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Cultivate Loyal Customers: The Value of Defection Management

John Tschohl, called the “guru of customer service,” by USA Today, Time and Entrepreneur magazines, is a best-selling author, service strategist and president of Service Quality Institute. John is a regular contributor to the Desk.com Blog Expert Corner series

Businesses commonly lose 15-20% of their customers each year, but when you cut this in half, the average growth rate more than doubles. For example, a 5% change in the rate of retention – keeping more loyal customers – can increase profit 25-100%.

So goes the conventional wisdom put forth by Frederick Rieschheld, former director of Bain & Co.’s customer retention program and W. Earl Sasser, professor at Harvard Business School more than 15 years ago.

Despite its vintage, I would have to say that this is still the most powerful customer service research I’ve seen over the last couple of decades.

So why do most companies still let customer defections slide?

Tracking the real cost of customer defections

Regardless of the profit impact of reducing customer defections, accounting systems don’t capture the value of a defection prevented, reconsidered or reversed. Nor do businesses even track numbers of defections. As a result, executives vastly underestimate the cost of losing loyal customers. Most accounting systems focus on current-period cost and revenues, ignoring expected cash flows over the lifetime of a customer.

So how should you go about proving that reducing customer defection and cultivating more loyal customers can significantly contribute to your business’ bottom line? You need to develop a defection management program.

A case study

My company conducted a survey of large Plasma Group to determine impact of defections. This center operates from 17 locations with some 300 employees. We found that annual “value” of each donor was $5,035.88.

The statistics were based on these findings:

Defection Rate 6 %/40,600 donors per year
Lifetime of typical 41 months/3.4 years loyal donor
Lifetime total donations 16 liters by loyal donor

Fair market value of loyal donor’s plasma            $11.4loyal donors plasma

$11.48

Average profit on one liter of plasma after manufacturing

$40

Profit provided by loyal donor over typical lifetime

$6,560

 

We also found:

Revenue Loss, 1 Year $103,320,000
Lifetime Revenue Loss, All Defections $351,288,000
Profit Loss, 1 Year, All Defections $59,040,000
Lifetime Profit Loss, All Defections $200,736,000
Total Loss, 1 Year, All Defections $162,360,000
Total Loss, Lifetime, All Defections $552,024,000

 

Whenever a single donor defected, lifetime loss to the plasma group was $18,040. One donor!

Making the case for a defection management program

Determine your current annual defection rate. Determine the life of a loyal customer and how much they spend each year over their customer lifetime. Then calculate your total loss in sales and your total profit loss – and then the grand total of all losses. At this point you will probably have cardiac arrest. The losses for most firms will be in the millions. Enter the necessary detail into this formula:

  1. Compare the cost of acquiring a new, loyal customer (includes marketing, advertising, sales, etc.).
  2. Assemble employees, supervisors, and managers into focus groups charged with the task of listing the causes for defection. When a steady customer drops out, call and ask the reason for the defection.
  3. Interview front-line employees. They see customers come and go and they usually know the primary causes for defections. You can also send surveys to former customers, including an inducement for them to reply. Telephone and in-person interviews with defecting customers are also effective.
  4. Monitor conversations on social media to see what people are saying about your product/service and why they are no longer happy with your company.

Implementing a defection management program

  1. Create SWAT teams. Assemble an action group of your most proficient employees. Their job: to contact defecting customers and to persuade them to give the company another chance.
  2. List actions to reduce defections. Prepare a list for individuals, for departments, and for the entire organization.
  3. Train employees. Implement expanded quality service training (or new approach or content) every six months, since employees will not change customer service practices for life in reaction to one-shot training. Train the entire work force. Cost of training is a small fraction of potential growth in sales and profit.
  4. Maintain momentum. Issue monthly reports of declines in defection rate and monetary savings related to defection rate. Share this with the entire workforce.
  5. Recognize, praise, and compensate. Reward those employees who have been responsible for a zero defection rate. Usually, I focus on recognition; but savings can be so large that you ought to share some of it with employees.

Of course, your everyday customer service efforts are a key part of this equation to reduce customer defections. Poor service is responsible for 40% of customer defections, according to a study by Booz, Allen & Hamilton Inc. Therefore, evaluating the results of your customer service strategy and plans should be an important exercise in conjunction with your other defection management efforts.

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