The True Costs of Losing Customers
Losing a loyal customer can have a much bigger financial impact than you might think. You don’t lose a single transaction; you lose all future revenues and profits from this customer.
"I'm never going back there!" — When losing a repeat customer, some small business owners seem unconcerned. "Don't worry" is often the prevailing motto.
This attitude has always shocked me. The first reason is purely emotional. I would find it painful to see a loyal customer leave because they were dissatisfied with our services. What could we have done better? Where did we miss the mark?
The second reason is economical. Depending on the industry, it costs five to nine times more to gain a new customer than to keep an existing one. These are staggering numbers. However, the customer acquisition costs are only one aspect. The true costs of losing customers are much higher.
Customer Acquisition Costs
Companies usually spend the majority of their marketing budget on attracting new customers.
However, getting a new customer to place an initial order is challenging, and the dollar value is often small. That's because many new customers view the first purchase as testing whether a business is as good as it claims to be. Talk is cheap. A small order minimizes the risk that a company will not deliver on its embellished marketing promises.
It takes a lot of time and effort to build the necessary trust before first-time customers feel confident enough to place a second larger order.
Yet, converting them to repeat customers is the key to a company's profitability. According to Bain & Company, a consultancy, a slight 5% increase in the customer retention rate can boost profitability by as much as 95%. While new customers drive growth, loyal customers drive profitability.
Loss of a Customer’s Lifetime Value
When a business loses a customer, it loses not a single transaction but the value of all future transactions.
This idea is captured in the customer lifetime value (CLV) concept. It measures a customer's value not by a single order but by the sum of all potential purchases over the lifetime of the relationship.
Additionally, the marketing costs for these future transactions are usually very low because repeat customers do not require expensive advertising campaigns to convince them of your brand.
There are many reasons why loyal customers suddenly stop buying from a company. Sometimes, they literally outgrow a brand. Young adults are less likely to purchase clothes from a brand that focuses on teenagers. There is nothing a business can do unless it launches a second brand for young adults.
What's concerning, however, is when repeat customers are unhappy, frustrated, or angry and voice their dissatisfaction on social media and leave negative Google or Yelp reviews.
Negative publicity is bad for business, especially for small businesses that depend on word-of-mouth marketing for referrals and recommendations.
Losing a loyal customer means foregoing all future revenues and profits from this customer.
Unsurprisingly, this value can be significantly higher than the value of a single purchase.
Unfavorable reviews will become another headwind.
Companies now have to deal with increased marketing costs as they must overcome the negative publicity while trying to replace the lost customer. This money is no longer available to grow their business but is diverted to maintain it at current levels.
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