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We have talked over the years about the needs and wants of your customers and that building internal excellence through the skills and knowledge of your employees is the key to success. We also have talked about the fact that your employees will work much harder to satisfy your customers than they will to satisfy their bosses.

I don’t think that either of these points is earth shattering. Nor do I believe they are going to develop long-lasting relationships with your customers either. That takes much more than two simple items.

The key to success in any business built on supplying products and services to a market is customer retention. This is an area many companies overlook.

Do you know what the retention rates are for your service or parts customers? Do you know what the return rate is for your customer installations in the year after the new sale? This is an extremely important area of knowledge.

Analyzing Customer Retention

Let’s look into your parts business. How many of the customers who bought parts from you in 2010 bought again this year? The number will be surprising to you. What I have experienced around the capital equipment industries is that between 15% and 20% of customers “defect” from you each year. You need to check it out for your business.

There is another statistic that is very compelling. In The Service Profit Chain, written by three professors from Harvard University, they found that in the industrial distribution business an increase of 5% in customer retention would improve the profit of the business by 45%. Think about that for a moment.

I’m pretty sure in the current business environment there is nothing you could do that would impact your profitability more than increasing customer retention. But you must be careful as it is easier said and read than done.

This also relates back to another key piece of information that is important for you in managing the business. What is the lifetime value of one of your customers? This is one of the guiding principles used by Carl Sewell in his automobile businesses in Texas and the philosophy he exposed in his book Customers for Life: How to Turn That OneTime Buyer into a Lifelong Customer. In the automobile industry, it was determined that a customer is worth some $332,000 over their lifetime.

What is the value of each of your customers over their lifetime? Perhaps you are thinking this is going to be too difficult to calculate. Don’t think that way. This is important.

So let’s get back to improving the profit of a business.

If you start with 100 customers and you have a customer retention rate of 80%, you lose 20% each year. That means your customer base will develop as follows:

Year 1—100
Year 2—80
Year 3—64
Year 4—51
Year 5—41

Let’s change the retention rate to 85%, or an improvement of 5%. The progression develops as follows:

Year 1—100
Year 2—85
Year 3—72
Year 4—61
Year 5—52

It should be pretty clear that by increasing customer retention by 5%, you will retain 11 more customers for each 100 customers you have in your business. If it’s 1000 customers, you will retain the business of 110 more customers each year. This is quite a multiplier.

I trust you can see how important it is now to determine the lifetime value for your customers. Now you can round out this exercise completely and calculate the dollar value you would recapture by improving your customer retention by 5%. The next step is to communicate this to your employees. Show them the facts and ask for their help.

Repeat this exercise for each aspect of your business: prime product, service, supplies. Whatever the main sales categories are, do the calculations.

Going Beyond Customer Retention

Let’s get into more details in the business. Do you use a customer relationship management (CRM) system?

If you do, then you can start to manage the customer relationship more completely. It is all about triggers. When the first CRM systems were implemented, they were primarily for the control of sales calls for salesmen. Tracking the calls and the content of calls—to ensure the skills that the salesmen required were in place—and training programs could then be used to maintain the best possible skills in the sales force.

But that really wasn’t the only thing CRM systems were intended to perform. When you sell a product, there are many things that should be put into a record for other calls that are required:

• The call from the service manager after installation to determine that everything is operating properly
• The call to warn the customer the warranty period is about to run out
• An inspection program you offer to ensure that the equipment is operating as it should and get warrantable items corrected during the warranty period.

There are many items that qualify for triggers. This will make sure everything that should be done in performing up to your standards and communicating with your customers in a timely and effective manner occurs. This will reduce the owning and operating costs of the products you sell, as well as ensure the highest residual value of those products.

This is the beginning of creating the “glue” to keep your customers coming back to you for years to come.

Next month we will continue this process of developing the tools and measures to help make sure you will have satisfied customers for life—both yours and theirs.