ENTREPRENEURS

How to Deal with Leaks in Your Revenue Bucket

Did you ever stop and consider that it's always cheaper to keep your existing customers than to acquire new ones? It's darn expensive to acquire new customers, and companies can invest a lot of their revenue on marketing and sales efforts without realizing how impactful similar investments can be in retaining the customers you already have.

That's why it's critical for your business to keep an eye on whether you've sprung any leaks in your revenue bucket, losing some of those hard-won clients, and take action to fix them.

The best companies have customer retention rates of over 90%--which means they only lose less than 10% of their customers on an annual basis.  When it comes to retention, any percentage that starts with a 9 is a good number. If you are good, you keep all your clients and grow them for retention rates over 100%! Businesses with retention rates of 50% to 60%, on the other hand, have sprung serious rates in their revenue bucket. I worked with the leader of one software organization, for example, who found that his retention rate was just 68%. Their customers just didn't stay around for long--which is a serious challenge in trying to grow a business.

So, what can you do to fix the problem? Consider taking the following three steps.

The first step to take is to get an accurate measure of what your retention rate is. You can't fix what you can't measure. To calculate your retention rate, simply look at the year-over-year figure of how many new customers you have brought in compared to the prior year. If you wind up with a number that doesn't start with a 9, move on to Step 2.

One of the reasons customers leave is that they don't think they're getting enough value for their investment. One way to assess this is to talk to the customers who are leaving, as well as the ones you've retained for a while. Use those conversations to assess the value proposition you're offering. One effective question to ask is: "If I could change one thing beyond price to make you stay, what would it be?" Your goal is to find ways to improve the value of your offering--without reducing your price. And the answers you get back often yield interesting answers that drive service and product development. While some people push back on this idea, saying that you're only reducing your margins by giving more for the same price, the reality is that the things your customers ask you to add won't cause your costs to go up by that much and it will almost always be cheaper than your customer acquisition costs.

According to a Gartner study, the number-one reason people cancel a subscription is that they don't use it. Okay, it might be obvious that you likely won't renew a product you aren't using, but this gives you a direct path to action and improving retention. This is where monitoring how your customers are using your product or service and taking a proactive approach in helping them use it more can be an effective retention strategy.

This is exactly what happened to that leader I mentioned earlier who had the measly 68% retention rate. Once he started monitoring how customers were using his product, he shifted his customer service focus to taking an active role in answering their questions and helping them use the product. This simple act of becoming more proactive helped drive up utilization of the product--which then drive retention up to 85% in just a few months. It' should be long before they cross 90%+ retention.

So, if your business isn't growing at the rate you expect it should, consider whether you have a leaky revenue bucket or not. Start by measuring your customer retention rate, then shift into action by adding value to your offering and driving utilization to better connect the dots between your customers and your product or service. If you can do that, you'll find your revenue bucket filling up faster than ever.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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