profitability, try retaining long-term customers by nurturing the customer relationship. To accomplish this, it’s important to give your customer success team the right technology to succeed. Using a robust customer success platform, your enterprise can gain all the functionality it needs to deepen the customer relationship at every stage of the customer journey. 

As your company matures, you should be retaining more customers versus simply acquiring new ones. With a customer-centered model, profitability and growth will follow naturally. 

With Totango and our customer success platform, your team gains visibility over all stages of the customer journey, making it easy to engage customers and prevent churn. Request a demo or explore Spark to learn more about how Totango can help you retain customers and increase profitability.

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