Episode 13 - How Improving Retention 5-10% Can Double Profits

Welcome to episode thirteen of the Retention Blueprint. This newsletter promises to transform your retention impact in just 5 minutes per week, providing digestible retention content that adds value every time. This episode explores how improving retention by just 5-10% can double profits. 

How can improving retention 5-10% double profits?   

As we explored in episode 5 of this newsletter, if you have an effective customer retention strategy and as a result retain more customers than you had planned, you can reduce your spend on customer acquisition.

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

As a result, this can decrease your Customer Acquisition Cost (CAC), making your customer acquisition efforts even more efficient.   

If you have improved retention, referral rates improve, further reducing acquisition costs.  

 In addition, if you retain more customers for longer, cost to serve reduces, 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 get to keep the margin that you would have lost.   

Lets take a (heavily simplified) hypothetical example:  

Assuming a hypothetical subscription business has 100k customers, generating $24 per customer per year, a 35% annual churn rate and 3 year average life for $72 CLV. Adopting the industry standard 3-1 CAC to CLV ratio, would result in a $24 CAC (this is a simplified average, brands should invest in CAC by predicted value).   

In this scenario the company is expected to generate $1.6m margin per annum after accounting for churn (excluding any growth from acquisition).  

Improving retention and reducing the churn rate from 35% to 30% would generate:   

$360k CLV margin from customers would have lost ($24 x 5000 x 3 years) 

$120k+ saved from acquisition costs the brand would have spent to replace the 5k customers lost (based on $24 CAC X 5000 customers)  

$50k from reduced cost to serve, since in this hypothetical example, new customers typically cost an average of $10 more per customer to serve in year one, with no need to directly replace the 5000 customers who would have churned with new customers, the brand saves on service costs. 

$30k from upsell in years 2 and 3 from customers the brand would have lost, assuming in this hypothetical example customers spend an average of $3 more in years 2 and 3.  

= $560k additional margin from a 5% reduction in the churn rate or 36% of 1 years margin (noting some of that margin comes in years 2 and 3).

If the brand improved the churn rate by 10%, this would generate $1.1m CLV margin (72% one year margin). 

If the brands average tenure was 5 years and not 3 years and achieved a 10% reduction in the churn rate, this would generate $1.6m CLV margin or a doubling of one year margin.

Then if the run rate churn rate of 30% was continued each year, each year the brand would see the above CLV margin benefits, which is how this hypothetical brand would get to a doubling of profits.   

Of course this a very hypothetical and highly simplified example, assuming all of the extra churn saved would have been first year customers and that margins and product mix remains static, so it is indeed a heavily simplified example. However these numbers show that relatively small improvements in the retention rate can have a huge impact on profitability. 

So how do you drive a 5-10% improvement in retention?  

To drive 5-10% reduction in churn, improve retention 1-2% at each moment of truth.    

As we explored in episode 1 of this newsletter, in any subscription business, there are key moments in the relationship: the first 90 days, or in life when usage drops, an important service issue, or the cancel journey—which are all often key moments of truth that require the most focus. 

The key is to understand your business's most important moments of truth and alter the experience to optimise retention. 

Brands can understand the most important moments using analytics and data science to understand what happened immediately before a churn event or to identify which types of interactions, experiences, or behaviours have improved retention. They can also understand these moments through experiential NPS tracking or qualitative research.   

Employing systems for onboarding (nurturing customers to undertake activities that benefit their long term usage), cancel journey management (which helps customers ponder the decision, without being obstructive), creating habit, customer love and embedding the product into customers lives are all vital here to improve retention at moments of truth (see previous newsletters for insight on all these areas).  

Behavioural economics and proven channel execution techniques across CRM Marketing, product and customer service can also be important.

Final Thoughts 

Small improvements in retention can lead to significant gains in profitability. As we've seen in today's example, a 5-10% reduction in churn can have a powerful impact on margins. The key to achieving this lies in focusing on retention at critical moments of truth, whether it's during the onboarding phase, when customer engagement dips, or even in the cancellation process. By utilising data-driven insights and implementing proven retention systems, you can optimise these moments, reduce churn, and ultimately substantially improve profitability.