Reduce customer defections for exponential increase in profits

Its been a long time since I have talked about customer mathematics. So let me introduce you to the next customer math formula.

The link between customer retention and profitability can be seen in many businesses. A study has shown that a 5 percent increase in customer retention increases profits by 35 percent in the software industry, by 50 percent in insurance brokerage, and as high as 95 percent in the advertising industry. The next Customer Math formula 5%=50%, derived from above, states that reduction in the defection rate by 5% can result in an increase in profitability by an average of 50%

MNBA, an American company, found that a 5 percent increase in retention results in an increase of profits by 60 percent in the fifth year. A division of IBM found that a 1 percent increase in customer satisfaction led to an increase in revenue of $257 million. One percent decrease in customer defection of Canal Plus, a pay-TV channel in France would result in a gain of 75 million francs in revenue. It is obvious that in such situations, the impact on profitability is huge as the overheads are spread over a larger volume.

Why does profitability go up disproportionately to the decline in defection rate? First, satisfied customers make more frequent profitable repeat purchases. Second, they purchase more per transaction. Third, they are willing to pay a price premium. Fourth, the operating costs in dealing with satisfied existing customers is also less. Fifth, satisfied customer make payments on time thereby reducing your financial cost. Last but not the least, you get free-of-cost referral sales from satisfied customers. No wonder, retention of customers will have a disproportionate positive effect on your bottom line.

I hope you are now convinced that customer satisfaction is not only free, but is actually very profitable. When I suggest that you should not to lose a single customer in order to increase your profits exponentially, I have taken into account the effects of Customer Math formula 5%=50%. By the way, I also have empirical evidence of my own business which clearly shows that reduction in customer defections results in an exponential increase in profits. Maybe one of these days, I will share my business data to convince you of what I am talking about.

Avinash Narula

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