All marketing and advertising —from the Goodyear blimp to a coupon sent to customers on their birthday—fall under one of three categories
- Customer Acquisition or lead generation, or how you drive new customers into your retail business, website and ultimately into a database.
- Value Optimization or up-selling, or how you maximize customer transactions, for example when McDonalds asks you if you want to supersize your meal.
- Retention and referrals, or how you keep customers so happy they buy more and tell their friends and family how great you are.
Some businesses who operate in extremely competitive environments — like the fast food or automotive industry — require a constant stream of customer acquisition advertising.
However, some business owners are content with a niche or a smaller footprint; they can survive and thrive without investing much money in customer acquisition. A good example is one of my best friends, Dayne, who’s a real estate agent in Indianapolis. He has never advertised, aside from maybe a post on Facebook or a postcard, and has a thriving business through referrals. Dayne is happy to have a certain level of business that suits his lifestyle. He does everything himself with zero help from assistants or staff.
If Dayne finds himself in a situation where he has too many referrals, then he can be pickier about who he spends time with. When his pipeline is weak, he’ll spend more time developing insights to share with his network, and usually has a customer appreciation event a few times a year which reengages him with all of his clientele. The distinguishing factor here is that Dayne doesn’t want to deal with the hassles of a larger business. He’s content with his quality of life, is great at his job, and he has a systematic way of reminding clients to refer him.
On the flip side, there is another local real estate agent who is usually #1 in sales volume in Indianapolis—her name is Bif. I know this because she promotes her #1 status through constant advertising in direct mail, magazines, and local business publications. She invests money to keep her pipeline full of leads and has a large staff of realtors who benefit from her customer acquisition efforts. Bif has a burning desire to keep growing and stay #1, and is comfortable delegating numerous aspects of her business.
When you begin building a steady supply of leads, it’s critical to have processes and training in place to maximize every transaction and to build relationships.
Crew Carwash, an Indianapolis-based car wash chain, uses TV, radio, and billboards for lead generation. They also invest in training their salespeople because every time I get my car washed, regardless of which location, I am politely asked—with a smile—if I want to upgrade my wash or buy a book of washes (most of the time I buy a book). Their employees seem to follow a clear process and script, and they are all dressed in a similar fashion. All of their car washes are clean and brightly lit, have signage encouraging customers to buy more washes, and are located near busy intersections.
Crew Carwash constantly seeks new ways to package and sell a simple service—a car wash. I would argue this investment in training, professionalism, and consistency has more to do with their success than their actual lead generation.
A book by Dan S. Kennedy and Shaun Buck, No BS Guide to Maximum Referrals and Customer Retention, quotes Keith Lee, a contributor and owner of five businesses:
“What can business owners do to improve their customer service?
- Train your entire team to deliver exceptional customer service.
- Consistently reinforce customer service expectations with your team.”
One of the most common breakdowns in marketing occurs at this step. Many businesses get plenty of leads through their marketing tactics, yet they fail to maximize or capitalize on those leads in a meaningful way – And then they blame their advertising!
Customer Retention and Referrals
Consider this fact. The reason a lot of businesses struggle to increase their profits is this: the cost of losing customers exceeds the cost of profits gained from new customers. Again, I will reference the excellent book, No BS Guide to Maximum Referrals and Customer Retention, in which coauthor Shaun Buck illustrates the potential of just reducing the loss of customers, or attrition, by only five percent.
Let’s say hypothetically you have 1,000 customers who spend on average $1,000 per year, grossing your business $1 million dollars per year. You lose five percent of those customers every year—some through natural attrition (people die, move, etc.) and the rest through dissatisfaction with your service or competitive offers from lower-priced national retailers. This equates to 50 customers or $50,000 of lost customer revenue per year. But let’s expose the true value of the lost customers over a five-year horizon:
- 50 customers lost per year = 250 customers lost over 5 years
- 250 customers @ $1k per = $250,000 of lost revenue over 5 years
- On average, you get 2 referrals per 50 customers, and over 5 years that equates to 10 lost customers and another $50,000 in lost revenue.
- Total lost revenue = $300,000 (almost 1/3 of your annual gross revenues)
- Cost of investing in ways to keep more customers = much less
What if you reallocated a small portion of your overall budget to improving customer retention: training for your staff, upgraded customer relationship management software, and direct mail and email campaigns designed to keep existing customers engaged with your products and services at all stages of their buying process? Something like this could be done for as little as $10,000 per year, and if you just reduced attrition by 2.5 percent, it would mean you lose 25 fewer customers per year.
- 25 retained customers per year = 125 customers saved over 5 years
- 125 customers @ $1k per = $125,000 in saved gross revenues
- You retain 5 referrals, resulting in 25 new clients and $25k in saved revenues over 5 years.
- For a minimal investment, you saved $150,000 from leaving your business.
In his book Flip the Funnel: How to Use Existing Customers to Gain New Ones, Joseph Jaffe argues customer acquisition is a waste of money, while retention and loyalty deserve the lion’s share of your budget. I absolutely agree. But somehow you need to build up a customer base.
Once you have a robust database of happy customers, you have a significant asset—perhaps more valuable than any physical inventory, equipment, or real estate. I’ve heard the single easiest way to double your business is to convince each of your current customers to bring a friend.
Depending on how mature your business is, and your personal desire to grow, your needs may differ. If you’ve been in business for a long time and have a large customer database, you may find a better return on investment through value optimization and retention with email marketing, direct mail, VIP sales, and events. If you are a new business without customers, allocate more of your budget to efficiently capturing new clients. Never can any one of these areas be ignored, but generally it’s a more efficient model to generate revenue from an existing clientele base.