The Miracle of Client Retention

Most firms go to market focused on two primary pillars: client satisfaction and selling new business. Legions of literature and faddish management paradigms have emerged to guide companies in pursuit of these two goals. They’re important, it’s just that they’re not sufficient to differentiate a service-based company from its competitors in a manner that generates significant profit improvement and category leadership.

Client satisfaction is simply a prerequisite. Today, it just gets you into the game. Running the operation well is important, however client satisfaction alone is not enough to achieve breakthrough rates of return.

Instead, it takes an ‘out of the box’ thought process that recognizes that not only is there a third pillar to success, but that this third pillar will carry much more of the potential for profitable growth than either client satisfaction or new sales.

The third pillar of success …

This miraculous third pillar is client retention, in other words, reducing the rate of attrition in the base business. Consistent incremental improvements in retention generate immense economic leverage. In much the same way that compound interest and disciplined dividend reinvestment work to build wealth for investors, client retention fuels the economic profit engine by providing a springboard to leverage incremental growth. As this becomes more fully understood and appreciated, retention and loyalty marketing will certainly command even greater recognition and acceptance.

Recognize that client-retention demands a ‘formal process’ …

An entirely separate set of intentional behaviours must be learned, embraced and practiced every day in order to keep the clients you’ve worked so hard to acquire.

Firms who are winning the client loyalty and retention battles have learned, invested in and applied the following competencies:

·      A structured process for precisely understanding, reconciling, prioritizing, managing and documenting the pinpointed expectations of their clients

·      A structured process for assigning the responsibility to establish and manage multi-level relationships and for enhancing their quality. The process ensures these critical relationships are owned, not only by the individuals involved, but also by the firm.

·      A structured process for creating “Relevant Value” which goes beyond simply solving problems to delivering breakthrough innovation

·      A structured process that effectively deals with people changes on both sides of the table

·      A structured process that benchmarks the “Lessons Learned” by your most experienced and successful client managers and memorializes and shares their best practices with the newer people in the organization.

·      A structured process of quantitative measurement that tracks the economic value of investments you make in improved client retention

Your competitor has a formal process…

You’ve probably noticed we’ve used the term ‘structured process’ quite a bit. OK. Well, the sobering reality is that your competitors have almost certainly embraced a structured and formal process to take your best clients away from you. Their best sales people are plotting to make that happen. They are well trained and highly-motivated, and they are coming after your livelihood.

Retaining those key clients by successfully defending them from competitors requires commitment to a formal process. The right process defines a set of behaviours that go well beyond client satisfaction. Why? Simply because, if you think about it, you’ve lost clients in the past who’ve scored well on satisfaction surveys. Unfortunately, you will continue to lose clients that your satisfaction surveys led you to believe were safe, unless you defend them aggressively.

What does it take to make a miracle?

Well, defining the magnitude of the miracle available to your company requires an objective and thorough analysis of the true costs involved in both selling to and losing clients as the portfolio evolves. Most firms, depending on their industry, will find that it takes somewhere between three and eight new clients to replace the profit from each mature client lost in a given year. Keeping clients, who might otherwise have been lost, accomplishes growth in the base that is compounded for every year the client remains as a client.

Our conclusion is that many firms, in the mistaken belief that growth comes from the next new client they aqcquire, have drifted in to a drastic and destructive imbalance between their acquisition and retention investments. Indeed, truth be told, many firms are not really investing anything at all against retention believing that investments in service capabilities are the same thing. Big mistake! These firms are confusing programmatic retention investments with satisfaction tools and when pressed, are unable to differentiate between the two.

Most firms would create superior, even miraculous, returns by redirecting existing funds from new business development (sales and marketing) to client retention (investing in the base business).

An example of the leverage available …

One of Tenacity’s clients is a publicly traded service management firm with revenues exceeding €1 billion. Their industry is highly competitive and easily entered. They have several hundred clients in their portfolio. Their average client tenure is about ten years with a year over year retention rate of 92%. Thanks to an aggressive business development program, skilled operations teams and tight overhead control, they have consistently grown annual profitability within a range of 10 – 13% per year.

Despite their success – the leverage available to them is enormous. Improving retention to 95% (an increase of just over 3%) produces year over year economic profit gains of 24% (more than double their existing historical results), with no increase in their new business acquisition rate. This is the essence of leverage, and it takes us part of the way to their miracle.

The rest of the miracle is in understanding that the deployment of funds necessary to leverage this profit growth is miniscule by comparison – in fact – their investment in Tenacity’s client retention process was repaid in full when retention increased less than one percent. The economic benefits are recurring – the account you didn’t lose is annualised and continues to contribute incremental profits year after year.

The by-products of improved client retention …

By the way, this miracle comes complete with a whole host of sub-miracles.

1.     Substantive improvements in retention directly facilitate the efficiency of the new business development process.

2.     Increased retention fosters a palpable increase in the morale of the entire organization through validation of their efforts.

3.     Last, but not least, better retention underlines the firm’s positive reputation. Most observers agree that the company that keeps the most clients enjoys a superior reputation compared to the one that sells the most.

“If you leave client retention to chance, the chances are that you will lose clients.”

Instead, invest in the miracle of client retention. You will have taken the most important and cost-effective step you can take to build long-term stakeholder value and leadership for your company.