Reasons Why Customer Retention Is A Key Formula To Success For F&B Businesses

customer retention formula

It’s a long-standing debate. According to one school of thought, customer retention often takes a backseat, as loyalty and engagement are more often than not, intangible and therefore unmeasurable to some extent. However, it is important.

On the other hand, customer acquisition is important in the initial stages of a business as having a rock solid customer base is important. As your customer base expands, retention becomes important. The second school of thought, therefore, vehemently claims that a staggering 80% of a business’s future revenue will come from 20% of the existing customer base.

Cost is an important factor driving this assumption. Marketers know that it is 10 times more cost effective to retain an existing customer than to acquire a new one. Despite that, a mere 16% of organizations focus on retaining existing customers.

We think that any business, no matter which vertical it operates in, registers success or failure basis how economically they acquire and retain their customers. The strategy needs a shift from concentrating only on acquiring customers to retaining acquired customers as well.

Customer acquisition is a costly proposition

Acquiring a new customer is vital to all businesses, but it is a costly proposition. The factors that drive this cost include outbound traditional marketing expenses (online and offline ads), inbound marketing expenses (SEO, social media, blogs etc.), sales, business development and event marketing promotions.

Keeping such costs in mind, it often makes business sense to put efforts on customer retention. All the time, money and effort can be recovered by leveraging the potential of the customers you already have on board.

Why customer retention is necessary

Customer acquisition helps businesses scale in volume, but it involves a lot of sweat and money. Repeat businesses cost much lower. As per a survey, it was found that 70% of companies opine that it is far more cost effective to retain an existing customer than to acquire a new one. The cost of acquiring a new customer can be 5 to 7 times higher that retaining an existing one.

Also, customer retention lets you see who your customers really are. This is important as the information you get helps you to retain existing customers by creating personalized and targeted promotions. This, in turn, helps in building a successful base.

Further, the data helps in new customer acquisition efforts as you will now know who all are more likely to become your loyal customers. Where can they be found, where they roam around, which messaging strikes a chord with them, etc.

Retention also more often than not, leads to acquisition. Customer loyalty from existing customers can also help a business acquire new customers. Word of mouth is not only free but it is also one of the most credible forms of advertising and your loyal customers do that for you.

Therefore, it is commonly held that just a 5% increase in customer retention can catapult a company’s business profitability by 75%. You can also acquire more new customers by offering incentives to existing customers, asking them to refer their friends and family.

Customer acquisition and retention in F&B business

Things are slightly different when you take, the Food and Beverages business into consideration. Typically, such businesses have a relatively low customer acquisition cost, but retention costs are recurring and high. In other industries, for example, the customer acquisition cost is relatively higher.

Consider the automobile sector. Here, a customer buys a car only once in many years. The amount of business an average customer provides over the years is low if the person buys cars from different companies, thus, the LTV or lifetime value of such a product is low.

As an example, suppose a customer buys a car from TATA and then buys his next car from Honda then his LTV for TATA is low. But if TATA manages to retain the customer and make him buy his next car from TATA itself, then the LTV for TATA shoots up.

By that equation, the higher the LTV the more profitable would be the business. The only way to ensure a high LTV is by retaining customers who have already been acquired. The Customer Retention Cost gradually reduces the number of customers retained keeps on increasing.

Most businesses concentrate only on the acquisition, discounting the importance of retention, without realizing the fact that such a deal is not much conducive to business profitability in the long run.

The software is available today that can help in tracking ROI on for customer acquisition across marketing avenues. It also assists in customer retention by profiling each individual customer, their spending patterns, addresses, preferences, order history, frequency, etc. And knowing more about your customer always aids in taking better decisions.

The Customer Acquisition Cost and Customer Retention Cost measurement metrics are growing in use with the availability of technology to track the expenses. Today, the avenues for acquiring customers are many, including Linkedin, Google, Zomato, Facebook, SMS campaigns, Offline marketing, In-house promotions, word of mouth publicity, etc.

Technology can be used to track these aspects, especially the internet first F&B companies. Customer Retention cost, being the other side of the same coin, are driven by factors such as service cost, experience (Dining, Delivery, Packaging), quality control cost and promotions and loyalty programs for existing customers.

In the F&B industry, it is important for businesses to build a solid customer base. One of the simplest metrics to understand how a business is doing is to check the proportion of the customers who keep on coming back, repeat customers so to speak.

And for this, a good customer acquisition and retention strategy are required. Once this is achieved, you know that you have a replicable model which have the potential to grow into a multi-store multi-city business.

Also Read: How A Startup From Pune Is Helping Your Favorite Restaurants

(Disclaimer: This is a guest post submitted on Techstory by the mentioned authors.All the contents and images in the article have been provided to Techstory by the authors of the article. Techstory is not responsible or liable for any content in this article.)

About The Author:

Suneet Kulkarni is the Co-founder and COO of Torqus, an end to end SaaS based technology solutions provider for businesses in the F&B space. In his current role, Mr. Kulkarni’s chief responsibilities include managing the company’s overall business operations, customers and finance.