Why employee and customer retention can be a vanity metric.
When I was a business owner, one of the metrics I was most proud of was our ability as a business to retain staff. At the time, I took great pride in the length of time people had worked with me. The same thing happened when I worked for a market leading coaching company. My client retention statistic was higher than the company average. At the time, a great deal of importance was put on this number across the business.
What’s the real impact of retention?
But in both instances, while these metrics were important, when taken to the extreme they hold your business back and become a vanity metric. I put too much importance on achieving a certain level without considering the impact of that number. Was a high level of employee retention matched by a higher level of profitability / productivity / innovation?
Looking back, I put too much importance on retention rather than profitability. Similarly when I was a licensed coach, I put too much emphasis on client retention as opposed to the impact my coaching was having. I was avoiding vulnerability by sticking with what I knew, rather than stepping outside of my comfort zone. It was comforting to retain clients and employees but it wasn’t challenging me as an owner or as a coach as much it could.
Why you should aim for less than 100%
I would suggest that for both employees and customer there is an optimal % retention that is ideal and this ideal % is lower than 100%. Now this might sound counterintuitive when considering this for the first time but let’s work through the logic:
Firstly if we consider employee retention the dangers of a 100% employee retention year on year could be some of the following:
Very little challenge to the status quo way of running the business
Stagnation in thinking and approaches
Employees being promoted beyond their skills into senior positions
I acknowledge higher customer retention is better than low retention. But, your current client base should also give you the turnover and profitability you’re looking for, and have the potential to grow further. Retaining the ‘wrong’ sort of clients is neither good for you or for them in the end. Frustration will grow in the relationship, as yours and their expectations start to diverge. So 100% customer retention could lead to some of the following challenges:
Less than optimal levels of profitability
Low referral levels
Limited customer lifetime value
Little collaborative learning opportunity
If we agree that a 100% retention is a vanity figure that is not worth chasing what is the optimal level?
The optimal level depends on two considerations. Firstly, the growth stage your business is at, and secondly the amount of structure you have in place within your business. During infancy and adolescence as your business is growing quickly then high retention generally is a good thing. This gives consistency and predictability to the way you operate. As this stage you need / want people around you that you know and you can trust. However as you go through adolescence, you could start to experience stagnation if you have too high staff retention and you are not bringing in enough new ideas, ways of working and best practice from other companies.
Be courageous
This is a difficult balancing act to achieve as you need to be courageous as the leader, you may need to let go long serving members of the team that have grown as far as they can grow, and you may need to restructure your organisation to bring in the level of newness need to avoid stagnation or slowing growth patterns.
I would encourage you to be brave and focus on the important metrics rather the vanity ones. You as the leader need to be challenged both by yourself and by others if you are to improve your leadership. So shed the familiar and embrace vulnerability to give yourself the best chance to move quickly through adolescence to the more profitable and stable zone of maturity.