Episode 52 - The Birthday Edition

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📰 Top Story: The Most Popular Concepts from The Retention Blueprint’s 1st Year

Customer Retention is your Growth Engine   

Harvard Business Review and Bain have proven that a 5% reduction in churn can drive a 25%-95% improvement in profitability.  

This happens because: 

If you implement an effective customer retention strategy and, as a consequence, retain more customers than anticipated, you can lower customer acquisition spend.

If this happens, you can allocate less to acquisition marketing to reach your targets, and your spend will be focused on attracting the easiest-to-reach customers, who tend to convert more cost-effectively. 

If retention improves, more customers will be happier, and referral rates will improve, further reducing acquisition costs. 

In addition, if you retain more customers for longer, cost to serve will reduce since newer customers always cost more to serve than longer-tenured customers. 

Longer tenured customers are also easier to upsell. 

Finally, if you keep customers who would have churned, you, of course, keep the margin that you would have lost.   

Retention really is the key to growth. But the problem is that it's often much harder to do than simply funnelling money into acquisition. 

I unpacked this in episode 5 and episode 13.

The Retention Hierarchy of Needs 

Retention is complex because it is a function of the entire retention hierarchy of needs. 

At the base of the pyramid is the value proposition, what you offer and at what price to whom. What customers pay for the thing you provide has a huge bearing on retention. 

Factors that influence this include: 

• What you offer

• How you craft your offer, inc. pricing tiers  

• Competitive offerings & their prices 

• Total Addressable Market (TAM)

• Brand

• Organisational culture - are you short-term profit-focused or customer-first?  

How you market and who you market to affect customer retention. This is the second level of the hierarchy. Run a ton of $1 free trials; your customers are unlikely to be sticky.  Run a blended CAC (Customer Acquisition Cost); you are likely to overindex on low-value subscribers. If you use CLV (Customer Lifetime Value) to acquire customers by value; you’ll gain more high-value customers for better margins. 

Provide an attractive discount on annual versus monthly subscriptions, and you will acquire more loyal customers for higher CLV. 

This is unpacked further in episode 20. 

At the top of the pyramid is how you manage customer relationships at critical moments of truth. All moments of truth are influenced by 

• Journeys you build to handle different moments of truth 

• Execution tactics 

• How you leverage data & personalisation 

• Behavioural science 

• How you leverage AI 

Episode 37 covered moments of truth in detail. 

Customer love is your engine for retention-led growth 

In his brilliant book, Winning on Purpose, Fred Reichheld outlined how NPS vertical leaders beat the stock market average between 2011-2020: 

The chart shows the cumulative total shareholder value indexed vs. Vanguard total stock market index (VTI) between 01/01/11 and 12/31/20. 

The reason these brands are massively outperforming the market: customer retention. 

All these brands put the customer first, aiming to resolve service issues in a single call, empowering agents, making cancellation simple, ensuring they truly understand their customers' needs, and removing barriers to an excellent product and service onboarding and in-life experience. This means customers stay longer, spend more, and refer others. 

In episode 25, I unpacked the retention power of customer centricity. 

But remember, customers realise value, you don't create value

If you believe you create value, you can feel that your product or service is a gift bestowed upon customers.

As a result, you can force customers to adapt to your processes, engage in your preferred channels, do things that only benefit your business, and focus only on your wants vs. customers' needs.  

The reality is that it's only through using your product or service that value is created for customers. 

By understanding customers realise value, you flip the script.

You become focussed on enhancing your service offering, based on how your customers realise value with your core offer. For example, a gym might include tailored workouts and meal plans to help their customers achieve their desired goals.

In episode 33, I unpacked the customer value realisation process. 

Why focusing on the right customers means correctly calculating CLV 

All this does not mean you should naively add cost to your business for no upside. 

In most businesses, if you accurately calculate Customer Lifetime Value (CLV), you will understand that the majority of revenue is generated by around 20% of your customers. If you correctly measure Customer Lifetime Value, you will be able to identify the highest value customers who you need to be highly attentive to, your growth cohort in the middle and your lowest value customers, who you probably still need, but who you only need to provide acceptable CX to. 

If you focus on protecting and serving the needs of the highest-value customers and developing products and experiences to support the middle growth cohort, you will be more successful with your retention initiatives because they will directly create commercial upside, which will be observable in the P&L.  

In unpacked this in episodes 1, 3, and 26. 

Final Thoughts 

It's been a great year writing this newsletter; it really has been a passion project. If you have enjoyed reading it as much as I have enjoyed writing it, please drop a “😎 It was great!” in the poll below and if you like you can add your comments to the feedback section. 

Next week, we return to our 3-part series on agentic AI. 

Until then, 

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]