Let’s Work Together

“Make New Friends, But Keep the Old”

May 2nd, 2012

Kevin Jones – There’s an old song whose lyrics are “Make new friends, but keep the old. One is silver and the other gold.” Sound advice for our personal lives to be certain. But it’s also a good strategy for small businesses. Many small business marketing strategies focus on increasing sales by adding new customers (new friends). But there are plenty of good reasons why small businesses should be paying more attention to existing customers (old friends).

According to a report by Frederick Reichheld of Bain & Company, “acquiring a new customer can cost 6 to 7 times more than retaining an existing customer.” This is because creating a new customer often involves getting someone to change their buying habits and behaviors – to try something new or to switch from a current supplier. Changing behaviors is not easy and it often takes more effort.

The Reichheld report cited above goes on to state that over a five-year period, customer attrition rates could reach as high as 50 percent, if customer databases are left dormant. In other words, if they’re ignored, your “old friends” will go away. Finally, Reichheld’s findings say that businesses that boosted customer retention rates by as little as five percent saw increases in their profits ranging from five to an astounding 95 percent.

So, what can you do to keep your “old friends”? Here are some suggestions for building a customer retention program:

Know your existing customers – Remember the 80/20 rule? It says that 80 percent of your sales (or profits) are generated by just 20 percent of you customers. Put another way – a relatively small portion of your customer base is responsible for a relatively large portion of your overall business. But do you know who these customers are? The first step to an effective customer retention program is to establish a customer database (not just a customer list). A database tells you how much each customer has spent in the last year/quarter, what they spent it on, number of purchases, frequency of purchase and much more.

Maintain communications – Find a reason to reach out to your existing customers and follow-through. Whether it’s to say “thank you,” to share news or to transfer some useful information, this is a service that customers value. Talking directly with your best customers (by phone or in person) is always the best way to go. But depending on how many customers you have to communicate with, as well as the subject matter, you may use direct mail, e-mail or social media, such as Linked-In and Twitter.

Develop appropriate loyalty programs – Find ways to reward your customers for doing business with you. For retailers, good old punch cards that give customers a discount or free product after a set amount of purchases may work well. In B2B channels, cumulative quantity discounts may be more appropriate for building loyalty. Decide what you want to reward – e.g., repeat business, referrals, buying certain items or paying invoices on time – and design a program around those behaviors. But remember the KISS principle – don’t make it too complicated.

Don’t ignore dormant customers – Your customer database should reveal past customers who haven’t bought for a while. You may feel it’s better just to let them go and focus on getting new accounts, but it’s important that you find out why they stopped buying. This could be informative and may reveal problems that you weren’t aware of. Resist price-cutting, though.  Simply lowering prices may not get former customers to come back. It may be better to suggest other products or services that are more affordable.

Every business needs a customer retention program as part of its overall marketing plan. The time, effort and resources required to keep “old friends” is usually well worth the investment.

Kevin Jones is a Business Advisor for the Central Indiana Small Business Development Center, an organization with the mission to create a positive and measurable impact on the formation, growth, and sustainability of Indiana’s small businesses by providing entrepreneurs expert guidance and a comprehensive network of resources. Kevin can be reached at kjones@isbdc.org.

*Photo via iStockphoto.com