For most businesses, about 80% of revenue and profit comes from existing customers. For start-up and fast growing new business, this obviously is not the case. And for many established businesses in slow growing segments, the percentage can be well over 80%. However, for this discussion the only thing that does matter is that retaining customers is critical to long-term success.
When I am making a basic decision or trying to evaluate two competing alternatives, I like to think about what happens at either end of a continuum. As I think about customer retention, I describe the two end-anchors as handcuffs and hugs.
- Handcuffs are when you have a customer so locked-in that there is no economically practical way for them to end the relationship.
- Hugs are when the relationship with your customer is so tight, and possibly unbalanced in his favor, that they would never think about leaving even if you are losing money.
Neither extreme is healthy. There has to be balance in a relationship; a “win-win”. If the only way your business can retain customers is by handcuffing them into a long-term contract or if your company is taking advantage of the difficulty of switching then you are taking unfair advantage of the situation and will surely pay the penalty. Here are two examples of difficult to switch situations:
- You provide enterprise software and all your client data and applications are customized for your package. Switching will require new data structures, new workflow to develop and test, new reports will have to be created, and the users will need some retraining.
- You sell and service electro-mechanical tools used for production (e.g., robots) or real-time plant monitoring (think power generation station control rooms). These are semi-permanent installations with a heavy component of custom programming, compatibility with other parts of the process and, of course, lots of training and workflow.
What’s so wrong with taking advantage of the situation? How about for starters the fact that these people talk with associates in other parts of their company and, possibly even worse, they communicate with colleagues in other companies. This means they frequently get asked to provide a reference for you as they consider purchasing your stuff. How loudly do you think they will shout NO!? Enough said?
A relationship built on hugs is very much preferable as long as it is balanced. At this point, you may be thinking how can this relationship get unbalanced. Here are two examples:
- Your largest single customer incentivizes its purchasing department to get the absolute lowest price on each purchase plus demand lots of freebies like delivery, support, upgrades, and extended warranties. After acquiescing your company starts to calculate the “real” margin contribution of this customer and learns they are losing money on the deal – not even breaking even. When you try and renegotiate your contract with them, they tell you “It’s my way or the highway” and your company has already factored additional purchases into its short and medium-term sales budgets. That is what is called “being caught between a rock and a hard place.”
- In another case, a relatively small customer constantly calls your support center and asks so many questions that your first-line support folks call them “the customer from Hell.” It is so bad that it is affecting the morale of your team and they are getting discouraged. They tell their supervisor but the company has never before discussed firing a customer. Not a good situation at all.
These types of situations are very difficult to resolve once they exist but can be avoided by having a well thought-out retention strategy. The first requirement of the strategy is to consistently deliver on your value-proposition. This strategy must ensure that benefits of a long-term contract don’t become handcuffs. The long-term contract should mutually reduce the cost of annual negotiations and contracts and, additionally, offer some savings to the customer as an incentive. The strategy should also reward your customers for selecting your products and you should be working as hard as possible to turn these people in raving fans so they actually recommend your company to associates and colleagues in other companies.
As for people taking unfair advantage of you either during negotiations or after they start using the products the solution is again providing so much value that the purchasing pros will back-off trying to squeeze the last dollar from you because the end-users want your product and will not accept a second choice. And finally, it is up to your company to set expectations about all touchpoint interactions so that if and when a customer starts to take unfair advantage of you the limits have already been established and you can offer alternatives to minimize the internal stress.
This all means that the company, and the heads of its internal silos, must agree on business practices and have the courage to stand-up for the employees and the P&L.