By now, it is common knowledge that Indian startups had been on a huge spending spree over the years in their bid to acquire customers. Clearly, they were more focussed on market share rather than sound business metrics and other vital aspects such as customer retention that could keep them going in the long run.
The subsequent flurry of shutdowns, mergers and devaluations have revealed glaring deficiencies in this approach. Most startups could not maintain their sales volumes in the face-offs with other competitors or could not ring up enough sales up to justify their operating expenses, which lead to their downfall.
This has brought alive the debate on whether customer retention is equally or more important than customer acquisition for a startup to sustain. It is important to note in this context that amongst the major causes of the startup failures was that the fact that the cost of acquiring customers (CAC) was higher than the ability to monetise those customers.
It is a waste of time, effort and resources to acquire customers after spending a bomb and then not being able to cash into the full potential of this relationship once they have bought into the services.
Here are many more reasons why startups should realise the importance of customer retention:
Customer retention costs less
Although marketing teams are fonder of acquiring new customers, as it makes for a good pitch to investors, and is a more quantifiable measure of success, customer retention offers better long term returns.
Repeat business comes at a lower cost than trying to attract new customers. As per a study, 70% companies say it is cheaper to retain a customer than getting new ones as much as 7 times more expensive. Moreover, paying more attention to the needs of existing customers has a higher probability (60 percent-70 percent) of an assured sale than trying to sell to a new customer (5 percent-20 percent).
Ramping up customer service, introducing loyalty programmes and birthday offers and customising of shopping experience for loyal customers still will cost less than the huge ad spends to attract new customers and engineers at times a lifetime of profitable relationships.
Faster sales with old customers
The realisation of a sale is faster with an existing customer than trying to woo a new one. Existing customers have already bought into your product and are more likely to go in for a repeat experience, if they have liked it.
With new customers it’s a long process from snagging their attention, to retaining their interest long enough to stay to look through the products, to translate into a final purchase. This journey requires a lot of pushing, convincing, and cajoling through expensive publicity and increasing visibility on social networking sites.
All it takes for a company is to ensure it consistently delivers the promises it made to its existing customers to gain their trust and get repeat business from them.
Better customer retention is the sign of the right product market fit (PMF)
When growing companies shift their focus from customer acquisition to customer retention, they automatically start laying the foundations for the right product market fit (PMF). They starts working out the details of how to improve the customer experience and focus on learning about their product preferences and expectations to ensure customer satisfaction.
In this process, the right product market fit is fine tuned to retain the valuable repeat customers. Investors place a lot of emphasis on this PMF for the subsequent rounds of investment and are likelier to invest in companies with a stable customer base.
Startups that have specifically worked to retain even 15 percent of heavy users can get a jump of 33 percent in overall revenues with their constant patronage without incurring additional costs.
Customer retention attracts new potential customers
Startups that have built up a loyal customer base can find valuable ambassadors in them to acquire new customers. Their word-of-mouth publicity and “shares” on social networking sites are free and more honest publicity for the company and its products.
So, indirectly even a 5% growth in customer retention can translate into almost 75% jump in user base for a company. This is why a lot of startups actively promote referral programmes amongst their regular customers to reward them of the indirect benefits of this relationship.
How to nail customer retention
The key to retaining those hard earned customers lies in being on the same page with your customer at every stage, right from time the concept ‘pops up’ in your head to the product development stage to selling the product and the after-sales phase. So, if you look at it, the whole entrepreneurship game literally boils down to understanding customer’s expectations and living up to them!
It is understandable for you, as a founder, to have multiple priorities clamouring for attention once you’ve embarked on the entrepreneurial journey but focussing on putting the customer first at every stage is imperative for long term success.
Here are some important questions you need to answer to nail customer retention:
Are you following a customer acquisition plan?
Only once you have identified your target market and figured out where it can be found can the sales map can be formulated. However, only this alone is not enough to go ahead with the product launch.
If you have gone through sufficient test runs to know the customer, then the product needs to be fine tuned before the launch. In this process, you should have spent sufficient time in various relevant geographies with customers to understand their problems and whether the product is truly able to solve them.
Spending time to gather information from online data is also necessary for you to gain an insight into the right customer profile. You ought to be closely involved with the customers to become aware of the challenges that they face. Only then can you gain an insight into how the startup can help these customers to have a smooth and satisfactory experience.
Do you have a strategy to engage with your customers?
As a founder, if you have worked out how to engage with your customers at the ground level then you are on the right track. Mostly, for a customer, it’s all about the emotional connect. They are most likely to block out the technical details, features and functions of the product if it strikes a chord with them emotionally.
They are more likely to respond to the products uniqueness and how it can make their life easier by solving their problems. In a world crowded with a plethora of information, it is good for a startup to stand out with precise, concise and genuine information which you can back up.
Do you have a thorough after sales follow up with customers?
A key element that helps in bringing a customer back for repeat business is the overall experience. After sales service and complaint redressal form a large part of this experience. Keeping in touch with customers for after sales or service feedback is therefore as important as conducting the sale itself.
As a founder, you should be closely tracking social media and other common sites to follow posts and shares on your products. Be prompt in answering and solving direct customer inputs on the sites as they can damage many a reputation.
Sometimes going out of the way to make a disgruntled customer happy can earn manifold brownie points through their social media networking and help you win more customers.
Taking a leaf out of the thriving Japanese ecosystem
Take, for example, the case of the Japanese ecosystem that has long been considered synonymous with introducing the world to company after company that has sustained and thrived over the years owing to their strong customer orientation, global competition notwithstanding.
Softbank, Uniqlo and Rakuten are just a few such success stories that startups and larger businesses can learn from. Not only are all these companies profitable listed companies (with IPOs), they also have in common a popular Japanese belief that they uphold – Okyakusama wa kamisama desu- which means, "The customer is God".
In keeping with this philosophy, they have all been known to emphasise and invest on forging a strong relationship with customers instead of spending millions and billions on customer acquisition.
Then, there’s Ichiro Kawanabe, the CEO of Japan's biggest taxi business, who has been successfully running his 100+ years of family business while retaining the top position simply by placing the customer at the crux of the business. This is one of the prime reasons why even the likes of Uber or Lyft have been unable to overtake the company in terms of market share or even eat into 5 % of their market share in the last 5 yrs! In fact, a program run by Nihon Kotsu (known in English as Japan Taxi) under Ichiro Kawanabe’s leadership offers special privileges to pregnant women in Japan.
Why just Japan, even Indian Mythology teaches us, Grahak Bhagwan Ka Roop Hai which means "Customer is a form of God". Chances are that startups that have been following this principle sincerely are well on their way to becoming global conglomerates.
Since I too have been actively investing in Indian startups, I can clearly say that I have immense respect for entrepreneurs who understand the importance of customer retention and budget for it in their business plan. On the other hand, I have declined to invest in companies that place their bets on customer acquisition rather than customer retention.
I firmly believe that you can go a long way if you have even 100 happy customers viz. a viz. 100,000 unhappy customers. By now, we all know how in recent times, several well funded startups have had to shut shop because they had 100,000 unhappy customers, while on the other hand, there are those that were just seed funded and had only 100 odd happy customers but are continuing to grow with word of month. Need I say more?
(The author is Chief Evangelist at GHV Accelerator)
Updated Date: Jul 14, 2017 17:16 PM