My Wife Left Me. This is What I learnt about Customer Retention!
How to not lose customers (and maybe Friends or Subscribers)
My wife did not leave me (yet).
By following the advice from this article, I am hopeful that she never will.
If you opened this article hoping to read about why my wife left me, you will be disappointed; this article is actually about managing customer relationships. The goal of which, similar to marriage, is that they will last forever and be happy.
Following my previous articles on How to Not Suck at Sales & How to Close Deals, this is a natural accompaniment. Landing a sale is great but if you can’t hold on to your customers, your business will eventually run out of prospects and fail.
By the end of this article, you will learn the importance of customer management and why customer success is the key for your future success. You might also realize that I break my own advice with my title, as I am misleading you from the very start. Some of you found this funny, others feel alienated, you should try to avoid alienating your partners, customers or loyal readers (kudos to one of my Subscribers for noticing this).
Keeping a customer long term is actually not that different from maintaining a relationship with a spouse or close friend. In all of these cases, happy participants choose to stay because they are satisfied with the value they receive. The longer a relationship, the more goodwill is built, making it more difficult for a newcomer providing similar or less value to dislodge the incumbent. Most people will choose discomfort over uncertainty, so the fact is, the incumbent has the advantage. This does not mean that you should take your customer or spouse for granted, but rather that it is much harder to acquire a new one than to maintain an existing one.
Making a conscious change is rarely easy. It takes time, energy and sometimes money. I make the point to say conscious because despite best efforts, change is inevitable. Nonetheless, some people are more comfortable with change than others but few will look to change something they are happy with. Have you ever seen somebody shoot the best golf round of their life than buy a brand new set of golf clubs the next day? 1
If people don’t like change, then why do they do it? They do it because they see a better alternative but more likely, they are unhappy with the incumbent. The discontent with the incumbent often begins during the sales process. Many salespeople never learnt the lessons in How to Not Suck at Sales, instead of looking to solve real pain, they resort to making grand promises that their company will never be able to fulfill. They succeed in getting the deal closed, then they throw these problems over the wall to their colleagues responsible for delivering the service.
This starts the relationship off on bad footing, in many cases it can never be salvaged. This is why the key to customer retention actually starts before they become a customer. The sales team needs to do a good job managing expectations or else they are guaranteeing that the customer will not be happy. The bigger the gap between expectations and reality, the more disappointed they will be. Unhappy customers are more likely they are to seek out alternatives.
Assuming you operate in a competitive industry, there will be others eagerly looking to take your place. These competitors will employ all kinds of aggressive marketing and sales tactics, trying to convince your customer that they can better fulfill their needs. If their sales team is any good, your customer might believe them and suddenly your incumbency advantage will quickly become a disadvantage.
Your customer will get resentful and start wondering why other vendors are quoting them lower prices or making better offers. While you complain every time she asks you to take out the trash, the other vendor is offering to clean her entire house without her asking. You do not want to find yourself in this situation. These competitors might be overselling or giving them a teaser rate, only to jack the price back up once they switch, or just willing to accept lower profit margins2. In any case, once your customer is gone, they are unlikely to come back. Losing existing customers is more damaging to a business than failing to close new ones.
Why?
Unless your company is closing new business at an astonishing rate, the majority of your future revenue will come from your existing client basis3.
Unless you have a massive number of prospective buyers, you will eventually run out of new customers to offset your lost customers
This is why Direct to Consumer businesses such as Netflix can have double digit churn rates and continue to grow whereas B2B vertical SaaS providers would quickly fail if their net retention rates fell below 100% (more on that later)
From a financial planning perspective, it easier to budget with the assumption of slower growth from fewer new customer, compared to declining sales from an eroding client base.
Your existing customers will help you close new customers.
To expand on that last point, existing customers are important to help win new business. They provide a social proof to prospects, because few are willing to take a chance on being the first customer. If you do a great job keeping them happy, and provide the right incentives, they can be a great channel to land new business. Have you ever bought something off a recommendation from a friend or industry peer? Nielsen reports anywhere from 70-80% of consumers are more likely to buy a product if their friend recommends it to them. In the case of large business purchases, buyers don’t want to waste their company’s money on a tool that underdelivers; they will want assurance by speaking with existing customers to see that it can accomplish what they need.
Even if they don’t help land other customers, if you do a good job demonstrating your value, you will be able to sell more to these existing clients over time. You can sell them more products or raise your prices without losing them. Expectations management is the key to grow an account. If you consistently under promise and overdeliver, you will have a customer for life.
This is why if you can’t set the right expectations, you will never be able to overdeliver. This extends to all types of items. People are more angry with something being overrated than not being good. This is the value perception gap. If they have low expectations then like it, they will be happy.
I really enjoyed the movie Parasite but it was sold to me as one of the most disturbing movies ever. When I finally saw it, it was quite tame compared to what I had built it out to be in my mind. Similarly, my friend brought me to the Ryan Gosling film Only God Forgives telling me it was a sequel to Drive. Turns out it was not and we weren’t emotionally prepared for the ensuing 2 hours of debauchery. We were disappointed.
There a few ways to judge whether your clients are satisfied; you can send them net promoter score (NPS) questionnaires or Customer Satisfaction Surveys (CSAT), but these often generate more noise than signal. A better way to judge if your customers are happy is based on their engagement with your product (are they using your product every day, week, month etc,) and are they referring you to other customers? If your love interest is texting you every day and bringing you to meet their friends and family, this is probably a good indication that they are happy with the state of the relationship. Beyond engagement and referrals, another critical way to judge your customers satisfaction is if they continually spend more money with you. You judge the latter based on two key metrics Gross Retention Ratio and Net Retention Ratio.
These ratios take a cohort view of customers buying patterns to determine how much the same group is paying at a later date compared to when they became clients. Gross Retention Ratio ignores any price increases or new product purchases whereas Net Retention Ratio factors that in. The maximum Gross Retention Ratio is 100%, the Net Retention Ratio could be infinite.
EX: My first year as a personal trainer, I had 10 clients that each paid me $5,000 per year. By the end of the 2nd year, 2 of these clients left, whereas the remaining 8 clients were now paying me $7,500 per year.4
The Gross Retention Ratio = 80%
The Net Retention Ratio = 120%
(If you want to learn more about these metrics I suggest you check out or
, they are among the best on Substack)You will lose some customers, don’t be discouraged. What is more important is that the customers you do maintain, are very happy and willing to spend more with you over time or help you land other customers. This might not apply well to the marriage analogy (unless you live in Utah) but so long as you set the right expectations at the start of the relationship and can continually under promise but over delivery, I am sure that you and your spouse will be happy together, and you will not be starting a Substack article with the words my spouse left me.
Similarly, you should not wait until you find out your spouse or customer is unhappy before you try to address their concerns. If you see your customer is using your product less, proactively reach out to them to understand why. You see that your partner is spending increasingly more time going out to night clubs with their single friends and skipping your home pottery nights, ask them what’s going on? Good communication is key, no matter the relationship.
To summarize, keeping a customer long term is important for your business to survive. To keep customers, they need to be happy. For them to be happy, they need to feel that they are getting good value for the services that you provide. Much of this comes from expectations management, if they are getting less than what they expected, they will be unhappy. If they get more, they will be happy. If they are using your product a lot and recommending it to other people, this is a good sign. Once they decide they are unhappy, it is difficult to win them back. It is harder to win a new customers than keeping existing ones. If you can’t keep your customers, you will not be able to keep finding replacements and your business will eventually fail. We don’t want that for your company or your marriage.
I hope you enjoyed today’s article, if you have questions or suggestions on how to can maintain long term relationships (customers or partners), please comment below!
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The reverse is also true. How often have you seen somebody play terribly, blame their equipment, then suddenly the club that they were hitting perfectly last week needs to be replaced.
Amazon founder Jeff Bezos famously once said “Your margin is my opportunity”. This is also consistent with economic theory of competitive industries; stating that over time any excess profits will be competed away.
A company cannot double revenue in perpetuity. Once your business stops doubling in size each year (assuming 100% of this growth comes from new customer), by definition more than half of next year’s revenue comes from your existing revenue base (assuming net retention of 100%).
This is only meant to work as a numerical example. If you work for the Canadian Revenue Agency, this is not a declaration.