Reducing customer defection


There are five main steps a company can take to reduce the defection rate.
First, the company must define and measure its retention rate. For a magazine, the renewal rate is a good measure of retention. For a college, it could be the first-to second –year retention rate, or the class graduation rate.

Second, the company must distinguish the causes of customer attrition and identify those that can be managed better. The Forum Corporation analyzed the customers lost by 14 major companies for reasons other than leaving the region or going out of business: 15 percent switched because they found better product; another 15 percent found a cheaper product; and 70 percent left because of poor or little attention from the supplier. Not much can be done about customers who leave the region or go out of business, but much can be done about those who leave because of poor service, shoddy products, or high prices.

Third, the company needs to estimate how much profit it loses when it loses customers. In the case of an individual customer, the lost profit is equal to the customer’s lifetime value—that is, the present value of the profit stream that the company would have realized if the customer had not defected prematurely—through some of the calculations outlined above.

Fourth, the company needs to figure out how much it would cost to reduce the defection rate. As long as the cost is less than the lost profit, the company should spend the money.

And finally, nothing beats listening to customers. Some companies have created an ongoing mechanism that keeps senior managers permanently plugged in to front-line customer feedback. MBNA, the credit card giant, asks every executive to listen in on telephone conversations in the customer service area or customer recovery units. Deere & Company, which makes John Deere tractors and has a superb record of customer loyalty—nearly 98 percent annual retention in some product areas –uses retired employees to interview defectors and customers

Forming Strong Customer Bonds

A marketing expert has identified three retention-building approaches adding financial benefits, adding social benefits, and adding structural ties.

Adding Financial Benefits

Two financial benefits that companies can offer are frequency programs and club marketing programs. Frequency programs (FP) are designed to provide rewards to customers who buy frequently and in substantial amounts. Frequency marketing is an acknowledgment of the fact that 20 percent of a company’s customers might account for 80 percent of its business. Frequency programs are seen as way to build long-term loyalty with these customers, potentially creating cross-selling opportunities in the process.