Article 101

ESSENTIAL RULES OF MARKETING ECONOMICS:
MAKE MORE MONEY IF YOU WORK WITHIN THESE RULES,
BE UNDERPAID IF YOU DON'T.

CLIENT RETENTION IS WHAT DRIVES PROFITABILITY IN A SERVICE BUSINESS. It's not your ability to get people to the door for the first time. It's your ability to keep clients once they come to the door, to get them to come back to you for additional purchases, and to get them to make referrals

WHAT IS YOUR COST OF GENERATING A NEW CLIENT?
10%- 25% of the gross value of the first sale, is not an unusual cost of obtaining a new account. That's what it may be costing you to get a new client.

What does it cost you to get a new client if you're able to retain them or generate a referral? Rather than spending 15 - 25% of the total fee, it typically costs you only 2 - 4% of the client fee in order to get that business, to keep business you already have, to generate referral business, or even to breathe life into dormant accounts.

When we're talking about making money in a service business, are you going to make more money if you're spending 15 - 25% of the dollar value of the fee to get a piece of new business, or are you going to make more money if you're spending only 2 - 4% of the gross value of that new fee in order to get the business? Obviously, you're going to make more money if you're only spending 2 - 4% of the fee to get that new piece of business. That means that client retention is what drives your profit.

WHAT'S A GOOD CLIENT RETENTION RATE? Keep a few statistics in mind. The most successful service businesses have a client retention rate or ratio in the 90 - 95% range. The client retention rate is the rate at which clients tend to come back to you or to make referrals to you. Most service businesses are in the 70 - 85% range when it comes to client retention. Under performing service businesses always have client retention rates that are less than 70%.

TAKE NOTE. Let me share with you a fact that will amaze you. If you can increase your client retention rate by only 5%, you will increase the profitability of your service business by 10 - 25%.

If you are like many business owners, when you start thinking about how to make more money with your business, your first thoughts are to invest a lot of time and money with a big marketing splash to get strangers to your door. However, I encourage you not to do that if you're not currently paying attention to your current and previous clients. If you can focus just a little money on your current and previous clients, get them to come back, make referrals, and increase the client retention rate by just 5%, then you're going to increase the profitability of your service business by 10 - 25%.

ONE DOLLAR TO KEEP A CLIENT, HOW MANY TO GAIN A NEW ONE? Here's another fun fact. If you spend a dollar to keep a client, you're going to need to spend $6 to get a new client. It's been proven again and again, that if it only costs $1 to keep a client, it costs six times as much money to get a new client to your door. You need three new clients to equal the lost profits of just one lost client, so focus on your client retention rate.

I want to give you one last example to illustrate this point. I read a study done by the Xerox Corporation. They had analyzed what effect a client's level of satisfaction had on a client's willingness to re-purchase from them or make referrals to them. They had clients fill out a form and they interviewed them. They then rated them according to their client satisfaction on a scale of 1- 5. The difference in client retention rate of a client who was very satisfied with their service was astounding. They found that when a client who was rated as a five (who was extremely enthusiastic about the service they provided) was compared to a client who was rated as a four (who was very satisfied with their service), the clients who rated a five were six times more likely to repurchase from them or to make referrals to them.

If you can move beyond clients being very satisfied with you to being enthusiastic about your services, you're going to have a tremendous impact on your client retention rate. Because a higher client retention rate leads to much higher profits, you are going to increase your bottom line in a much more substantial manner.

So let's summarize:

1. Client retention drives profitability.
2. It may cost you 10% - 25% of a fee to land a new account or client matter, it only costs 2% - 4% of a fee to generate a repeat sale or an account by referral.
3. If it costs you 6$ to get a new client, it only costs you 1$ to keep one.
4. You need three new clients to replace the profits lost by losing an account.
5. A 5% increase in client retention will increase profits by 10% - 25%.
6. Client retention is most influenced by consistent communication and the belief that you care.

Best of luck with your sales and marketing program,
Scott Channell

Copyright 2001-2009 Scott Channell

Article 147	Essential Rules of Marketing Economics
	by Scott Channell