Customer acquisition may be rising up the list of business priorities according to experts, but any business that doesn't have retention and profitability under control is heading for trouble. Jack Springman takes a strategic look at customer retention.
Gartner’s prediction is that acquiring new customers will rise to the second highest priority for businesses in 2010. Such a reaction to signs of upturn after a long recession is understandable; but such a focus risks alienating existing customers if they notice special deals offered to new customers are not available to them. Their natural response is to search for new customer deals being offered by alternative suppliers, with a merry-go-round resulting.
No-one wins from this – not businesses whose marketing spend creates a prune juice effect (current customers exiting as fast as new ones arrive); and not customers who expend time and emotional energy moving from one company that does not care for them to another whose feigned interest evaporates as soon as a contract is signed.
Not putting existing customers first is probably the biggest marketing sin most businesses can commit. Nothing shows professions as hypocritical more clearly than solely focusing on the financial needs of the business and assuming customers will accept their lot. Marketing is the external-facing function of the business, the one that listens to customers, seeks to understand their needs and gives them a voice in meetings where otherwise the internally-focused priorities of functions such as finance, logistics and manufacturing would predominate. It acts as a fulcrum, balancing the business interests with those of customers. If marketers lose sight of this role and become too internally-aligned, then customers have no-one to advocate on their behalf. And ultimately it is self-defeating as failure to defend customers' interests inevitably results in a rise in churn.
The ideal way to acquire new customers is referrals from existing ones. This has long been recognised and the practice of rewarding referrals with a gift pre-dates the conception of loyalty schemes. When done well (i.e. when their expectations are taken into account) thanking, recognising or rewarding customers for referrals accentuates the positive emotions that generated the referral in the first place; making them feel even more valued, acknowledged and respected – the cornerstone emotions of excellent experiences.
If customers are not recognised for their loyalty or referrals – or worse, they are penalised relative to new customers – the message conveyed is you are not important to us. Delivering a great experience to current customers is the foundation of any sustainable growth initiative and acquisition strategies that violate this principle, relying on inertia to limit defection, will ultimately cost more than they generate.
Walk the talk
Customer strategy is defined by four outcomes – acquisition, growth, retention and profitability. In a fast growing and immature market where there is significant untapped demand, it is logical for businesses to prioritise acquisition, particularly if switching costs apply and there are financial benefits to maximising the installed base. But for most businesses this should be inverted, with customer retention and customer profitability the key priorities. Any business that has both under control is viable - customers can be served profitably with a product or service that meets their needs. Any business which doesn’t is heading for trouble.
Inevitably, divergence of interests – the business’ and customers’ - creates some tension between the two. Improving profitability involves reducing costs to serve or increasing prices paid (typically by limiting discounts being offered and establishing control via pricing corridors), both of which risk generating churn. But such churn is necessary where unprofitable customers are concerned.
Understanding customer profitability (or ideally lifetime value) to ensure the most attractive customers are prioritised is the first step towards optimising retention. The second involves understanding the drivers of churn – both to identify those most at risk and to remove the causes.
Identifying customers most likely to leave starts with reviewing the histories of those that already have. Transaction patterns often change in the period immediately prior to defection – whether signalled formally by ending a contract or de facto through the absence of further purchasing - with activity becoming less frequent or smaller amounts being purchased. Identifying typical pre-defection behaviour and monitoring current customers for similar patterns reveals customers potentially at risk.
Such analysis helps identify who may leave but not why customers defect and what should be done to reduce churn. Understanding the reasons for defection requires broadening the pattern analysis of departing customers to a broader data set – for example numbers of complaints and performance on key customer-facing processes such as delivery completion, invoice accuracy, query response times and complaint resolution. (Data sets for both departing and remaining customers need to be compared to reveal which are only linked to churn.) These insights can be used both to refine the defection risk algorithm and highlight where skills need to be improved or processes made more robust.
However, this may be insufficient to explain all defections. Also it can only identify correlation, not causality (events that correlate with defection may themselves be the effect of some deeper, less visible cause). Confirming the genuine driver requires root cause research with recently defecting customers. This technique uncovers the real influencers of behaviour – digging below the initial, superficial responses – by asking five ‘Why’ questions, five being necessary to identify the real or root cause of a problem. Responding to the first answer given could be both costly and ineffective – as the following example shows.
Reviewing historic transaction and interaction patterns of defectors and performing root cause research with customers will identify the causes of churn and what should be done to reduce it – both with at-risk customers and generally.
Problems will always arise in customer relationships but it is how they are managed to prevent recurrence (both in terms of specific instance resolution and general process modifications) that defines the true ethos of the company – how customer-centrically it walks as opposed to how customer-centrically it talks.
Jack Springman is head of corporate advisory group at consulting and systems integration firm Business & Decision.
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