It is a well known fact that it is much more expensive to acquire a new customer than retaining an existing customer. But as they say, common sense is not so common. We find that businesses are going out of their way to attract new customers by offering them great deals. I do not think there is anything wrong in this, but when you exclude the offer to your existing customers, you are inviting trouble.
This is a very important reason for customer loyalty to become so rare. There does not seem any benefit for customers to remain loyal anymore as they miss out on such attractive offers in the market that are only available to new customers. So, they keep changing loyalties.
In the short term, everyone is happy. The businesses are gaining new customers and the customers are getting attractive offers. However, in the long term all of them stand to lose. The customer has to keep negotiating with new vendors with associated risks. Constant change in the suppliers can also mean in-consistencies in the supplies/services which in the long run can hurt the customers’ business.
The businesses spend so much more to attract new customers and the cost of customer acquisition goes drastically up and hence the cost of sale and the profitability starts its downward trend as businesses will need to continually come up with more and more attractive offers to attract new customers and this becomes the only way for top-line growth as repeat business starts to shrink due to lack of loyal customers.
Once businesses realize that they are in this downward spiral, they decide that it is important to retain existing customers as well and hence start offering the attractive offers to existing customers as well in addition to new customers. Still they will find that retaining customers is a challenge.
A clear example of this phenomena playing out currently is in the Indian telecom industry. All the players like Airtel, Vodafone, Tata DoCoMo, Idea, Reliance, Aircel and the other players are all creating very attractive offers for new customers and incentivize customers to switch from one player to another. This has led the profitability of the entire industry downward. These businesses will be able to sustain their top-line growth and profitability till the overall market keeps growing. Once this stops, then we will see a shake-out of the players in the industry.You will then start mergers and acquisition starting to be considered and there will be only a handful of player be left in the market and the same cycle will get initiated with a similar result.
Now the question is “What are the alternatives?”
I think that there are a couple of alternatives that they can consider:
- Incentivize your customers to bring in additional customers for your business. Make your customers your evangelists.
- Incentivize your sales teams more on bringing in repeat business than net new customers.
Let me elaborate on both the alternatives.
Incentivizing your customers to refer additional customers for your business:
There are a few things that you will need to put in place in order to turn your customers to evangelists:
- Deliver and delight your existing customers by the high standards of quality and service!
- Make them your raving fans!
- Create an opportunity for your customers to refer your business/products/services to their peers, friends and family!
- Make it much easier, simpler, and faster to do repeat business with you!
- Recognize/reward all your customers who have referred your business to their network
- Never show new customers are more important than the existing one’s!
As you can see that this is a cultural change that businesses will need to undergo. This focus on customer delight will take time and effort but is worth all the time, money and effort that goes into this as this will create a competitive advantage that will be hard replicate. You can even go on to.
An example of one such company is Apple. In this age of declining customer loyalty, Apple customers are still one of the happiest lots and do a lot of evangelizing for Apple.
Incentivize your sales teams more on bringing in repeat business than net new customers.
Businesses often realize that new customer acquisition is of paramount importance and hence expend a lot of their energies in acquiring new customers. Sales people are incentivized for bringing in net new customers for the business. Marketing is busy creating the next great offer to attract new customers. All of this leads to the state that no one is bothered about the potential business opportunity with existing customers and their networks.
- Set a rewards/recognition program for sales teams where they get more rewards and recognition for Repeat business generated from existing customers, Net new customers referred by existing customers and slightly less compensation for Net new customers who were not referred by existing customers
- Introduce a step in your sales process where sales people ask for the customers/prospects to refer you to people in their network. Request for referrals even in the opportunities where you have not won the deal.
- Reward sales people who get more repeat business transactions (irrespective of the volume of transaction).
- Initiate a customer satisfaction survey for 2-3 customers of each sales person. Choose the customers randomly.
This will clearly give out the message to the sales teams that it is very important to provide excellent service to existing customers. They will also learn to explore options to generate repeat business and to keep their customers happy all the time.
I know that there are businesses that have customer referral programs in place that intend to achieve the same outcome but I have not seen any of them achieve it. This by itself is a deep topic which I will discuss in a separate post.
I have not come across a business which has implemented this system for increasing business from existing customers yet!
Happy selling !