Most entrepreneurs rightly focus on revenue generation from new customers. But many do not plan for — or flat out ignore — customer retention and the opportunity it represents.
By your company’s third year, it’s typical that 50 percent of your revenue will come from just 10- to 15 percent of your customers. To achieve this level of loyalty, though, there are a few steps you’ll need to take as your company goes through three growth phases.
The shotgun phase
In the early days of your business, you’ll sell anything to anyone in order to keep the doors open. You need customers to prove to your investors that your ideas and plans are sound.
The feedback you get from early customers is priceless, but understand if you are signing customers of any type, your retention will suffer and you’ll ultimately have to work even harder to replace them relatively quickly.
To develop those early customers into loyal patrons, listen closely to them. Find out what they truly value from you – and realize this often is not why they bought from you in the first place.
The band-aid phase
Very quickly, you’ll find yourself with happy and unhappy customers. It’s inevitable. Your first inclination will likely be to slap Band-Aids on the bad relationships and hustle to adapt your product or service when unhappy customers stop buying.
This can be a dangerous trap, though. Too much time spent fighting customer churn can easily pull resources away from R&D investment or revenue generation.
Your response, of course, is highly dependent on your cash position. If you are fighting for survival, by all means try to keep the revenue. If you’re in a more secure position, keep your eyes on the future and do the following:
1) Segment – Identify which customers have the potential to stay in your top 20 percent for a long time.
2) Focus – Understand exactly what these customers want and give most of it to them
3) Make Tough Choices – Explicitly decide which customers will get lip service
Remember, you can’t keep everyone happy. Pick and choose who you absolutely need to keep and cross your fingers on the rest.
The lovefest phase
Once you hit cash flow positive or 12-18 months of cash reserves, you can start making more rational choices about investment. If there is any repeat purchase behavior in your business, retaining customers fuels your cash flow engine.
It’s critical at this point to figure out why your best customers stay or rebuy, then do more of it. Then do even more of it. And then do some more. Don’t take them for granted – keep investing in the features or services they actually use. Ask them why they stay, and more importantly, why they leave.
At the same time, put programs in place that recognize great customers and reward their loyalty. During downturns like the ongoing reession, high value customers in retention programs defect at much lower rates than your average customers in the same program. They’ll also refer more, contribute more content (like reviews or forum posts), and be less likely to complain to the 10,000 people they influence if you screw up.
Ultimately, if you think early on about retention, you’ll look like a genius. At least 70 percent of your customers should be returning each year, making your growth plans both impressive and realistic. You’ll have lots of referrals, taking the stress off your sales and/or marketing team. Your prospective VCs will have great due diligence calls. And you’ll be well positioned for a good multiple or a long run.
About the Author, Michael Greenberg
Michael is COO of Loyalty Lab, a SaaS marketing solution for consumer brands including Virgin America, Nine West, and Gold’s Gym. Michael started as the company’s VP Marketing and has held executive positions at several startups and a couple public companies.