The stock market is down, profits are shrinking, prices are up and demand is down. The “good times” are over. This is how pundits have described the economic situation for the last year. Drycleaning, however, has been described similarly for the last five years. So cleaners now are faced with a double dose of bad news. The industry is down, and now the economy is down, too.
What can a prudent cleaner do? The answer lies in the basic equation of business: Profits = Revenues - Costs. There is an implicit assumption in this equation — that to maintain profits, businesses have the choice of increasing revenues or decreasing costs.
Increasing revenues is usually considered the best answer. However, this usually requires an investment of money and time. Sales promotions, new stores or expansion into routes are all ways to increase revenues. The negative with these initiatives is the lag time from when the investment is made until results appear.
Cutting costs is the other option. The challenge here is that since most cleaners have been in a competitive situation for years, many costs have already been cut. Additional cuts (for example, using cheaper detergent or trying to extend filter life) will probably result in a lower-quality product. Other costs that can be cut will be of such minimal value as to be almost meaningless—such as saving ten cents on 1,000 tags.
Complicating the solution is the fact that most costs are going to increase over time. “Cutting” costs is really is a misnomer; in reality, it’s “containing” costs. But the appeal is in immediacy; there is immediate financial gratification in cost-cutting.
Conversely, an investment takes time to show results. The return on equipment is measured in years. Results from revenue-generating programs such as advertising may take years to measure. It is always more appealing to add a dollar to your pocket today than to spend a dollar in hope that you’ll get it back in the future.
Taken to the extreme, the best way to cut costs is to lock your doors and walk away. Your costs are zero; of course, so is your revenue. The feat of minimizing cost and maximizing profits is a dynamic process. There is no one answer that fits everyone, and there is no one answer that is permanent. New processes offer the appeal of greater profits, but carry the cost of investment.
However, there is one way to get immediate gratification and increase revenues: a customer-retention program originating in your point-of-sale database.
Estimates show that in a typical year, a cleaner loses about 40% of its clients. The same studies show that a typical cleaner adds new clients in an equal amount, for a net gain of zero. In other words, if you change nothing, you end up in about the same place as you started.
If you want to draw new customers, you need to spend money. So let’s look at the other option—not losing as many customers. Not all customers can be kept; some move, some change jobs and some are just mad enough to never return.
Most customers, though, stop because of a change in the market, a new competitor or a coupon. They are still taking their cleaning to be done, just not to you. If you can get just two out of 10 lost customers to come back, you’ll increase your revenues by 8% (20% x 40%).
An 8% increase in any business is admirable, and the fact that the tools to achieve this return are in your computer is nothing short of amazing. The problem is that you have to start a program to take advantage of it. It is a lot easier and cheaper to get a lapsed customer to return than to find a new one.
In a computer database, a lost customer is simply someone who hasn’t been in for a specified amount of time. If you watch this information, you can identify customers who have stopped using your service. Most systems even have a lost-customer report function that tells you who hasn’t been in lately—usually three or six months.
The simplest customer-retention program sends lost customers an incentive to return, usually a coupon. They will either come back or they won’t, so the results you see (as with cost-cutting) are almost immediate. Unlike cost-cutting, however, the results of a customer returning can have positive effects for years.
If you don’t get results with your initial customer-retention program, you need to re-evaluate the incentive—in other words, increase the coupon offer or provide other reasons to do business with you. If, after a period of time, your retention programs are still not working, you need to look at your product and service. If a retention program doesn’t work at all, it’s because you are not delivering a value to the market.
Let’s assume you do produce a competitive product with an acceptable level of service. The simplest program is to get a report or print address labels of the customers who haven’t been in your store for three months. Stick the label on a mailer, or have your evening counter staff address a coupon. This gesture probably will get several people to try you again.
It must be remembered that a “lost” customer is not an existing customer, but a new one. That is, they are trying your service to determine if they want to do repeat business with you—the mental equivalent of what a customer goes through when they use you for the first time.
If your business grosses $100,000 a year, you lose $40,000 a year in lost customers. Assuming the average value per customer is $40 a year, this means that you are losing 1,000 customers a year. The cost of sending a mailing to all of those customers is probably about 50 cents each, or $500 per year.
Now assume that your offer is not that appealing, and you get a 2% response, often considered the standard return on a mass mailing. In our example, each person who returns spends about $10; of those who return, half stay with you. This means that of the 1,000 customers lost, 20 came back, resulting in $200 in revenues. Ten stayed and spent, on average, another $30 over the year. You got your money back!
It cost $50 per customer to get them back as regular customers. You broke even on your costs, but increased your customer base by adding six customers that otherwise would have been lost (10 customers who stay x 40% annual lost customers). So your second-year income would increase $240 (6 X $40).
This is a worst-case scenario, in which you are not differentiated in customers’ minds from any other cleaner, and your quality is so bad that only half your trial customers return. Now, let’s look at a realistic example. Competition picked up most of these lost customers. If you act quickly, you can reclaim them before they feel like customers of a competitor. You’re providing an “excuse” to come back, and you make them aware that they are important to your business.
You should expect 10% of your lost customers to return, if given an incentive. This means that of the 1,000 lost customers in the example, 100 return. Assuming that only 50% stay with you, you now have generated $1,000 in return visits and another $1,500 in repeat business over the year. Your $500 investment has returned $2,500, or 500%. All things being equal, the program grew your annual business 2.5%. This is a conservative estimate of the power of a concerted customer-retention program.
Now assume that previous returns are not high enough for you. A way to increase returns is to target “lost” customers. Using the 80/20 rule, 20% of lost customers account for 80% of your lost business. But don’t just send them one coupon—send them two invitations to increase the likelihood of their return. The cost of each remains 50 cents.
Of 1,000 “lost” customers, you’re only concerned with 200. Two mailings to each will cost you $200 (2 x $.50 x 200). The value of each of these customers is not $40 a year, but $160 ($40,000 x 80% ÷ 200). So if you get 10% of them to return, you get not only that first $10 visit from 20 people for $200, you also get $150 over the year from 10 otherwise “lost” customers for $1,500—a total of $1,700 a year.
Overall return is now 850%, and your business has grown 1.7%. The net return is lower, but the costs are lower and profit-per-customer higher. What other investment can you make that yields an 850% return?
The added beauty of customer-retention programs is that they’re repeatable. With a cohesive, targeted retention program, you can consciously decide who you want to do business with, and over time—by refining your program—consistently increase the value and profitability of each customer.
It’s important to note that the better your retention program, the better your results. To fully maximize your profits, a marketing specialist can tailor a specific program for your market and company.
The number of customers and potential customers is finite. Every customer you keep is one less for the competition. Every customer you keep is more money for your business. As you compete for more customers, it becomes increasingly important to define and refine your market, your customer and your message.
An advanced retention program can measure an individual’s buying patterns and alert you when they deviate. It will also allow you to target a specific promotion to a specific customer. For example, a top-10% customer will get a different offer than a below-average customer.
You are now moving from a general offer to a specific benefit that is based on the past relationship your business had with that customer. As you get better and more refined in your efforts, you can expect to get even larger returns and change your retention program from a tool to get customers back to a tool to build customer loyalty.
A customer-retention program will also increase customer turnover at your competitors. Remember, they’re losing 40% of their customer base annually, too. The difference is that you are actively lowering your lost-customer numbers, increasing lost-customer percentages at your competitors.
If you don’t actively develop and refine a customer-retention program, you run the risk that the competition will. And once your business starts losing customers, it’s difficult to change the downward trend without further investment in revenue-generating programs. Then, you would be increasing costs with the promise of future returns, while losing customers and revenues at the same time. Based on the basic equation of business, that means profits would be falling.
Only one thing can help avoid that situation—a POS system that includes a customer database. The better your retention program and the quicker it is enacted, the sharper your competitive edge will be.
Have a question or comment? E-mail our editor Dave Davis at [email protected].