When reviewing their businesses, many business owners get hooked on the wrong metrics. They start managing for margin when they should be managing for longer term profit.

If you manage your business for customer retention, it is possible to achieve dramatic profit improvements.

Loyal Customers:

• Bring in referrals
• Are more likely to spend again with selling costs that are much less than those required to win the first order from a new customer
• Cause a lot less disruption in your business
• Can be prepared to pay a price premium
• Cost less to service
• Are more profitable because acquisition costs are spread over more business – a longer customer lifetime

Disenchanted Customers:

• Tell at least seven people
• Have to be replaced with new customers who cost a fortune in time and effort to win
• Disrupt our businesses
• Are unlikely to pay a premium
• Cost ££££££££’s
• Require expensive rectification or remedial work

Take the basics:
The probability of selling more to an existing customer is high. The probability that you will sell to a new prospect is always low – in some businesses frighteningly low.
A modest improvement in customer retention will result in a substantial increase in company value. Whilst some work is always required, the process of implementing a customer retention strategy that works is not hard.
A small increase in customer retention will lead to an improvement in business profits. The amount depends on the sector.

Real customer worth:
Not all customers are profitable, even over an extended period. It is vital that you understand the relative profitability of your customer groups (or even individual customers in some businesses). In this way, you can ensure that you spend your limited time and resources on those that are, or have the potential to be, the most profitable.

A caution: Unprofitable, or break-even, customers may make an important contribution towards covering your fixed costs. If you are thinking of starting to discard some customers, make sure that you are working from an objective set of figures. If you have any doubts, ask your accountant to help you.

This was a guest post by Paul Fileman of SPS who are a national team of proven senior management professionals, passionate about working to help businesses achieve their next level of development and performance. Whether they are facing market changes, financial problems, people/skills issues, or are preparing a major project, they offer dedicated support from a multi-disciplined team of experts.

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