Cost of customer churn too hard to ignore

Regardless of what you call it – defection, attrition, turnover, changing providers, you name it – customer churn is a painful reality doing business. Even the largest and most successful companies are not immune.

In Australia, our businesses on average lose between 6-8 percent of their customers each year, with our utilities and telecommunications sectors taking biggest beating with losses of between 20-25 percent.

To add further insult to injury, our energy retail market boasts one of the highest rates of market churn in the world, worst affected being Victoria which at last count was seeing one in four customers head for the door each year!

Much of this churn has been attributed to the liberalisation of energy retailing which has seen a succession of new entrants streaming into the market.

While competition at the best of times is good, constant switching between providers is significantly detrimental to profitability.

Australia’s health insurance sector – another group struggling under the yoke of unusually high customer churn – understands this all too well. It is seeing around 10 per cent of policy holders switching providers each year, which says health insurance industry consultant, Avnesh Ratnanesan, is putting $2 billion of revenue at risk on an annual basis.

While it is difficult, if not impossible, to determine what churn overall is costing Australian businesses, (these figures are not publicly available, in fact most businesses prefer not talking about customer attrition) best estimates put it at billions of dollars each year.

Sadly these losses, in the main, are viewed by most organisations as a part of doing business and something they have to live with!

The general consensus is that acquiring more customers and generating new business will in time balance out these unavoidable losses.

Regrettably, this thinking loses sight of the fact that it costs business 2-3 times more to acquire a new customer than retain an existing one (and in the case of the utilities sector, 6-7 times).

Businesses often forget that the cost of losing a customer is not just determined by the costs associated with recruiting replacement customers. There is also the loss of the ‘life-time value’ or the revenue the customer would ordinarily have brought in during their relationship with a business, not to mention the loss of revenue during on-boarding process.

These additional costs have the habit of just slipping under the corporate radar!

According to Sanjivrao Katakam, Principal Consultant – Energy & Utilities, Wipro, in India – who has worked extensively in the utilities sector around the world, including Australia, losing customers also has implications beyond loss of revenue.

This includes the loss of market share, a decline in brand image, not to mention the perilous threat of acquisition should a company be perceived to be haemorrhaging customers!

Tide is turning for customer retention

However, the good news is that despite the prevailing acceptance that customer attrition is part and parcel of doing business; the global tide is now turning.

More and more businesses are now no longer prepared to cop a financial belting and increasingly turning their attention to customer retention.

They are increasingly sharpening their focus on better understanding the key drivers of churn and how to step in and address an issue before it becomes a full-blown problem and a customer leaves.
Are you one of these more forward-thinking, progressive businesses? Do you believe churn is not something we should passively accept but rather something we should actively look at reducing?

Go to the Customer Churn Cost Savings Calculator to find out how much churn is costing your business.

Caring

Do we really care about keeping customers?

Apparently not! Over the past year or so I have been chatting to business managers and friends on the topic of being smarter about servicing customers … not just giving customers online self-service, but really putting in the effort into making life easier for them to stay our customers.

In these conversations, I have been genuinely surprised by the focus on customer acquisition and the apparent lack of concern for customer retentionIn fact, the more I looked into the issue, the more I realised that Australian businesses overall view customer churn as a painful reality of business and something they have little control over.

Basically, it’s been put in the ‘too-hard basket’.

For starters, there’s no one person or department stepping up and taking responsibility for customer churn. On top of that there a huge misalignment between sales and service in businesses.  Sales people are rewarded for the customers they bring on board, irrespective of whether they are a perfect fit or not and with total disregard for their longer term prospects.

Sadly it is often the service team that is left to pick up the pieces when the sales team gets it wrong and customers are sold the wrong product or service!

Growing global groundswell to managing retention

Despite the somewhat gloomy picture I have painted I am happy to report that there is a growing global groundswell to more effective customer retention.

This has resulted in the emergence of a brand new practice area, ‘customer success’, and is seeing businesses increasingly focussing their attention on customer retention and systems and processes aimed at keeping their customers happy.

Think of the cost to business and the unnecessary effort for customers in the current ‘acquire – churn – acquire’ way of doing business.  According to Harvard Business Review “If you’re not convinced that retaining customers is so valuable, consider research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) that shows increasing customer retention rates by 5% increases profits by 25% to 95%.”

“In many industries, hyper-competition has eroded traditional product and service advantages, making customer experience the new competitive battlefield,” said Jake Sorofman, research director at Gartner…. The reality is that focusing innovation on new products — and even new business models — is subject to shrinking periods of competitive advantage.”

The big question is: are Australian businesses embracing this new thinking?

Are we moving away from ploughing millions into new customer acquisition and truly getting behind improving customer retention through better customer experience. More importantly, are we doing a better job holding on to them than we have up until now?