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FAILURE TO IDENTIFY THE FINANCIAL IMPACT OF CUSTOMER DEFECTION CAN COST A COMPANY MILLIONS IN POTENTIAL PROFITS-WITHOUT ANYONE KNOWING. BETTER UNDERSTANDING OF THE RELATIONSHIPS BETWEEN CUSTOMER SATISFACTION, CUSTOMER RETENTION, AND FINANCIAL RESULTS WILL LEAD TO IMPROVED PERFORMANCE. THREE MODELS ARE PRESENTED TO HELP QUANTIFY THE COSTS OF THESE RELATIONSHIPS.
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In today's competitive business environment, merely satisfying customers is not enough to acquire long-term, repeat customers. A key aspect of managing customer relations is building lasting and positive relationships with customers. Acquiring a new customer can cost up to 10 times as much as supporting an existing customer. The first sale is expensive and time-consuming, involving activities such as advertising, promotion, calls, contacts, demonstrations, and training. It may take many years before a company breaks even on new customers. Credit card companies, for example, lose $50 per customer the first year, while life insurance companies break even after three years.1
Loyal customers generate higher profit margins than new customers. Studies indicate that a 5% improvement in customer retention can add anywhere from 25% to 85% to the bottom line.2 A 10% increase in acquisition costs adds less than 2% to overall customer value (present value of profit streams over customer lifetime with the company), whereas a 10% increase in customer retention adds up to 30% to customer value. The impact of retaining 2% more customers is about the same as cutting costs by 10%.3
Because customer satisfaction is difficult to quantify or capture in financial reports, managers frequently fail to identify the full extent of the issue. Since satisfied customers also defect sometimes, erroneously equating customer satisfaction with customer retention can lead to disappointing results and the loss of potential profits. To provide a deeper understanding, this article looks at different levels of customer satisfaction and the relationships between customer satisfaction, customer re- tention, and profit. Also presented are models to estimate the value of customers over time, estimate the cost of lost customers, and measure the impact of improved retention on profits.
CUSTOMER SATISFACTION
Customers are the most critical aspect of any business. They are the focal point of a company's operations. They define quality and specify levels of expected performance in a variety of product attributes and...