1. Learning From Customer Defections
Management Analysis
Summer 2001

2. Importance of Defections
On average, US companies lose half of their customers every five years
Companies do not usually measure customer defections
Companies make little effort to prevent defections
Companies fail to use defections as a guide for improvements

3. What Do Defections Signal?
Clearest possible sign that customers see a deteriorating stream of value from the company
A climbing defection rate is a sure predictor of diminishing flow of cash from customers to the company – even if customers are replaced
New customers cost money to acquire
Old customers tend to produce greater cash flow and profit potential than new customers

4. Why Don’t Companies Pay Attention to Defection Rates?
Don’t understand the intimate causal relationship between customer loyalty, cash flow and profits
It is unpleasant to examine failure – might be hazardous to one’s career
Customer defection is often hard to define
Sometimes it is hard to define who the customer is – especially customers worth keeping
Extremely hard to identify root causes of customer defections and learn appropriate lessons

5. Why Don’t Companies Pay Attention to Defection Rates?
Getting the right people to learn lessons from customer defections and take appropriate action is a difficult challenge
Difficult to conceptualize and set up mechanisms that turn the analysis of customer defections into an ongoing strategic system that is closely supervised by top management and responsive to changing circumstances

6. Value of Long Term Customers
Longer a customer stays with a company the more that customer is worth
Long term customers
Buy more
Take less of a company’s time
Are less price sensitive
Bring in new customers
Reducing defections by five percentage points can often double profits

7. Customer Retention Best indicator of strategic success or failure
Best predictor of future value creation
Basic building block of profitable growth

8. Analyzing Failure Overcome preoccupation with success
Reduce focus on benchmarking for the source of others’ success – difficult to replicate entire system of interactions
Psychologically and culturally difficult and threatening to examine failure closely
Usually examine failure in order to place blame

9. Defining Defection Total defectors Partial defectors
Large and small defectors important
Partial defectors
Reduce share of wallet
Which defectors are worth saving?
Interview defectors
Listen carefully to reasons for defection
Avoid temptation to rationalize complaints
Listen, learn and take corrective action
Make tracking and responding to customer defections systematic

10. Identifying Core Customers
Learning from Customer Defections
Identifying Core Customers
Not always easy
One of the most critical strategic processes
Deep discussions about mission and ultimate goals
Three crucial questions
Which customers are the most profitable and loyal?
Which customers place the greatest value on what you offer?
Which of your customers are worth more to you than to your competitors?
Most profitable and loyal?
Spend more money
Pay bills more promptly
Require less service
Prefer stable, long-term relationships

11. Important Measurements
Life cycle profit pattern
Net present value of each customer segment
Share of customer wallet
Average customer retention by segment, age, and source

12. “Even in a mass-market business you don’t want to attract and retain everyone …
The key is to first identify and attract those who will value your service and then to retain them as customers and win the largest possible share of their lifetime business.”
Colin Marshall Chairman British Airways

13. Secret to Sustainable Growth
Find and keep the right customers – core customers
All the techniques of root cause defection analysis can be used for new customer acquisition
If advertising, sales incentives, or marketing promotions draw unprofitable or marginal customers – the sooner you know it and fix it – the better

14. Root Cause Analysis The Five Why’s Technique
Usually have to ask why something happened at least five times to get to the root cause of a failure
Review the history of a customer’s interactions with the company – customer corridor
Identify significant life events that present new opportunity to create value for customers
In most cases, a series of events leads slowly to a decision to seek better value elsewhere

15. Steps of Failure Analysis
Have the right people do the interviewing
Senior managers and respected frontline personnel – branch managers or leading salespeople
Determine which defectors are worth calling
Spend what it takes to talk to a representative sample of the true defectors who were core customers
Reconvene to discuss what everyone is hearing in interviews
Resolve problems with the process
Share best practices
Develop preliminary list of corrective actions

16. Steps of Failure Analysis
Reconvene to discuss what everyone is hearing in interviews
Resolve problems with the process
Share best practices
Develop preliminary list of corrective actions
Develop an action plan based on results of defector interviews
Be careful not to mistakenly identify potentially valuable customers as dispensable
Make appropriate changes in measures, incentives and career paths

17. Steps of Failure Analysis
Make appropriate changes in measures, incentives and career paths
Make failure analysis permanent
Build a measurement system to monitor whether and how effectively the solutions are reducing defection rates
Percentage of customers giving an increasing vs. decreasing share of wallet
Defection rate for each customer group
Frequency of root causes
Keep senior managers plugged into customer feedback