Raising your retention rates by even 5% could increase your profit by 25% to 95%.

Did you know that? Intuitively, it doesn’t make sense, right?

How could it?

Here’s a quote pulled from a study by the Harvard Business School:

Ten years ago, Bain & Company, working with Earl Sasser of Harvard Business School, analyzed the costs and revenues derived from serving customers over their entire purchasing life cycle, and we published the results in this magazine. We showed that in industry after industry, the high cost of acquiring customers renders many customer relationships unprofitable during their early years.

Only in later years, when the cost of serving loyal customers falls and the volume of their purchases rises, do relationships generate big returns. The bottom line: increasing customer retention rates by 5% increases profits by 25% to 95%. Those numbers startled many executives, and the article set off a rush to craft retention strategies, many of which continue to pay large dividends.

There’s a lot of factors that go into these disproportionate results. I’ll cover the broad strokes that went into the aforementioned study.

1. Acquisition cost

In the beginning, the cost to acquire a new member is high. It may take multiple months to cover that cost. After a while, though, the acquisition cost is paid off and profit kicks in. Every successive month is more profit.

2. Members spend more over time

This won’t be the case for every business, but a factor to consider is that people purchase more over time.

In coworking terms, the longer members stay, the more likely they are to grow and spend more in the process. Their office gets bigger and so do your profits. Not all members grow, but it’s a factor.

3. Members spend more frequently

In addition to spending more, people spend money more frequently over time.

They build habits in your space. The friction decreases. Since some are expanding their office space requirements, there are more people to use your services and amenities. More opportunities to spend money with you.

Not all of them, but it’s a factor. And these factors are beginning to compound.

4. Referrals

The longer people stay, the more likely members are to refer people to you.

Happy members stay longer and refer more people. Every new person they refer starts the cycle all over again.

Those new members may refer even more people down the line as well. And so it goes.

5. Customer support

A quote again from the article cited above:

“Referred customers tend to use the people who referred them for advice and guidance rather than calling [your company’s] technical support desk. In effect, loyal customers not only take over the function of advertising and sales, they even staff the company’s help desk—for free!”

This is probably a minor factor in the coworking industry, but I’ll use it to segue into another idea not mentioned in the article.

6. Member satisfaction

It’s my non-scientific belief that members who bring members will be happier overall because of it.

Knowing and liking others in the space makes it a better place to be. New members who are referred by others will get integrated into your community faster, which makes them more likely to stay longer.

Plus, existing members who make referrals are adding friends and colleagues in the process, making them happier in the process.

The community gets even better for everyone and the cycle continues.

7. Increased loyalty

I’ll take the liberty again and expand on another idea that was mentioned but not cited as a reason for the disproportionate results: increased loyalty.

The longer your members stay with your company, the more loyal they will be (my non-scientific theory). They’re invested.

They may have gone through ups and downs with your company, but if you do right by them, they will become even more loyal, stay longer, buy more, refer more, and the cycle perpetuates.

This isn’t a perfect summary of the HBS article, but it paints a picture that helps wrap your head around why retention is so important to the profitability of your business.

P.S. Two years ago I wrote a long article on how to increase retention rates for your coworking space. My ideas have evolved since, but there are some good ideas worth reading.