Since every business loses customers, the question is whether you lose them faster than you can replace them. The leaky bucket theory is one picture of this challenge: a bucket full of water, where the water stands for your customers and each leak stands for one reason why they walk away. Your job is to plug those leaks before the bucket empties.
Plugging the leaks matters because you pay far more to replace a customer than to keep one, according to the figures below.
The real cost of losing customers
The numbers that matter
You pay five times more to acquire a new customer than to retain an existing one (Invesp). When you raise customer retention rates by 5%, you can boost profits by 25% to 95% (Harvard Business Review).
When is high, you lose revenue from two directions at once. You lose the recurring income from each departing customer while you spend more to replace them than you would spend to keep them. A subscription business can go under from that cycle, while a product business can lose margin quarter after quarter.
A customer who stays longer can spend more and refer others, while you pay less to serve them. Retention is therefore a growth strategy in its own right, since according to the figures above you can raise profits by a quarter or more with a small improvement in it.
Finding the leaks
Before you can fix churn, you need to understand what causes it. You can sort the common causes into four groups:
- Poor customer service. When support answers slowly, answers unhelpfully, or leaves a complaint unresolved, customers move to a competitor who treats them better.
- Lack of perceived value. When customers feel that they pay more than the product is worth, or when a competitor offers something clearly better, their loyalty ends and they leave.
- Unmet expectations. When you promise more in your marketing than you deliver with your product, customers stop trusting you, which means that they doubt every later promise as well.
- Friction in the experience. When users find the interface confusing, a workflow breaks, or a task takes more steps than it should, they grow frustrated and start looking elsewhere.
From analytics and direct customer feedback you can learn which of these apply to your business, provided that you ask the questions and track the signals while the customers are still with you.
Strategies for plugging the leaks
- 1
Personalise every step of the customer's path
Customers stay when they feel understood. Personalisation means tailoring the whole experience to each customer's preferences and behaviour, from the products that you recommend to the help that you offer.
Customer journey mapping is the exercise of listing every touchpoint that a customer has with your brand, from first contact through purchase and beyond. Once you draw the map, you can see where personalisation makes the biggest difference, which is usually onboarding, product recommendations, support interactions, and renewal.
The organisations that do this well track behavioural data across channels and use it to anticipate needs before the customer complains. When a customer receives a recommendation that matches what they are already considering, or receives help before a problem stops them, they have one more reason to stay.
- 2
Use technology to scale retention
With artificial intelligence, a support team can analyse purchasing patterns, predict when a customer is likely to leave, and start a personalised intervention before they go.
Chatbots answer common questions around the clock, which means that your human agents can spend their time on the complex issues where a customer needs empathy and judgement. A bot answers the simple question fast while a person answers the hard one with care, which is how the customer gets the right kind of help either way.
The goal is that someone, human or bot, answers every customer query and someone acts on every warning sign.
- 3
Build a loyalty programme that customers want to join
A loyalty programme works when customers value its benefits and can reach them. A programme fails when customers have to spend more money or effort on its rewards than they are willing to give, because the programme then feels like a chore to them.
In an effective programme, you reward what customers already buy and make the path to each reward clear so that the customer sees the reward as thanks. Points systems, tiered memberships, and exclusive access can all work well when the offer is honest and the rules are simple.
The larger effect is psychological, because a customer who already has a stake in the programme and can see the next reward is likely to choose you even when a competitor's price and convenience match yours.
- 4
Find at-risk customers before they leave
If you wait for customers to complain, you miss the ones who leave in silence, which is why proactive retention means finding at-risk customers before they go and intervening with a targeted offer.
The records that you need are in your and your data analytics platforms. By analysing historical behaviour, you can spot the patterns that precede churn: declining usage, fewer logins, reduced order frequency, or a support ticket that an agent closes without resolving it.
Predictive analytics tools such as IBM Watson Studio, RapidMiner, and Microsoft Azure ML can build models that score each customer's churn risk so that your team can prioritise outreach towards the customers who are most likely to leave.
On the qualitative side, you can collect structured feedback easily with tools such as SurveyMonkey, Qualtrics, and Typeform. When you ask customers what works and what fails, you learn from their answers what to fix first.
Learning from the leaders
Amazon charges a flat annual fee for Prime membership, in return for which members receive free shipping, access to streaming services, exclusive deals, and early access to new products.
Once a member pays the fee, every purchase from Amazon feels like a way to recoup it. Because of that sunk-cost effect and the benefits that they use, members keep buying from Amazon even when a competitor matches the price.
Prime members spend significantly more per year than non-members and renew at rates above 90% in mature markets, which is what Amazon gains by treating retention as a product in its own right.
Starbucks bases its rewards programme on a simple points system. Customers earn stars with every purchase, which they exchange for free drinks, food, and other perks. The programme is part of the Starbucks mobile app, where customers order, pay, and track their stars in one place.
The programme works because in the app, each purchase becomes part of a habit loop. The app sends personalised offers from purchase history, sends a reminder when a customer is close to earning a reward, and adds bonus star challenges that turn the experience into a game. With each of those messages, Starbucks strengthens the customer's habit of choosing it.
Starbucks raises visit frequency and average order value through the programme, which proves that with a well-designed loyalty programme a business grows revenue from its existing customers as well as keeping them.
Amazon and Starbucks share one principle, which is that a customer has a reason to stay beyond the product itself when leaving would mean forfeiting the value that they build up.
Where retention is heading
Retention teams will rely more and more on machine learning and predictive analytics, because with these tools a business can already anticipate a need before the customer states it.
The organisations that retain customers over the long term pair that technology with a culture where every team, from product to support to marketing, shares responsibility for keeping them.
Because customer behaviour and market conditions keep changing, you have to change your retention strategy with them. The businesses that learn why their customers leave, and then fix each cause, are the ones that keep the bucket full, which means that each year's new customers add to the last year's total.
