Loyalty is not simply a thing to be hoped for. Plan for it, work for it, and see how profits grow.
Customer retention – it’s the only means for business survival. We must establish a customer retention goal that reads something like this: Every customer that we do business with today we will do business with forever.
That is quite a mouthful, but it is also critical to the success of your business.
In a study conducted by Frederick F. Reichheld and W. Earl Sasser it was found that with a reduction of just 5% in customer defections in the industrial distribution business sector, the percent increase in customer value was 45%. Once you see your customer defection rate and the impact that it has on your business, you will want to take some form of positive action to retain all of your customers all of the time.
In the same study by Reichheld and Sasser they suggest that “companies can boost profits by 100% by retaining just 5% more of their customers.”
Customer retention and the customer defection rate are measures that are rarely used in this industry. Do you measure customer retention or defection? We’ll discuss here how you can begin now.
Retention / Defection Determination
With the January calendar year-end coming up, let’s review a customer retention/defection calculation method.
Get your customer sales history for the calendar year 1997 and also calendar year 1998. Most of your computer systems will be able to generate these reports pretty easily. Look at the two reports side by side and compare customer purchases. (Some of you will have the last two years on the same report).
Any customer that bought something from the dealership during 1997 and did not buy in 1998 defected for some reason or another. I agree they might not be in business anymore – that should be reviewed in the “why they defected” work later. Nevertheless, that counts as a defection. At the end of this exercise you will know how many customers defected during 1998.
Next, count the total number of active customers you had in 1997. (An active customer is any customer who purchased something from you.) The rest is easy arithmetic. Divide the number of customers that defected by the total number of active customers and you have the defection rate. Subtract the defection rate from 100% and you have the retention rate.
Whatever number you arrived at, if the defection rate can be reduced by 5% you will increase the customer lifetime value by 45%.
I would like to do the same calculation for just the parts department and then just the service department. In today’s market the same should be done for the rental department, too. The equipment sales group is more difficult because many times a customer will buy a machine one year and not buy another machine for three, five or more years.
Find out the customers who purchased parts in 1997 but not in 1998 and the total active parts purchasing customers. Do the same for service and for rentals. This will lead you to retention/defection rates for each of these departments.
For those of you who read my segmentation article in August, what I normally like to do is determine this retention/defection rate for each of the major customer groupings. For the “AAAA” customers in parts service, sales and rentals that have the largest machine population, it is the fleet owner. For the “BBBB” customers, it is the “A” and “B” of any combination of purchases for parts, service , sales, and rentals with the fleet population. Then the same thing again for the large machine population customers.
From these retention/defection statistics we can make a determination of which customer groups we want to retain and what it will take to keep these customers.
Never lose sight of the fact that measuring these statistics is very critical for your dealership.
Alter Your Delivery Systems
Once we have determined which customer groups are most important to the dealership and why, we can set out to establish key systems and methods to improve our service to these customers. We must start first with the fact that each and every employee must become customer oriented. This is more than the smiles and thank you’s – it is a heartfelt belief that each employee will benefit from serving the customer in manners that are unequaled.
From these statistics we need to establish the methods, systems, styles of communication, delivery vehicles (not trucks), employee recognition and measurement methods to enhance customer retention. We don’t want to enjoy just a single sales transaction but an ongoing relationship with a lifelong series of transactions.
We must transform the sales and service methods that we use into a personalized form. A form that is revolutionary in the eyes of the customer. It must be employee-based. They must feel liberated in their actions. They must feel free to do what they believe to be the right thing. That means that we must first train the employees to understand what the right thing to do might be. They must understand how far they can go to satisfy a customer on a particular transaction or a particular problem.
Don’t forget that the starting point for customer loyalty and satisfaction is happy and satisfied employees!
If your customers look to you to provide products or services as a last resort – the one they turn to when all their other channels of distribution have been tried and failed to solve their problem – then the relationship is not really a good one. Is it? If that’s where you are with any of your customers, it’s a problem that needs to be remedied.
Customer loyalty, high rates of customer retention, is listed as the most significant factor for successful businesses in study after study.
Imagine a situation in which you would lose 5% of your customers each year. Over a period of 25 you would not have any customers left. Imagine the difficulty of trying to create new customers at that rate each and every year.
Further, you know how quickly a customer’s purchases grow. It is fine to make equipment sales. But the long term benefit to the dealership is the parts and service business that the use of the machine generates.
Again I repeat-retain customers! You know it is important. Did you realize how important? How do you measure retention? Do you even measure retention? Most don’t!
Another form of quick review for retention/defection is to track the normal purchasing patterns of your customers. Get your customer list and the purchases for each of your customers-all the purchases: parts, service, sales and rentals. This time look at their purchase history by month.
Now separate them into their buying patterns according to those that:
- Purchase something every month.
- Purchase something every quarter.
- Purchase something twice a year.
- Purchase something once a year.
- Purchase nothing in the year.
Repeat this for each department-parts, service, sales and rentals.
Have you any idea what this breakdown will look like?
Now take the total purchases, in dollars of sales, for the same time blocks and split the sales volume into percentages. Repeat this for each department. This should be repeated for cost of sales and for gross profit.
Just this small exercise will lead you to start thinking about strategies for individual groups of customers. How should you manage the business with customers who buy every month? How about those that haven’t bought anything in a year? Each group is different and needs different strategies. Without this type of review, customer retention will become a hoped for rather than a planned for result.
This type of retention/defection review and purchase review should be done at the branch level and even at the sales territory level. This is all critically important in determining a customer satisfaction strategy. It is this strategy which will help you in increasing customer retention.
Don’t forget to ask your customers what they think you should be doing. It is critical that you include your customers in setting forward a strategy for customer satisfaction. And remember to include another very special group of customers that can help you immensely – those customers who have defected!
You know we go through exit interviews with our employees. But do you ever interview your customers who have defected? Probably not. Not because you didn’t want to, but probably because you didn’t know that they had defected.
Many of you will have concluded, by now, that the customers who are most important to you are the higher volume buyers, the larger profit-generating customers. I grant you it is critically important that you retain your large-volume customers. However, once you go through this calculation, I expect that you will find a small number of these “special” customers, and think how vulnerable you become if you lose one of them.
If you went through the segmentation exercise (see the August issue of CED page 47) you will know right now what percentage of your customers generate 80% of the sales. The 80:20 rule does not apply in this case. The number of customers that generate 80% of your sales will be closer to 10% than 20%.
This low number of high-sales-generating customers is due, in part, to the defection rate of your customers growing at a higher rate over the years than the rate at which you were generating new customers.
Acquiring customers is expensive. In the first year that a customer does business with you, you normally will lose money with that customer-taking into account the cost of advertising, promotion, setting up credit the number of sales calls and startup costs associated with a new customer.
Having the volume of customer purchases rise to full market/profit share takes time. It takes a relationship. It takes trust on the part of both you the dealer as well as the customer. This is not easy to do. But, when you consider the alternative, it is far easier and smarter to do the right thing by your customers and retain them forever.
There are many reasons why loyal customers of a dealership that has high customer retention deliver more profit:
- The cost of acquiring customers goes down.
- Satisfied customers become apostles telling others about you.
- Long-time customers normally give you more business.
- Long-time customers are normally less price sensitive.
- Long-time customers are less costly to serve as you know their needs.
Dealers who have high customer retention normally share three characteristics:
- They know who their good customers are.
- Every employee understands that this is a lifetime relationship.
- Delivery systems consistently provide superior service.
A Circle Of Champions
So let’s look at something more positive as a sales and marketing idea. How many customers are with you today that were with you the first year you started your business? Do you provide any form of special recognition to these customers?
Most of you have “Years of Service” pins for your employees. How about starting a “Years of Business” recognition program? A Circle of Champions as they say in sports.
Have special customer appreciation evenings once a year during at which you present anniversary awards. Five-, 10-, 15- year, etc., patches, pins, decals-whatever you think is appropriate.
You might be thinking to yourself that this is inappropriate. Well, frequent buyer programs have become a very normal part of business. Look at the frequent flyer programs, the hotel programs, just to name a few. They recognize customers by the level of their purchases. It just makes good sense.
Think of the customer who has just earned his five-year customer appreciation pin in the room with customers who have been with you 25 years or longer. There will be a considerable amount of peer pressure on that customer to work with you and remain one of your loyal customers.
In my September column titled “Who Are Your Heros” I stressed that you need to have your customers become apostles for your business. Look at customer appreciation programs as another form of creating apostles.
Employee Satisfaction Impacts Customer Satisfaction
In the service profit chain it is very clear that satisfied employees are a critical requirement if your dealership is to maintain customer satisfaction at levels that will retain customers for life. As those of you who have followed the themes of my work will know, I strongly believe in aligning systems and methods with words and vice versa.
It is critical that we provide easy-to-use and effective systems, whether they be manual or automated.
- We must provide parts when customers need them and get the missing part reliably and quickly.
- We must provide the repair service accurately, professionally and in a timely manner.
- Rental units need to be clean and operate properly and be priced fairly.
- Our credit facility must be in line with the proper business requirements.
In short we must operate a business that provides the customer with unequaled levels of support.
These are all important elements that are required if we want to reduce customer defections and increase customer retention. We must work hard to have retention levels that are exceptional. We must have customers believe and know that we want their business for their lifetime, that we will work hard to achieve their trust and confidence.
We must never lose sight of the fact that:
- it is a privilege to serve our customers,
- by serving them professionally and properly we will retain their loyalty for a long time,
- we will enhance our profitability by retaining customers at higher levels and
- we will be able to afford the improvements in service, systems and people that will be required as we move forward to the new year.
A 5% improvement in retention provides a turbo boost to your profits. Measure your customer retention/defection! Design systems that satisfy your employees and your customers. Know which customers are good customers and work hard to have zero defections with these customers.
Do these things and you will reap rewards for years to come.
by Ron Slee
About CED Magazine
Construction Equipment Distribution is published by Associated Equipment Distributors, a nonprofit trade association founded in 1919, whose membership is primarily comprised of the leading equipment dealerships and rental companies in the U.S. and Canada.
With CED, content is king. No fluff, no advertorials – CED just gives AED members what they want to read: business information, industry and association news, plus fresh, original and useful feature articles that they share with their management teams. Our subjects range from rental, product support, sales strategy and customer service to technology, construction markets and legislation – and much more.