Customer Retention Secret & Doubling Profit

Companies in the 21st century spend significant amounts of money to acquire customers. Marketers protect those investments by trying to keep customers satisfied and loyal. Reducing customer attrition, also called churn, is an important part of a marketer's job.

Customer churn is a natural concern for companies of any size. Marketers use discounts and other incentives to keep customers from defecting. Knowing who to target is often a challenge. According to a report in "Forbes" magazine, there is a smarter way to reduce customer attrition.

Sunil Gupta, a Harvard Business School professor quoted in "Forbes," says many companies fail to consider the complete value of their customers, particularly the ones they are trying to retain. Traditional methods focus on the likelihood of a customer to leave than on that customer's overall profitability. Gupta proposes a new, more profitable retention method.

Identifying the Target

Customer churn is a widespread problem in the United States and Europe, according to the "Forbes" report. For example, American credit card providers experience a 20 percent annual attrition rate. In Europe, mobile phone carriers battle churn rates up to 38 percent.

For companies in the United States and Europe, customer retention is a high marketing priority. After all, lost customers mean lost dollars. Various services exist to help companies retain customers and grow their revenue. Service Source is one example.

It is not easy to identify potential defectors, and offering incentives to those who are likely to flee may not be profitable. Marketing firms who understand this can help companies improve their bottom line, Gupta explains.

He says traditional marketing methods are flawed because they ignore an important fact: Not all

customers have equal value to a company. Companies may reduce churn through marketing incentives, but unless the goal is maximizing profits, they miss the big picture.

Boosting the Bottom Line

For maximum profit, a retention campaign must consider several factors. The churn rate is just one of them. Companies must also consider how much money a customer spends, how likely he or she will respond to an offer, and the cost of the incentive itself.

Gupta calls this the gain-and-loss method, and he says it should help any company that wants to retain customers with discount offers. "From my view, acquiring a customer is far more costly than keeping a customer. So any company that wants to retain its customers should find some value in this," he says.