Why customer retention is the key to growth in an increasingly service-oriented economy
By Rich Paterson
Customer retention has become an indispensable growth lever for most companies today – and is relevant to all business functions. While recent events have complicated things, they have also amplified the importance of keeping customers happy. This article shares a five-pillar framework for thinking through these near- and longer-term customer retention concerns.
Longtime Adobe CEO Shantanu Narayen recently quipped “retention is the new growth.” Results don’t lie—since moving to a subscription-based model in 2011, Adobe’s stock has skyrocketed 1000%. While SaaS and “cloud-based” services models aren’t new, traditionally product-based businesses have embraced “as-a-service” models at a feverish clip. Revenue from Microsoft’s Office 365, for instance, eclipsed its traditional Office product in 2017. And there’s no denying Netflix’s meteoric rise since Blockbuster ceased operations in 2010.
While advances in technology and ubiquitous connectivity are the enabling forces behind these models, the trend is not exclusive to Silicon Valley. From Rolls Royce’s TotalCare™, which offers airlines propulsion-as-a-service using IoT to monitor and maintain jet engines globally, to Harry’s razor-as-a-service, which ensures there’s never a dull moment in men’s daily shaving routines, it’s clear the subscription economy is here to stay. Even Audi and BMW have deployed concierge-based services that give subscribers access to their full lines of vehicles for a monthly fee.
Becoming Indispensable –Pillars of Customer Retention
We’ve all heard the mantra—it’s 4-5x more expensive to acquire a customer than to keep an existing one. For established subscription-based businesses, the figure can be much higher—particularly in highly competitive markets. Think about it: one company’s customer retained is another company’s would-be customer acquired. It simply makes good economic sense to instill maniacal discipline around customer retention.
The key? Become indispensable.
We offer five pillars to driving growth through customer retention:
- Engage customers through your brand
- Sell experiences and outcomes
- Understand customer lifetime value (CLV)
- Hone your platform strategy
- Innovate continuously
- Engage Customers Through Your Brand. Customer retention starts before the sale—with your brand. Traditional approaches to marketing (e.g., 4Ps) are product-centric and look through a transactional lens. Even the term “digital marketing” evokes images of online sales funnels focused on customer acquisition. These are myopic and woefully insufficient for today’s service-oriented business models. The marketing function must engage customers through their relationship with your brand—two-way streets of loyalty and trust that are nurtured over time through carefully orchestrated interactions with the market.It’s worth the effort; loyal customers stick around. Tap into their enthusiasm and they’ll also become champions who fuel your sales engine. Take heed though; as the marketing function becomes more operational in nature, it’s easy to allow near-term circumstances (e.g., recessions, investor expectations) to undermine long-term investments in your brand. Be sure to keep a long-term focus.
- Sell Experiences and Outcomes. Keeping customers means taking accountability for their success.To deliver, we must understand their true needs—the outcomes they seek and the experiences they desire. Every ongoing interaction, as minor as it may seem, represents a potential moment of value. Seize upon these overlooked moments by making them meaningful and impactful.Segment your customers and monitor their usage to identify and opportunities to enhance value. Leverage advanced analytics to augment your understanding of their needs and desires. Use these learnings to thrill your customers at scale. Every interaction is important—from marketing, through sales, delivery, support and even back through the supply chain—so it’s crucial to break down silos and align across functions to customers’ outcomes. In the process, avoid being overly commercial and transactional in your approach.
- Understand Customer Lifetime Value. Traditional metrics such as contribution margin remain valid in the near-term but are woefully inadequate to describe the dynamic, long-term economic value of a customer. A sobering thought: as much as 80% of your company’s future revenue may derive from as few as 20% of your current customers—among them will be your biggest advocates in the market. Yet, most companies can’t measure CLV. Even fewer can tap into the full potential of their customers by identifying, amplifying, and channeling their enthusiasm back into the market.Success requires segmenting your customers by their purchasing behaviors and understanding cost to serve. This will inform what to give away and what to charge for, what to tailor and what to streamline. With a solid view of customer service level expectations, price sensitivity and stickiness, it is possible to drive targeted optimizations in your operating model that result in both cost savings and revenue lift while retaining those customers who will elevate you to your next echelon of growth and letting go of those who will drag you down.
- Hone your platform strategy. Platform businesses are nothing new, but technology has opened a world of possibilities through pluggable as-a-service models. Effectively executed platform strategies have customer retention built in. Not only do they provide lock-in due to high switching costs, many bring significant network effects where customer value grows exponentially with your customer base. Retention becomes an acquisition driver and vice versa. Tech-enabled platforms tend to bring supply-side economies as well. These dual economies of scale are so powerful that over 60% of the world’s 100 largest companies earn over half of their revenue through platform-mediated networks.Success will require a thoughtful strategy, a more sophisticated view of customers and brand (these concerns now extend to a collaborative ecosystem of partners, producers, providers and consumers), and an operating model to accommodate these complexities.
- Innovate Continuously. As the mantra goes—seek to disrupt, lest be disrupted. A carefully crafted innovation discipline splits resources between the “next big thing” that will reshape the markets of tomorrow and the “next small thing” that delights customers today. Historically, even incremental innovations have been carried out over relatively long planning horizons of enhancement and extension. Today’s customers expect more, faster (days and weeks vs. months and years). Keeping up means responding to their demands and innovating in real time. This is important for growth since existing customers are more than 50% more likely to try new products and will spend more than new customers.To innovate and adapt in real time will require an agile operating model that extends well beyond the IT department. Use successes in CLV and platform strategy to fund your innovation programs over near-, mid- and long-term horizons to stay one, two and three steps ahead of your competition.
A Customer-Centric Operating Model
One of the biggest pitfalls that companies face in their transition to service-oriented business models is to ignore the very real go-to-market and operating model changes required to succeed. The inclination to focus on customer acquisition over retention can be deep seated and culturally ingrained. For legacy product companies, it’s a matter of heritage. For younger growth companies, it’s what led to early success. But in the words of renowned leadership coach Marshall Goldsmith, “what got you here, won’t get you there.”
Rather than organizing around products or channels, organize around the customer. Put your customers at the center and work backward from there. The shift is fundamental.
Recent Axiom Consulting Partners’ perspectives on operating models:
5 Keys to Designing a Resilient Operating Model
Spans, Layers and Other Blunt Instruments: Why Structural Changes Don’t Improve Execution
Is your organization struggling to retain customers? Let’s chat.