Customer retention

Organizations engage in both sales and retention activities in order to improve their businesses: sales to win new customers, and retention to keep existing customers. Each activity reflects the organization’s ongoing revenue stream. Both are interconnected and interdependent. Traditionally, businesses are inclined to give priority to sales at the expense of retention because most companies find that sales activity produces results more quickly and it is relatively easier to measure. Pressure on sales tends to be short-lived episodes, while retention efforts are ongoing. Improved customer retention may not necessarily produce instant effects in sales and revenue. Thus, organizations overlook retention activity, particularly at times of economic boom, when sales become even easier. However, on the one hand, improved customer retention and advocacy can boost both cross- and up-sell activities. Satisfied customers can introduce their friends, colleagues and families to the organization that can increase its sales numbers. On the other hand, a poorly targeted sales strategy can result in lower levels of customer retention. This is because the sales team is aiming for instant results, and will often target low-quality leads with a high customer churn rate.

Generally, companies are averse to focusing on customer retention due to the challenges in understanding, improving and measuring it. But this shortsightedness will eventually impact their overall sales and other activities going forward. While it is difficult to identify and reverse the loss of a customer, there are certain measures that will help companies to improve the overall customer retention rate. This includes creating a customer retention initiative support in the company’s internal culture, building a good understanding of customer lapse behavior forms and evolving an appropriate measurement to focus on key areas. Customer retention has a crucial role in improving the bottom line of any organization irrespective of the nature of business. For example, profitability in the life insurance market is highly sensitive to customer lapse rates. Often, an overridden sales campaign may prove counterproductive to the company’s sales growth in real terms.

Inappropriate pricing of life insurance products and lack of accountability among teams may fuel the lapse rate even further. Increases in lapse rate will shorten the average term of products and make them unprofitable, impacting the bottom line. Only a methodological approach in managing the lapse rate could check further worsening and effect a possible recovery.

The complete article was written by:

  • Andrew Taggart
    Executive director in the Advisory Practice, Ernst & Young, Sydney, Australia
  • Daniel Marlay
    Senior manager in the Advisory Practice, Ernst & Young, Sydney, Australia
  • Walter Poetscher
    Senior manager in the Advisory Practice, Ernst & Young, Sydney, Australia

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