I recently had an all too common experience with a new client.
The owner was proudly sharing his rate of customer acquisition, which was 37 percent last year.
So I asked, “What was your retention rate over the same period?” His grin immediately turned into a groan as he replied, “I’m not sure.”
Together we ran the numbers and determined that his retention rate was 65 percent, indicating a 35 percent churn rate, which equated to a net increase of only 2 percent. You need to know the average purchase per customer and the cost of acquisition to determine the growth rate in dollar value.
A company’s growth rate depends on three metrics: 1) average value of a purchase, 2) average number of repeat purchases (lifetime value), and 3) cost of acquiring a new customer.
The calculation of the lifetime value (LTV) of a customer is:
Average purchase x number of purchases – cost of acquisition = net lifetime value.
Once you subtract your churn rate from your acquisition rate — knowing your lifetime value from the calculation above — you’ll have your company’s rate of growth expressed in dollars.
Here are some strategies for improving your growth rate by decreasing cost of acquisition and churn rates.
Decreasing the cost of customer acquisition.
Measure the return on investment on each promotional channel separately. Use separate phantom phone numbers, landing pages and promo codes so you can track and tabulate the results generated by each channel. Divide the monthly cost of each channel by the number of customers it produces each month. Canceling the channels that don’t produce a positive return on investment will lower your average acquisition cost.
Decreasing customer defection (churn rate).
The best way to curb churn rates is to understand the underlying causes of the churn.
Interviewing recently lost customers is a great way to spot trends so you’ll know where to focus improvements. A lost customer is not necessarily motivated to participate in an interview. The two best practices are to keep the interview short, and offer an incentive.
Prevention is less costly than intervention. The most effective thing you can do to reduce customer defection is to stay tuned to the early warning signs that a customer may defect,. Be proactive by reaching out to prevent the defection.
Increasing the lifetime value of a customer.
There are two ways to increase this value: 1) increase the amount they spend per purchase, and 2) increase the number of times they purchase.
You can increase the average amount of each purchase by providing appropriate up-sell and cross-sell offerings.
Cross-selling refers to offering multiple products related to the primary product, e.g. a bank checking account and a CD.
Up-selling refers to offering multiple versions of the same product, e.g. mobile phone plans that offer more data and faster speeds.
You can increase the frequency of purchases, and/or the length of time you retain the customer through promotions and alternative uses of your product, and through loyalty programs.
Promoting alternative uses for your product or a discount can increase the frequency of purchases, e.g. Chex cereals promoting Chex Party Mix with a coupon in each box.
Beyond remembering special occasions and offering loyalty programs, the best retention strategy is to consistently deliver a stellar brand experience.
In summary, calculate your rate of growth. Then look for opportunities to increase your growth rate by decreasing cost of acquisition and churn rates, and increasing the lifetime value of your customers. Keep your eye on all three growth rate metrics and you’ll be smiling all the way to the bank.
Andrew Ballard is president of Marketing Solutions, an agency specializing in growth strategies. For more information, call 425-337-1100 or go to www.mktg-solutions.com.
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