Leaking Bucket

Too often, businesses try their hardest to attract new customers but miss the low hanging fruit that’s in front of them. Utilising retention strategies and winning back customers is one of the easiest ways to secure incoming revenue and ensure it remains steady.

Why retention is important to your recurring revenue

Think of your business like a bucket. At the top of that bucket, you’re spending money to acquire new customers. This is called your customer acquisition cost or (CAC). This is usually made up of new customers or customers switching from other businesses.

It’s most likely, you’re spending all this money to continuously acquire new customers and ensure you’re making sales.

The outcome to this is called your market share. That’s how many people you currently have in your bucket, relative to the market. It also makes up your recurring revenue (RR).

Now at the bottom of the bucket (unless you have a very sticky product), there will probably be a leak. The leak represents customers leaving you, most likely switching to competitors or simply not buying from you. This is called your customer churn.

If you’re thinking about trying to increase your recurring revenue and grow your business, there are really only three things you can focus on:

  1. Topping up your bucket with new customers.
  2. Changing your mix or offering, for example, pricing.
  3. Plugging the hole in your bucket and making sure customers come back.

Point one is pretty straight forward. Acquiring new customers means you will need to employ new strategies or better market your offering. This all implies spending more money, which means your cost to acquire (CAC), will increase. If your new recurring revenue covers the cost, then that’s great! But is it solving the real issue if your churn is high?

Point two implies increasing your prices or changing up your mix. For the marketers out there, that means changing things such as your price, place of sale, promotions or product offering. This all usually incurs further costs and may have an impact on how loyal your customers are.

For instance, if you increase your pricing, you’re inevitably going to impact how many customers want to purchase your product. The result? Fewer people in the bucket.

Why you should plug your bucket:

Focusing on reducing your customer churn -- how many customers are effectively leaving you -- is five times cheaper than trying to acquire a new customer according to Forrest Research. So instead of vying for new customers, you should first be focusing your efforts on satisfying the customers you already have.

When you satisfy your customers, you’ll reduce your churn rate and therefore…

Have more in your bucket!