Receiving referrals is a bonus to any business and provides immediate gratification to business owners, whereas improvement in customer retention takes longer and isn’t always easy to see even as it’s occurring. While both elements are important to your overall growth and profitability, the degree to which your business provides recurring products or services to its customers may determine whether you should focus more on retention or referrals.
For example, if you remodel kitchens and generally only service a customer once during an extended timeframe, customer retention may be less important than if you are a cleaning business providing regular, repeat services to a large segment of your customer base.
Businesses that generally do not provide recurring services to the same customers may have more to gain from focusing on referrals, since a potential customer is six times more likely to buy from you if they have been referred by a friend or colleague.
On the other hand, businesses that provide repeat services to the same customers may have more to gain from keeping a customer than they do from receiving a referral. Most businesses of this type lose 20% to 40% of their customers each year; slowing this attrition by just 5% can increase their profitability 25% to 125%.
The bottom line is that while your focus will depend on the nature of your business, you probably can’t afford to ignore retention or referrals.