The debate about whether it is better for a business to attract new customers or to retain existing ones rages on. In truth, to grow and develop your business you need to do both.
But the statistics tell a different story. Let’s take a look at what the numbers suggest about the value of customers to your business.
Read On:
The value of old customers
The golden test to see what customers want
How to make customers happy
Cost of acquisition
The stat that is banded about the most when looking at new verses existing customers is that it costs typically six to seven times more to acquire a customer than to keep an existing one (according to many sources, but all seemingly derived from a Bain & Company report).
Value of existing customers
But the ‘value’ of servicing existing customers doesn’t stop with just being “cheaper as a keeper”. In fact, according to Bain & Company again, a 5% increase in customer retention can result in anything from a 5 to 95% uplift in profits.
This is driven by the fact that, according to McKinsey, eCommerce spending for new customers is on average $24.50, compared to $52.50 for repeat customers and that, if Marketing Metrics is to be believed, the probability of selling to an existing customer is 60 to 70%, while the probability of selling to a new prospect is 5-20%.
The cost of loss
While there are clear benefits to keeping customers once you have attracted them to your business, there is also the prospect that there is also a loss to be considered should you lose them.
According to KISSmetrics, the average value of a lost customer is $243 to any given company anywhere in the world.
With this in mind, it is also worth considering that KISSmetrics also finds that 71% of consumers have ended their relationship with a company due to poor customer service – so read the articles on eSeller about good customer retention.
Working out the value of your customers
So, how do you go about working out the value of your customers? This is of course the big question and one that doesn’t have a specific answer. However, the basic formula is along the lines of:
(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time) = Life Time Value (LTV)
The Starbucks example
According to research by KISSmetrics, Starbucks LTV calculations indicate that the average order value for a customer is $5.90. However, calculating the LTV reveals that in making repeat customers out of the people that buy their coffee can net the company $15,000 a year.
This is why Starbucks has so many shops and offers company couches and lets you take your time over your coffee: they know that by being everywhere and by treating you well they are more likely to get their $15,000 a year out of you.
This is the value of existing customers writ large.
Speak Your Mind