Episode 44 - The Hidden Cost of Reactive Retention

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📰 Top Story  The Hidden Cost of Reactive Retention 

In episode 5 of this newsletter, I wrote about how missing retention targets can have a catastrophic impact on your business.  Let's recap on the example: 

You have 100% of your customers at the start of the year. You expect to lose 10pp and budget for 10pp customer growth to get you to 110% of the previous year's customer number. The 'plan' bar in the graphic below:

In scenario 2, you missed the retention targets by 20 percentage points. This means that to reach the 110% customer base target, the acquisition target needs to double from 20 percentage points to 40 percentage points. 

To fill the gap would require a massive budget increase, which would reduce profit.

Alternatively, you would need to accept lower growth or worse.  

It could also trigger organisation-wide panic. 

You might try churn models. 

You might put churn turnaround working groups in place. 

But while I would always advocate focusing on retention, if you're in this position, it can be too late. 

Not only will you miss retention targets, but you will also divert aspects of the business away from its core day-to-day goals, which will, of course, come with other costs. 

So what's the answer? 

Effective retention requires focusing on the right customers (notably the 20% that typically generate most revenue) and the right moments (key interaction points in the customer journey).

Case Study - Amazon Prime

When Jeff Bezos launched Amazon Prime in 2005, he said, “I want to draw a moat around our best customers. We’re not going to take our best customers for granted.” Prime was formed with that mission in mind: to enable the best customers to get the fastest delivery possible. 

There was much concern at Amazon that this would be a margin reducer, and indeed, when it first launched, it was. Jeff acknowledged this at the launch: “We expect Amazon Prime will be expensive for Amazon in the short term. In the long term, we hope to earn even more of your business.” 

Almost twenty years later, Amazon Prime customers are worth 5X more than the rest, and the company has grown 30X since the Prime launch. This is all due to protecting the highest-value customers and prioritising the moment that mattered most to them, the delivery window.  

So how do you become the next Amazon Prime? 

Focus on retention and customers' needs as a strategic pillar, not a reactive tactic. 

Focus on getting retention right with the customers who drive 80% of your revenue, often 20% or less of your customer base. 

Identify early warning signals of churn by analysing the customers who churned before (more on that in episode 41). Use that insight to optimise the moments that matter to your most valuable customers. 

Use research to understand how customers realise value - see episode 33. 

The reality is that you do not create value; customers realise value. Once you recognise your product is not a gift bestowed on customers, you will adapt your processes to help customers achieve their desired outcomes. 

Fix issues that contribute to or trigger churn, improve your processes to make dealing with you easy, and help customers on their path.    

Over and over again. 

And take NPS seriously. 

Seriously. 

So many brands treat it as an afterthought. 

Fluff. A nice-to-have metric. 

That is secondary to commercial objectives. 

Big mistake. 

Research shows that "loved customers" generate 50% more revenue and a 165% greater Customer Lifetime Value profit contribution (Forrester). 

The evidence is overwhelming. 

Happy customers stay, spend and tell others. 

See episode 31 for more on referrals inc. case studies from Tesla and episode 2 for more on customer love with a case study from T-Mobile USA. 

Final Thoughts  

Most brands underestimate the actual cost of reactive retention.

Waiting until customers are already disengaged doesn’t just dent revenue - it creates a chain reaction:

• Acquisition targets surge just to stand still, and so does the associated budget required to hit them
  

• Teams are pulled into short-term firefighting, and focus on other priorities is lost.
  

• Profit margins erode

This isn’t sustainable. 

And it isn’t strategic.

The world's most successful brands treat retention as a growth engine, not a tactic. 

They focus on:  

• High-value customers
  

• Optimising key moments of truth
  

• Using the understanding of churn early warning signs and the customer value realisation process to optimise those key moments. 

Proactive retention isn't just more efficient, but it is your fastest route to sustainable growth.

Until next week, 

Tom  

Do you need help with Customer Retention?

When you are ready, contact me to discuss consulting, my fast-track retention accelerator, courses, and training. Or if you are interested in sponsoring this newsletter, get in touch via [email protected]