Here's a typical sales process:
You give your head of sales a number to meet, divide that target among sales leaders, everyone gets a quota for the coming year, and the sales begin. You increase funding for the advertising department, as they need to increase their programs to support potential new sales. The branding department updates the brand and the training department launches a new series of products, including sales training.
So far, all you’ve done is spend money - and quite easily. So, how do you get more money?
The Value of Customer Retention in Growing Sales Equity
In our article about sales equity, we pointed out that there are only 3 ways to make money: AXR.
A — Acquire a New Buyer: Find a new buyer and convince them to give you their money.
X — Expand Relationship with a Current Buyer: Convince an existing buyer to give you more of their money.
R — Retain a Current Buyer: Get money by not losing money. Do this by maintaining your current buyers and convincing them to keep giving you their money.
These three ways to increase revenue may seem simple but don’t fall into the growth traps. The most cost-efficient way to increase sales equity is to achieve a “fantastic” retention rate.
Retention value is the premise of maintaining and growing core offerings.
The most obvious starting point for creating value is by retention of your buyers— keep them buying and purchasing more of your core offering. If you sell computer hardware, make sure your buyer purchases his computer hardware from you year after year. If you sell accounting services, make sure your buyer purchases her accounting services from you year after year. Regardless of what buyers purchase from you today, if they can buy it again, then they should; this must be your number one priority.
Look at the chart below; notice how flat the curve is from 75% to 90% retention rate. But remember the dramatic increase in average tenure as your retention rate gets to 90%, 91%, 92%, and so on.
Instead of calculating an average tenure in your portfolio strategy, calculate a weighted average tenure by weighting your portfolio of buyers. We are going to assume that you own a medium-sized B2B company, so the average buyer portfolio will be:
Antagonistic: 9%
Transactional: 22%
Predisposed: 47%
Trusted Advisor: 22%
Now, let us consider some industry average retention rates by sales equity level.
Doing so gives a weighted average retention rate of 88.5%. In other words, today our “weighted average buyer” is retained for 7.5 years.
But, if we make a small shift in our buyer portfolio by moving one buyer in five from each sales equity level up one level, our new buyer portfolio will consist of:
Antagonistic: 6%
Transactional: 19%
Predisposed: 41%
Trusted Advisor: 34%
This will increase our weighted average client retention rate from 88.5% to 90.5%, and it will increase our weighted average client tenure from 8.5 to 10.5 years— that’s 1.8 more years of revenue!
That is exactly why you need to focus on more client retention and less on acquisition; always remember AXR!
Understanding Your Retention Rates
A fantastic retention rate locks in current revenue while also expanding for other opportunities. Let's understand how to look at your retention rates and how a 10-15% difference can make all the difference in your revenue.
How to Calculate Average Annual Customer Retention Rate
You can calculate your average annual customer retention rate by subtracting the number of new customers added from the number of customers at the end of the year divided by the number of customers at the start of the year.
How to Calculate Your Company’s Average Client Tenure
Your company’s average tenure is another valuable number to know. The average tenure of your company’s clients will provide insight into whether or not you’re effectively allocating resources to increase sales equity.
Your average client tenure can be calculated as one divided by your annual retention rate. For example, if you have an 80% retention rate, that means you lose 20% of your customers annually. If the company loses 20% a year, then the average client stays five years.
80% Client Retention Doesn't Sound So Bad, Right?
If the 80% retention rate doesn’t sound so bad, here's a scenario you can be familiar with.
Let’s say a company starts the year with 100 clients. That year, they had an 80% retention rate, meaning they only retained 80 of those 100 clients. In the following year if they lose another 20% of the remaining clients. By year three, they’ll only have 64 of the original customers left. By year five, the company is down to 41 of its original customers.
By now, they’ll need to use time and money to find 59 new clients just to break even. With these 59 new clients will come high delivery expenses, because the company will have to dedicate resources to learn about these new clients. Not to mention, this company will be so busy building these new low-profit relationships that they won’t even have time to think about achieving profitable growth.
Re-Evaluate Your “Good” Retention Rate
By turning clients over all the time, your company is constantly spending money to acquire new clients to replace clients you just lost. Therefore, you’re spending so much time and money trying to acquire new clients, that you hardly have any time to grow your company or relationships with current clients. In the example above, if the retention rate increases to 90%, the average tenure goes from 5 years to 10 years.
90% Customer Retention Rate Must Be Great!
Let’s take a look at the graph below. At a 90% retention rate, the curve begins a dramatic accent. Increasing from 90% to 95% retention earns the company an additional ten years average tenure. If your company goes from 95% to 96% retention, your company gains another five years on every client, moving your average tenure from 20 to 25 years! Still satisfied with that “great” retention rate of 90%?
What if Your Retention Rates are Higher?
Now let’s look at what would happen with those original 100 customers if your company had a 97% retention rate.
86 of your original 100 customers will still be with you 5 years later if you have a 97% retention rate.
Of these 86 customers you’ve retained for 5 years, what are the chances some of these customers will purchase additional products and services? What are the chances some of these customers will refer their friends and family to your business? What are the odds that your company’s sales team is more successful and satisfied in their jobs? With a 97% customer retention rate, you now have time to think about company growth.
How B2B Relationships Affect Retention Rates
Customer retention and customer loyalty go hand in hand to increase retention rates, and in turn, build sales equity. The best way to focus on expansion is to grow your revenue by increasing the profitability of the existing client base.
This happens by getting your clients to pay more, buy more, or lower the cost of serving them. While you can expand the profitability of a new client, this also involves devoting time and resources to get to know this client, maintain the client, and expand the revenue you’re receiving from them.
Being the Trusted Advisor of your clients can then be a sensible retention strategy. By building customer satisfaction and retention, you will see a positive growth for your business. In today’s rapidly changing B2B marketplace, businesses of all shapes and sizes have yet to explore untapped potential in their existing customer base. In other words, they have yet to build sales equity from their current customer base.
Learn more about how you can nurture business relationships here
Don’t Believe It? Calculate Your Impact Using Our Free Impact Calculator!
At Encompass-CX, we believe your impact matters. Our Impact Calculator will estimate your company’s financial impact, including revenue, profit, and tenure growth. Calculate your impact now! Access our Impact Calculator here.
Co-written by Alexis Audeh and Kristel Pineda