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Retaining Customers Part III: Invest to Prevent Customer Defections

This is the third of a series of four blogs devoted to the topic of customer retention. Read Part 1 and Part 2.

Bill Bleuel

Every customer that you keep represents at least three that you don’t have to attract. Numerous research studies indicate that the cost of acquiring a new customer usually runs from two to four times the annual cost of keeping an existing customer. Obviously, an effective customer retention strategy translates into profits.

It has been estimated that most companies spend about 98 percent of their time reacting to problems and less than 2 percent preventing them. The first, most important, way to prevent customer defections is to identify and define each problem from the customer’s vantage point. This blog suggests several ways to retain customers once you understand the problems and their ramifications.

Superior service and database management provide your best defense against customer defections. Service provides the opportunity to solve customer problems and build partnerships; the database serves as a vehicle to personalize customer communication and enhance your relationships.

Establish a Customer Baseline

In order to develop a successful retention program, you must have accurate and complete information about your customers. In my experience, at least 5 percent of the information in a typical customer database is inaccurate. Errors translate into wasted money, customer aggravation and loss of credibility.

You should know the following basic information about your customer base:

  • Number of current customers
  • Average number of new customers you expect to acquire within the next month/quarter/year
  • Average number of existing customers you expect to lose within the next month/quarter/year
    • Where will those customers go?
    • Why will they leave you?
    • How will you know they’ve left?
    • What will you do to retrieve them?

Customer Service as a Retention Strategy

A successful service strategy serves two vital functions: defense and opportunity.

  1. Defense: Quality service provides a powerful barrier against competitive threats because it gives you the chance to:
    • Ensure your customer’s successful experience with your products;
    • Demonstrate your competence, expertise and reliability;
    • Discover customer needs, problems and desires; and
    • Earn credibility and respect.
  2. Opportunity: Quality service also provides the opportunity to:
    • Build a meaningful, interactive relationship with each customer;
    • Earn their good will and trust; and
    • Motivate purchase/re-purchase decisions.

Both ingredients are critical to developing and sustaining a genuine interactive partnership.

The delivery of consistent quality service requires an unmitigated commitment to delighting customers. A superior customer service attitude must permeate an organization, where all persons take responsibility for participating and contributing fully to the enterprise.

Everyone within the organization must follow the guideline that, when a problem does arise, “fix the customer first,” then solve the customer’s problem. This sequence supports the goal of building customer partnerships that will endure over time, rather than reacting to a series of isolated problems.

The best ideas and plans are useless without people to implement them. In order to achieve an attitude of respect and concern toward customers, your organization must invest in each employee over time. Customer service is a multifaceted process that occurs inside and outside the boundaries of an organization. When employees have the training, tools, support, and appreciation of their company, they are eager to act in the mutual best interest of the company and the customer.

Understanding Customer Defections

Usually, customers defect because they are disappointed, they feel let down, and their expectations are not met. If you don’t really know what customers value, how can you possibly succeed in delighting them?

Customer expectations derive from wishes and wants as much as actual needs. This explains why customer satisfaction does not guarantee customer loyalty. You may respond adequately to a customer’s specific service need but fail to understand their expectations and their desires.

For example, the real issue may be that a customer wants to feel appreciated for giving you their service business when any number of other competitors could comply. Unless you ferret out their expectations, you may miss opportunities to delight your customers. Or you may realize the customer’s wish to be appreciated but not know what “appreciation” means to the customer.

The key to pre-empting defections is to focus on the root causes.

Customers defect for two primary reasons:

  1. The need for your product or service has ceased, or
  2. Your offering has failed to satisfy their needs in some way.

Some of the less obvious barriers to customer retention may be understood by answering the following questions:

  • Are defections seasonal?
  • Are there price differentials during the product/service lifecycle?
  • Do defections have a pattern: location, person, lifecycle phase?
  • Is there a correlation between retention rates and price changes?
  • What is the industry norm for customer longevity?
  • Which company has the best retention rate? Why?
  • In what specific ways do your customers feel valued and appreciated?
  • In what ways do your customers feel your complacency or indifference?
  • In what ways do your customers feel intimidated and/or ignored?

Defections of good customers cost you dearly. You lose base profit as well as profit from incremental purchases, profit from reduced operating expenses, profit from referrals and profit from price premiums.

Christine S. Filip, president of marketing, design, and public relations firm, The Success Group, wrote in the CPA Journal that when a good customer leaves, you will need at least three new ones to replace the revenue stream.

It is estimated that defecting customers will tell eight to 10 people about their negative experience with your company. One in five will tell 20 people.

Conversely, a referral from a loyal customer has a 92 percent retention rate vs. 68 percent for a customer acquired from advertising.

This is just one measure that indicates the value of word-of-mouth impact.

Database Marketing

An accurate, comprehensive database enables one-on-one marketing to your best customers. When you communicate individually with your customer, that communication tells them that you know them, remember them and care about their needs.

Personal attention, empathy and extra effort will work to:

  • Increase response rates,
  • Provide direction for product and service development efforts,
  • Improve sales forecasting,
  • Provide opportunities to test your marketing mix, and
  • Support your marketing decision making process.

In order to function as a viable resource, a company must have an effective marketing database that includes:

  • ID of customers and prospects by name and address,
  • Individual account numbers for each customer,
  • Relevant demographic information,
  • Purchase information such as transactions, payment records, records of inquiries and interactions with the company, product preferences and interests, competitive usage, and information about corporate culture.

Obviously, this data is virtually worthless unless you can manipulate and manage it to discern trends, patterns, and histories. Only then can you capitalize on successes, identify concerns and use the information as the basis for decision-making.

Customers want to feel like individuals, not prospects, consumers or targets. A good customer database can provide a foundation upon which to build authentic customer partnerships through welcoming new customers, thanking existing customers and inviting new prospects to begin a relationship with you.

The database can be used further to:

  • Examine purchase behavior information to forecast incremental sales and profit potential;
  • Correlate, cross-reference, and analyze data to understand customer preferences and trends;
  • Personalize messages, identify and contact new customers, enhance cross- selling opportunities and sell more (and more often) to existing customers;
  • Provide special benefits and services not available to the general public; and
  • Speak with one congruent, consistent voice (image and vision) through collateral material, letters, press releases, signs, graphics and departmental communications.

Survey Data as Intelligence

Building and maintaining a current, accurate, comprehensive customer data base is much more easily said than done. Compilation, management, and maintenance requires a significant allocation of resources (people, time, money), along with a total commitment to customer service and retention throughout your company.

The goal is to increase your ability to offer each of your best customers the products and services they need and want, as well as to identify and communicate with potential customers who have similar characteristics.

Proprietary customer information can be collected through:

  • Customer interaction records (purchase transactions, service calls, payment history);
  • Customer surveys (written and verbal) that measure satisfaction, loyalty, intent to purchase, perception of quality, expectations and outcomes; and
  • Focus groups (targeted population segments).

Secondary data, such as industry statistics and census data, provides a general context and reference for comparisons, market share calculations, trend analysis, and other strategic marketing functions.

Of course, the most difficult task is to gather accurate competitive information and substantive new customer information. I suggest creative ethical sleuthing and discerning investment in well-chosen targeted research.

A few important things to remember about customer surveys:

  • Define clearly what you intend to measure (satisfaction, dissatisfaction, loyalty, retention, quality, service), and why you want to know it.
  • Experience your company from your customer’s perspective.
  • Understand the following:
    • The relative scale of loyalty within your customer base;
    • The strength of your relationship relative to your competition;
    • The relevant antecedents to loyalty;
    • he relative effect of various interactions, activities and consequences.

Because profitability depends on what customers actually do, not what they say they will do, you should include a process for reconciling customers’ intentions with their actions.

Building customer loyalty and improving retention have significant implications for profitability.

According to Filip’s article, a 5 percent improvement in retention rates can raise profits from 15 percent to 50 percent.

The most profitable firms enjoy retention rates of 93 to 95 percent; the average firm has a 78 percent to 85 percent retention rate. The cost of finding a new customer is five to six times more expensive than keeping a current one, so it behooves you to manage your customer retention rates proactively.

  • Pay close attention to your best customers. Act quickly (within 24 hours) on their requests and dissents.
  • Stay in touch with your customers. Be willing to hear accurately and integrate their feedback throughout your company.
  • Find out exactly why a customer defected. Act immediately to determine the possibility of rectifying the situation.

People seek relationships (personal and business) that are caring, honest and respectful. Superb service provides the foundation from which to develop and maintain genuine partnerships with your customers. In many companies, the customer service personnel have more contact with customers than the sales people.

Another point that is often overlooked is that customer service personnel get inside the customer organization much easier than the sales people who most often have to get in through the front door. The customer service personnel usually bypass the front door and go directly to the area with a problem. Once inside, it is not uncommon for the customer service personnel to understand what is going on inside the customer organization.

Build your customer database right. Record everything that your customers do, say or buy, then use the information to fine-tune future communications. As you develop trust and credibility with your customers, they will reward you with their business and their referrals.

The bottom line is that companies need to understand the value of keeping a customer. Secondly, companies should spend more time and energy to preventing problems. Finally, companies should keep an accurate data base of their customers.

When do you resort to defensive or angry responses with customers?

Leave your answers in the comments!

This post first appeared on my blog, The Customer Institute, on May 17, 2008.

Related Resources in the Graziadio Business Report

Cultivating the Customer Asset by William Bleuel, PhD

Customer Satisfaction Measurement by Charles W. Fojtik, DBA, and John D. Nicks, PhD

Calculating the Strategic Value of Customer Satisfaction by Chic Fojtik, PhD

Author of the article
Bill Bleuel, PhD, Professor of Decision Sciences
Bill Bleuel, PhD, Professor of Decision Sciences
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