Why is it that businesses spend 80% of their marketing dollars going after new customers and clients when it is much more profitable to cultivate and maintain the customer relationships they already have?

It is estimated that an average company loses half its customers every five years. Unfortunately, 70% of those lost customers are turning to another service provider or supplier because they feel ignored in their current business relationship.

When that happens, the impact on a business can be very costly, because replacing a lost customer can be six to seven times more expensive than the cost to retain that customer. In addition, the company is losing the value of a repeat customer who spends on average 33% more than a new one will. And repeat customers are also the best source for referrals.

It can certainly pay to ramp up customer retention efforts. According to the Harvard Business Review, a 5% improvement in customer retention improves a company’s profitability anywhere from 25 to 95%.

In fact, this has been found to be the case not just for businesses but for nonprofit organizations as well. A 2007 study sponsored by the Association of Fundraising Professionals, the Fundraising Effectiveness Project, shows that while charities are effective in attracting new donors, improvements in donor retention could affect their fundraising revenue dramatically.

According to the study, fundraising revenue increased in 2005 by 10.5%, led by a two-thirds increase in revenue from new, recaptured and upgraded donors. However, the overall fundraising figure could have been much higher, if charities had not also suffered a 51.9% loss in donor revenue due to downgraded and lapsed donors. The study found that for every six donors charities are attracting, five other donors stop supporting the organizations.

So just as businesses have to nurture their existing customers while seeking new ones, nonprofits would do well to recognize and cultivate their established donors even as they beat the bushes for new ones.