As marketers, we often hear the old adage that it is five times more expensive to gain a new customer than it is to retain an existing one.
This stat has been circulating since the 1980s, but didn’t take hold in the industry until July 1990, when the Harvard Business Review cited the five times figure in an article. Though the accuracy of the stat is often called into question, the underlying principal — it’s cheaper to keep your existing customers happy than to continuously pump marketing dollars into chasing their replacements — is fundamentally sound.
This is the same core tenet that has driven much of our work at MarketingExperiments over the years. We believe in the transformational power of customer-first thinking, and hold that companies should shift their focus from the cost of pleasing customers to the value of doing so.
In the same Harvard Business Review article — ”The Profitable Art of Service Recovery” by Christopher Hart, James Heskett and W. Earl Sasser, Jr. — formally introduced the concept of “service recovery.” Service recovery refers to the retention strategies that we implement when customers’ perceptions of or experiences with our particular services do not match their expectations.
“Service companies must become gymnasts, able to regain their balance instantly after a slipup and continue their routines,” the article argued. “Such grace is earned by focusing on the goal of customer satisfaction, adopting a customer-focused attitude, and cultivating the special skills necessary to recovery.”
While the traditional business model primarily emphasizes monetary benchmarks — revenue, profit margins, return on investment — the recovery model holds customer satisfaction as the most fundamentally important KPI of all. A study conducted for the U.S. Office of Consumer Affairs once found that 70% of U.S. households would maintain brand loyalty if their problems were resolved satisfactorily at the time they arose, adding credibility to the importance of this KPI.
In short, putting the customer first and quickly and honestly addressing their concerns fosters loyalty, even when errors are inevitably made.
For an example of service recovery in action, let’s take a look at Audible.