Is Your Boat Leaking?
A boat that leaks is not a great boat. Obviously, a leaky boat has water where it shouldn’t be. It’s not the mere presence of water that is the problem, it is the impact of the water. Wood rots, cushions mildew, mold grows everywhere and it smells so bad you can taste it. And the boat goes slow. There is nothing good about a leaky boat.
I know from my sailing days that keeping a boat watertight takes a lot of work.
And so it is with business.
The leaky boat is like a business with a problem retaining its customers. It costs a lot of money to acquire customers. Customers who leave prematurely can harm a business’s reputation. Keeping the customers that you acquire is a great way to grow revenue faster and increase net income.
The Customer Retention Mechanism – The Principles
All businesses have mechanisms to drive results. If the mechanism is working well, then the results are good. The mechanism for customer retention varies by industry, but you can determine your mechanism by answering the following questions:
1. Who is your ideal customer?
The further a customer is from the ideal, the more work and expense it takes to retain them. The closer someone is to being an ideal customer, the easier it is to serve him.
2. How do you create value for your ideal customer?
Think about the value you offer in terms of customer concerns, wants and needs.
3. What specific actions does your business perform in order to create value for your ideal customer?
Think beyond the mere delivery of goods and services. What other actions do you take to communicate, eliminate surprises and support your customers?
4. How can you know if you are creating value for your ideal customer?
Think about measuring the specific actions above. You can also survey customers, but surveys should never be your only measure.
Answering the questions above helps define your customer retention mechanism and provides you with leading indicators of your customer retention rate. In the last blog post, I showed you how to calculate your customer retention rate. While the customer retention rate is a critical measure to monitor, it is a lagging indicator — you do not know that you have a problem until you have already lost the customers (when the boat is already leaking). Answering the questions above will help you identify problems with customer retention before you lose customers.
A Landscape Industry Example of the Customer Retention Mechanism
Landscape maintenance businesses have the opportunity to keep customers for a very long time. Therefore, answering the four questions above and determining the leading indicators of customer retention can accelerate revenue growth and improve profitability.
Question 1: Who is your ideal customer?
Landscape maintenance businesses should specify the type of real estate they want to service (single-family residences, retail, industrial, office, condominiums, etc.), the property size, and the range of services provided to that ideal customer.
Question 2: How do you create value for your ideal customer?
Landscape maintenance businesses create value for their customers in at least three ways:
- Improving the appearance of the property, which can increase its value and, in commercial settings, reduce tenant turnover.
- Providing knowledge about plants and materials that maintain the customer’s standards while meeting the budget.
- Reducing the time and energy the owner or property manager spends related to landscaping.
Remember: the more value you create for your customer and communicate to your customer, the more likely you are to retain them.
Question 3: What specific actions does your business perform in order to create value for your ideal customer?
Landscape maintenance companies should think in terms of how they communicate with their customers. What kinds of communication work best for your customers?
- How often do your customers want to hear from you?
- Do they want to hear that everything is okay when a job is done?
- Do they want to hear that you found a problem and fixed it?
- Do they want information on industry trends?
- How do you communicate the need for additional services?
- Do they want phone calls, emails or text messages?
Stating the obvious: Your customers will not all be the same. You will have to customize your communication to meet different customer desires.
Related to the service itself, how have you organized the actions for delivering the services?
- Do you have a standard way of delivering the services?
- Do you train your employees to meet this standard?
- Do you have systems and processes to ensure quality service delivery?’
- Do you have a system for noting and communicating individual customer preferences?
Question 4: How can you know if you are creating value for your ideal customer?
Answering this question comes down to measuring actions. How do you measure the quality of the service you deliver?
- How do you know that the quality meets your standards as well as the customers’ standards?
- How do you track that you have delivered all of the required services?
- How do you track communication with each customer?
- How do you know that the account managers are communicating well with the customer?
- How do you track customer contacts?
- How do you track issues raised by the customer?
Developing a comprehensive set of measures helps you monitor the value the business creates for its customers as well as the work performed by its people. These measures become the leading indicators of the business’s retention rate.
The Twin Goals
Obviously, no one wants a leaky boat. Therefore, one of the goals of measuring the retention rate is to retain customers so that a business can grow faster and be more profitable.
The second goal is subtle. Knowing the retention rate is essential to predicting future revenue.
To predict future revenue, you must measure your customer acquisition mechanism (as previously discussed in this blog post) and you must measure customer retention mechanisms.
Predicting future revenue will help you make decisions about adding people and equipment and making other investments with much greater confidence.
You may even have fewer sleepless nights. And we could all be happy with that.