Learning From Customer Defections

1. Learning From Customer Defections Management Analysis Summer 2001

2. Importance of Defections • On average, US companies lose half of their customers every five years • Companies do not usually measure customer defections • Companies make little effort to prevent defections • Companies fail to use defections as a guide for improvements

3. What Do Defections Signal? • Clearest possible sign that customers see a deteriorating stream of value from the company • A climbing defection rate is a sure predictor of diminishing flow of cash from customers to the company – even if customers are replaced • New customers cost money to acquire • Old customers tend to produce greater cash flow and profit potential than new customers

4. Why Don’t Companies Pay Attention to Defection Rates? • Don’t understand the intimate causal relationship between customer loyalty, cash flow and profits • It is unpleasant to examine failure – might be hazardous to one’s career • Customer defection is often hard to define • Sometimes it is hard to define who the customer is – especially customers worth keeping • Extremely hard to identify root causes of customer defections and learn appropriate lessons

5. Why Don’t Companies Pay Attention to Defection Rates? • Getting the right people to learn lessons from customer defections and take appropriate action is a difficult challenge • Difficult to conceptualize and set up mechanisms that turn the analysis of customer defections into an ongoing strategic system that is closely supervised by top management and responsive to changing circumstances

6. Value of Long Term Customers • Longer a customer stays with a company the more that customer is worth • Long term customers • Buy more • Take less of a company’s time • Are less price sensitive • Bring in new customers • Reducing defections by five percentage points can often double profits

7. Customer Retention • Best indicator of strategic success or failure • Best predictor of future value creation • Basic building block of profitable growth

8. Analyzing Failure • Overcome preoccupation with success • Reduce focus on benchmarking for the source of others’ success – difficult to replicate entire system of interactions • Psychologically and culturally difficult and threatening to examine failure closely • Usually examine failure in order to place blame

9. Defining Defection • Total defectors • Large and small defectors important • Partial defectors • Reduce share of wallet • Which defectors are worth saving? • Interview defectors • Listen carefully to reasons for defection • Avoid temptation to rationalize complaints • Listen, learn and take corrective action • Make tracking and responding to customer defections systematic

10. Identifying Core Customers • Not always easy • One of the most critical strategic processes • Deep discussions about mission and ultimate goals • Three crucial questions • Which customers are the most profitable and loyal? • Which customers place the greatest value on what you offer? • Which of your customers are worth more to you than to your competitors?

11. Important Measurements • Life cycle profit pattern • Net present value of each customer segment • Share of customer wallet • Average customer retention by segment, age, and source

12. “Even in a mass-market business you don’t want to attract and retain everyone … The key is to first identify and attract those who will value your service and then to retain them as customers and win the largest possible share of their lifetime business.” Colin Marshall Chairman British Airways

13. Secret to Sustainable Growth • Find and keep the right customers – core customers • All the techniques of root cause defection analysis can be used for new customer acquisition • If advertising, sales incentives, or marketing promotions draw unprofitable or marginal customers – the sooner you know it and fix it – the better

14. Root Cause Analysis • The Five Why’s Technique • Usually have to ask why something happened at least five times to get to the root cause of a failure • Review the history of a customer’s interactions with the company – customer corridor • Identify significant life events that present new opportunity to create value for customers • In most cases, a series of events leads slowly to a decision to seek better value elsewhere

15. Steps of Failure Analysis • Have the right people do the interviewing • Senior managers and respected frontline personnel – branch managers or leading salespeople • Determine which defectors are worth calling • Spend what it takes to talk to a representative sample of the true defectors who were core customers • Reconvene to discuss what everyone is hearing in interviews • Resolve problems with the process • Share best practices • Develop preliminary list of corrective actions

16. Steps of Failure Analysis • Reconvene to discuss what everyone is hearing in interviews • Resolve problems with the process • Share best practices • Develop preliminary list of corrective actions • Develop an action plan based on results of defector interviews • Be careful not to mistakenly identify potentially valuable customers as dispensable • Make appropriate changes in measures, incentives and career paths

17. Steps of Failure Analysis • Make appropriate changes in measures, incentives and career paths • Make failure analysis permanent • Build a measurement system to monitor whether and how effectively the solutions are reducing defection rates • Percentage of customers giving an increasing vs. decreasing share of wallet • Defection rate for each customer group • Frequency of root causes • Keep senior managers plugged into customer feedback