As leaders in the marketing performance measurement space, we are often asked, “What metrics should we use to measure marketing?”  One way to think about your metrics is think about the functioning of your business like a living organism.  Most health experts believe that there are certain vitamins essential for bodily function.

Very likely you have ready many articles what it takes to have a healthy business.  One measure of a healthy business posited by Greg Alexander, CEO of Sales Benchmark Index is the New Business-to-Repeat Business ratio. That is, what percentage of your revenue comes from net new customer (customer acquisition) versus the percentage of revenue contributed from existing clients (customer retention and expanding share of wallet).  The company needs to decide the customer and revenue targets for the ratio, which has significant implications for Marketing.   

Since Marketing’s job is to find, keep and grow the value of customers, this is a valuable ratio every Marketing organization can use to prioritize initiatives and select metrics.  Various studies suggest that there are many reasons to emphasize customer retention initiatives. Research by Bain & Company suggests that a 10% rise in customer retention yields a 30% increase in the value of the company. The firm Marketing Metrics found that the probability of converting an existing customer is 60-70% compared to only 5-20%  probability of converting a new prospect.

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Bring Color to Your Customer Retention Measure

The average company loses 10% of its customers each year.  Various studies hammer home the financial implications of customer retention:

  • 5% reduction in customer defection rate can increase profits by 25-125%, depending on the industry
  • A 2% increase in customer retention has the same effect on profits as cutting costs by 10

There are three customer value metrics that every Marketing organization can use to supplement your overall customer retention measure: Churn/Attrition Rate, Customer Retention Equity, and Share of Wallet. Let’s quickly review each of these metrics that will add color to your overall customer retention measure.

  1. Churn rate or rate of attrition: Knowing how many are defecting and why is the reflection of knowing how many are staying and why. Churn rate is a commonly accepted statistic related to customer retention.  
  2. Customer Retention Equity/Lifetime Value. In most businesses, existing customers are the most valuable assets that a company has. Most surveys across industries show that keeping one existing customer is five to seven times more profitable than attracting one new one.
  3. Share of Wallet and Potential Wallet Value. Share-of-wallet is a revenue-based measurement that gauges the depth of customer relationship and a profitability measurement system. The wallet of a customer is defined as the total amount this customer can spend in a specific product category. The share-of-wallet is how much they spend with a particular seller. In simplest terms, “share-of-wallet” relates to your portion of the money spent by your customers on your products and services compared to the total they spent on all products and services in your category. Your portion is your share.
Customer retention measures, metrics

Add color to your customer retention measures.

The objective is to increase revenues from existing customers for greater gains. You can use share of wallet as a way to improve your understanding of where added value may exist among your existing customers. By understanding the total wallet and the share-of-wallet you can identify which customers are the most loyal and which customer have the greatest growth potential. Both the ratio and the actual difference is important. The first tells us the share of wallet and the second the potential value.

Incorporate these metrics into how you measure Marketing’s contribution to the business. Want to learn more about Marketing accountability, metrics and performance measurement. Let’s talk! 

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