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The Art & Science of Retention – Part 4 – The Cost of Failure

Retention – The cost of failure.

The stock market is beginning to award an increasing premium to those enterprises that demonstrate a greater ability to retain customers. Naturally many corporations now report back to shareholders on their progress in securing organic growth. So chances are your competitors are actively seeking ways of engaging to lock-in their customers – many of whom are likely shared with your brand. For anyone with an established brand, if customer retention isn’t their first priority then…

The cost of losing a customer is expensive and becoming more so every day A 2008 CMO council study reported that 31% of the company marketers surveyed reported a 10%+ annual churn rate. Telco’s routinely experience churn rates in the 20% range. Reicheld reported in 1993 that the cost of acquiring new customers to be 5 times that of retaining an existing customer. Another study by Media Marketing* documented that the probability of making a sale to active customers to be 60-70% versus a 5-20% probability to new buyers/customers. Whatever metrics you ascribe to – the cost of losing a profitable customer and cost of acquiring a new customer are expensive.

*The original research by Dr. Terry Varva was published by Doug Proden, “How to Win Back Lost Customers”, Direct Marketing to Business Report, October 1995, pg 7.

Nothing personal… but there’s someone else: To make matters even more daunting, keeping customers satisfied is by no means easy nor enough to sustain brand stickiness. Reicheld (Loyalty Effect) reported, “In business after business, our research has shown that 60-80% of customers who defected had said on a survey just prior to defecting that they were “satisfied’ or “very satisfied”.

Part of the reason for the lack of traction with customer satisfaction rankings is that they do not adequately capture the safeness of equality as illustrated in this EquiTrend brand study from Harris Interactive which reported very little consumer perceived quality differentiation between the first 3 ranked brands in the retail, online, financial and Telco sectors.

Quality

Brand Rank

Retail Sector

Online Sector

Financial Sector

Telco Sector

1st rank

7.24

7.48

7.00

6.83

2nd rank

7.08

7.20

6.87

6.75

3rd rank

7.07

7.20

6.87

6.67

Source: Building Brands One customer at a time, Ramesh Venkat.

Others note the ‘disconnect’ to be linked to a non-linear satisfaction relationship – that customers need to encounter threshold levels of successes or failures before their attitudes translate into changed behavior – a criterion that is further impacted by time lags between events.

Six waves of customer satisfaction and sales data for about 250 retail outlets over the period 1998–2001 for a publicly held supermarket company – constructed a statistical model to address nonlinearities and asymmetries in the satisfaction-sales performance links. Customer satisfaction and retail sales performance: An empirical investigation Miguel I. Gómez, Edward W. McLaughlin and Dick R. Wittink. doi:10.1016/j.jretai.2004.10.003

A longitudinal examination of the asymmetric impact of employee and customer satisfaction on retail sales found a need to focus and achieve the threshold satisfaction levels on those attributes where consistent performance is linked to sales. Study based on 125 store US specialty goods retailer with over 34,000 customer questionnaires and 3,900+ employee questionnaires. Timothy L. Keiningham et al. Journal: Managing Service Quality. DOI:10.1108/09604520610686124

Passive Buyers: Is it any wonder then the basic issue of competitive differentiation and relevance remain foremost in importance while being the hardest to achieve. This simply reflects the reality that many customers typically do not have exclusive relationships with brands when they can embrace the benefits of a risk-less brand polygamy long before resorting to an outright defection.

Therefore if the brand is unable to engage in higher level relationships, customers have no choice but to be passive buyers, bereft of motivation. In fact a 2 year McKinsey study (Source: Customer retention is not enough) of 1200 customers spanning 16 industries reported that ‘inertial’/passive customers accounted for 13-31% of the customers studied. For McKinsey, the greater opportunity lay not in trying to mitigate against outright customer defection but rather in seeking to influence expenditure shifts between competing offerings. In their calculations, managing the upward migration of a brand’s share of requirements with engaged customers could have as much as ten times more value than concentrating on defections alone.

This is further corroborated by an IBM study of the retail sector (Why advocacy matters to apparel retailers ) which reported that a greater proportion of brand advocates (38%) will spend at least $600 compared to 27% of non-advocates at that threshold level.

For those prepared to listen, the customer will be sending important messages as to their level of engagement with the brand. A number of approaches have been outlined in the aforementioned published studies.

Another method for consideration is presented in this author’s paper (See:Brand Momentum) which attempts to outline the quantitative (Velocity) and qualitative (Direction) characteristics of a customer’s relationship across the 5 key links of a brand’s experience chain.

In addition The Harris Report (See: Sept 2006, Vol1, Issue 2) has a good review of Second LifetimeValue/Customer Winback strategies which at its core, seeks to help identify the reason for the defection (pushed versus pulled) and a winback profitability determination.

Next: Word of Mouth

One Comment leave one →
  1. September 4, 2008 7:07 am

    Hey Miro, absolutely great to have found you on linked in (Leading Loyalty Marketing Professionals)……have been going through your articles/thoughts on retention……and must say I couldn’t agree more….I have been a Direct Marketing / CRM practitioner for 13 years now. Have been on the agency side initially (Draft, Wunderman, JWT) and now have been on the business/brand owner side of the fence the for 5 odd years.

    I’ve been planing to put down my thoughts on paper for some time now, never got around to it….must say you have inspired me to start……..

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