The cost of customer retention

Many business owners rely on lead generation marketing to ensure that their incoming revenue is sufficient to cover overhead expenses and expansion initiatives. New clients are important for the long-term viability of an enterprise. After all, if a company only has the same number of customers from month to month, then its sales will likely stagnate and can plummet when buyers are poached by other organizations.

That said, you can’t simply rely on new customers coming in every month. If your marketing campaign isn’t effective, then you’ll lose money and risk going under. You need to have a loyal customer base to ensure that your business is on stable financial footing at all times. Client retention is one of the most critical factors for your business’ long-term health.

Unfortunately, your customers aren’t going to stick around just because you want them to and asked politely, though it never hurts to say you want your clients to continue their partnerships with you. As with most initiatives, customer retention will hit you where it hurts – your wallet. You have to dedicate a significant portion of your marketing budget to keeping your buyers and fostering loyalty among them.

There are many different schools of thought as to how much you should spend on customer retention. Below is a look at how a few experts believe you should allocate your financial resources for this objective.

The 75 percent strategy
According to YFS Magazine, you should dedicate at least 75 percent of your marketing budget to customer retention. Specifically, your funding should be used for direct communication with your clients, not broad platforms like social media, print advertisements and pay-per-click campaigns.

The reason for this heavy focus is because you can waste a great deal of money targeting consumers when you should be thinking about the people who already buy from you. Your customers already know what your business has to offer, so you don’t have to use your advertisements for education. Instead, your marketing materials can help you build connections with clients so that they’ll stay with your company for extended periods of time.

The formula
Some experts believe that there isn’t a fixed amount of money or standard budgetary percentage that you should use for client retention. In their research, Andres Musalem, from Duke University’s Fuqua School of Business, and Yogesh Joshi, from the Robert H. Smith School of Business at the University of Maryland, created a formula for determining the optimal amount to spend for holding on to customers.

In the conclusion of “How Much Should You Invest in Each Customer Relationship? A Competitive Strategic Approach,” Musalem and Joshi point out that their model includes flexibility to determine how much profit can be earned by retaining a specific customer. This is a critical aspect of determining the proper budget because customers have different spending habits which will lead to varying levels of revenue.

The case-by-case approach
You don’t have to calculate a customer’s profitability with Musalem and Joshi’s formula because the factor also allows you to decide if a customer is worth retaining. Look at how much revenue a client generates to determine whether it’s financially worth keeping him or her. Research your patrons and choose the ones that have the largest profit margins to target with your retention strategies.

Ultimately, keeping customers and fostering loyalty among them is a vital aspect of running a successful business. Without regular customers, it’ll be difficult to reach new heights. How much do you spend on client retention, and how did you decide on that figure?


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