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Customer
retention-it's the only means for business survival. We must
establish a customer retention goal that reads something like
this: Every customer that we do business with today we will
do business with forever.
That is
quite a mouthful, but it is also critical to the success of
your business.
In a
study conducted by Frederick F. Reichheld and W. Earl Sasser
it was found that with a reduction of just 5% in customer
defections in the industrial distribution business sector,
the percent increase in customer value was 45%. Once you see
your customer defection rate and the impact that it has on
your business, you will want to take some form of positive
action to retain all of your customers all of the time.
In the
same study by Reichheld and Sasser they suggest that "companies
can boost profits by 100% by retaining just 5% more of their
customers."
Customer
retention and the customer defection rate are measures that
are rarely used in this industry. Do you measure customer
retention or defection? We'll discuss here how you can begin
now.
RETENTION
/ DEFECTION DETERMINATION
With the January calendar year-end coming up, let's review
a customer retention/defection calculation method.
Get your
customer sales history for the calendar year 1997 and also
calendar year 1998. Most of your computer systems will be
able to generate these reports pretty easily. Look at the
two reports side by side and compare customer purchases. (Some
of you will have the last two years on the same report).
Any customer
that bought something from the dealership during 1997 and
did not buy in 1998 defected for some reason or another. I
agree they might not be in business anymore-that should be
reviewed in the "why they defected" work later. Nevertheless,
that counts as a defection. At the end of this exercise you
will know how many customers defected during 1998.
Next,
count the total number of active customers you had in 1997.
(An active customer is any customer who purchased something
from you.) The rest is easy arithmetic. Divide the number
of customers that defected by the total number of active customers
and you have the defection rate. Subtract the defection rate
from 100% and you have the retention rate.
Whatever
number you arrived at, if the defection rate can be reduced
by 5% you will increase the customer lifetime value by 45%.
I would
like to do the same calculation for just the parts department
and then just the service department. In today's market the
same should be done for the rental department, too. The equipment
sales group is more difficult because many times a customer
will buy a machine one year and not buy another machine for
three, five or more years.
Find out
the customers who purchased parts in 1997 but not in 1998
and the total active parts purchasing customers. Do the same
for service and for rentals. This will lead you to retention/defection
rates for each of these departments.
For those
of you who read my segmentation article in August, what I
normally like to do is determine this retention/defection
rate for each of the major customer groupings. For the "AAAA"
customers in parts service, sales and rentals that have the
largest machine population, it is the fleet owner. For the
"BBBB" customers, it is the "A" and "B" of any combination
of purchases for parts, service , sales, and rentals with
the fleet population. Then the same thing again for the large
machine population customers.
From
these retention/defection statistics we can make a determination
of which customer groups we want to retain and what it will
take to keep these customers.
Never
lose sight of the fact that measuring these statistics is
very critical for your dealership.
ALTER
YOUR DELIVERY SYSTEMS
Once we have determined which customer groups are most important
to the dealership and why, we can set out to establish key
systems and methods to improve our service to these customers.
We must start first with the fact that each and every employee
must become customer oriented. This is more than the smiles
and thank you's-it is a heartfelt belief that each employee
will benefit from serving the customer in manners that are
unequaled.
From these
statistics we need to establish the methods, systems, styles
of communication, delivery vehicles (not trucks), employee
recognition and measurement methods to enhance customer retention.
We don't want to enjoy just a single sales transaction but
an ongoing relationship with a lifelong series of transactions.
We must
transform the sales and service methods that we use into a
personalized form. A form that is revolutionary in the eyes
of the customer. It must be employee-based. They must feel
liberated in their actions. They must feel free to do what
they believe to be the right thing. That means that we must
first train the employees to understand what the right thing
to do might be. They must understand how far they can go to
satisfy a customer on a particular transaction or a particular
problem.
Don't
forget that the starting point for customer loyalty and satisfaction
is happy and satisfied employees!
If your
customers look to you to provide products or services as a
last resort-the one they turn to when all their other channels
of distribution have been tried and failed to solve their
problem-then the relationship is not really a good one. Is
it? If that's where you are with any of your customers, it's
a problem that needs to be remedied.
Customer
loyalty, high rates of customer retention, is listed as the
most significant factor for successful businesses in study
after study.
Imagine
a situation in which you would lose 5% of your customers each
year. Over a period of 25 you would not have any customers
left. Imagine the difficulty of trying to create new customers
at that rate each and every year.
Further,
you know how quickly a customer's purchases grow. It is fine
to make equipment sales. But the long term benefit to the
dealership is the parts and service business that the use
of the machine generates.
Again
I repeat-retain customers! You know it is important. Did you
realize how important? How do you measure retention? Do you
even measure retention? Most don't!
PURCHASING
PATTERNS
Another form of quick review for retention/defection is to
track the normal purchasing patterns of your customers. Get
your customer list and the purchases for each of your customers-all
the purchases: parts, service, sales and rentals. This time
look at their purchase history by month.
Now separate
them into their buying patterns according to those that:
Purchase
something every month.
Purchase
something every quarter.
Purchase something twice a year.
Purchase something once a year.
Purchase nothing in the year.
Repeat
this for each department-parts, service, sales and rentals.
Have you
any idea what this breakdown will look like?
Now take
the total purchases, in dollars of sales, for the same time
blocks and split the sales volume into percentages. Repeat
this for each department. This should be repeated for cost
of sales and for gross profit.
Just this
small exercise will lead you to start thinking about strategies
for individual groups of customers. How should you manage
the business with customers who buy every month? How about
those that haven't bought anything in a year? Each group is
different and needs different strategies. Without this type
of review, customer retention will become a hoped for rather
than a planned for result.
This type
of retention/defection review and purchase review should be
done at the branch level and even at the sales territory level.
This is all critically important in determining a customer
satisfaction strategy. It is this strategy which will help
you in increasing customer retention.
Don't
forget to ask your customers what they think you should be
doing. It is critical that you include your customers in setting
forward a strategy for customer satisfaction. And remember
to include another very special group of customers that can
help you immensely-those customers who have defected!
You know
we go through exit interviews with our employees. But do you
ever interview your customers who have defected? Probably
not. Not because you didn't want to, but probably because
you didn't know that they had defected.
Many of
you will have concluded, by now, that the customers who are
most important to you are the higher volume buyers, the larger
profit-generating customers. I grant you it is critically
important that you retain your large-volume customers. However,
once you go through this calculation, I expect that you will
find a small number of these "special" customers, and think
how vulnerable you become if you lose one of them.
If you
went through the segmentation exercise (see the August issue
of CED page 47.) you will know right now what percentage of
your customers generate 80% of the sales. The 80:20 rule does
not apply in this case. The number of customers that generate
80% of your sales will be closer to 10% than 20%.
This low
number of high-sales-generating customers is due, in part,
to the defection rate of your customers growing at a higher
rate over the years than the rate at which you were generating
new customers.
Acquiring
customers is expensive. In the first year that a customer
does business with you, you normally will lose money with
that customer-taking into account the cost of advertising,
promotion, setting up credit the number of sales calls and
startup costs associated with a new customer.
Having
the volume of customer purchases rise to full market/profit
share takes time. It takes a relationship. It takes trust
on the part of both you the dealer as well as the customer.
This is not easy to do. But, when you consider the alternative,
it is far easier and smarter to do the right thing by your
customers and retain them forever.
There
are many reasons why loyal customers of a dealership that
has high customer retention deliver more profit:
The cost
of acquiring customers goes down.
Satisfied customers become apostles telling others about you.
Long-time customers normally give you more business.
Long-time customers are normally less price sensitive.
Long-time customers are less costly to serve as you know their
needs.
Dealers
who have high customer retention normally share three characteristics:
They know
who their good customers are.
Every employee understands that this is a lifetime relationship.
Delivery systems consistently provide superior service.
A
CIRCLE OF CHAMPIONS
So let's look at something more positive as a sales and marketing
idea. How many customers are with you today that were with
you the first year you started your business? Do you provide
any form of special recognition to these customers?
Most of
you have "Years of Service" pins for your employees. How about
starting a "Years of Business" recognition program? A Circle
of Champions as they say in sports.
Have
special customer appreciation evenings once a year during
at which you present anniversary awards. Five-, 10-, 15- year,
etc., patches, pins, decals-whatever you think is appropriate.
You might
be thinking to yourself that this is inappropriate. Well,
frequent buyer programs have become a very normal part of
business. Look at the frequent flyer programs, the hotel programs,
just to name a few. They recognize customers by the level
of their purchases. It just makes good sense.
Think
of the customer who has just earned his five-year customer
appreciation pin in the room with customers who have been
with you 25 years or longer. There will be a considerable
amount of peer pressure on that customer to work with you
and remain one of your loyal customers.
In my
September column titled "Who Are Your Heros" I stressed that
you need to have your customers become apostles for your business.
Look at customer appreciation programs as another form of
creating apostles.
EMPLOYEE
SATISFACTION IMPACTS CUSTOMER SATISFACTION
In the service profit chain it is very clear that satisfied
employees are a critical requirement if your dealership is
to maintain customer satisfaction at levels that will retain
customers for life. As those of you who have followed the
themes of my work will know, I strongly believe in aligning
systems and methods with words and vice versa.
It is
critical that we provide easy-to-use and effective systems,
whether they be manual or automated.
- We
must provide parts when customers need them and get the
missing part reliably and quickly.
- We
must provide the repair service accurately, professionally
and in a timely manner.
- Rental
units need to be clean and operate properly and be priced
fairly.
- Our
credit facility must be in line with the proper business
requirements.
In short
we must operate a business that provides the customer with
unequaled levels of support.
These
are all important elements that are required if we want to
reduce customer defections and increase customer retention.
We must work hard to have retention levels that are exceptional.
We must have customers believe and know that we want their
business for their lifetime, that we will work hard to achieve
their trust and confidence.
We must
never lose sight of the fact that (1.) it is a privilege to
serve our customers, (2.) by serving them professionally and
properly we will retain their loyalty for a long time, (3.)
we will enhance our profitability by retaining customers at
higher levels and (4.) we will be able to afford the improvements
in service, systems and people that will be required as we
move forward to the new year.
A 5% improvement
in retention provides a turbo boost to your profits. Measure
your customer retention/defection! Design systems that satisfy
your employees and your customers. Know which customers are
good customers and work hard to have zero defections with
these customers.
Do these
things and you will reap rewards for years to come.
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