What’s Driving Your Customers Away?
Retaining existing customers is a challenge for any business. But you can’t address an attrition problem without first understanding what’s driving your customers away.
There are many causes of attrition. Customers may be leaving for lower-cost options, for example. You can test this by looking at attrition rates in various price bands. Divide customers into thirds by price and examine whether the highest-priced third attrits more frequently and the lowest-priced third leaves less frequently. This may indicate if your pricing is out of line.
Customer dissatisfaction could be another factor. Test this through surveys that measure customer satisfaction—not just among existing customers, but those who have recently left. You’ll quickly discover whether your delivery or customer service operations have put you at a competitive disadvantage.
Your business could also simply be the victim of a bad economy. Test this by looking at customers in industries most affected by the downturn to see if their declines were particularly acute. You can also test through surveys that gauge customers’ overall spending activities.
We tested these hypotheses for one client in the telecom sector whose annual attrition rate was consistently 15 percent. Our analysis delivered several interesting conclusions:
• The economy was not a major cause. In fact, the downturn generated additional demand for the client’s products because customers were using teleservices as an alternative to face-to-face meetings.
• Price was only a moderate attrition driver. Prices in the highest third of customers were twice the average price, yet attrition was only 17 percent among those customers, vs. 15 percent for the middle third. Prices in the lowest third of customers were 0.5 times the average price, yet attrition was still 10 percent among those customers.
Interestingly, the price impact was asymmetrical: price increases drove significant attrition, but a lack of (or relatively slow) price decreases had only a moderate impact on attrition. The client had raised prices by up to 12 percent on some customers in the prior year and was hit with 14 to 17 percent additional attrition over the next three quarters. Customer surveys showed the price increase caused many customers to re-think their provider choice and solicit bids; as a result, these customers were able to lower their telecom costs subsequent to the price increase. The client rescinded the bulk of the price increase after three quarters, but the damage was already done.
We also uncovered a continuous flow of price chasers who negotiated discounts with the client, stayed for a year, then switched providers to receive even greater discounts. Our analysis showed that the client should be happy to see these customers leave, because they created little value for the business.
• Dissatisfaction with billing and customer service were significant attrition drivers, particularly among the client’s most valuable customers. Billing errors were not resolved quickly or easily, and the bills were hard to understand. Customers either did not understand the fee structure or felt they were not notified of fees in advance (stop us if this sounds familiar as you look at your home phone bill!).
• Customers that purchased multiple products were much less likely to leave than single-product customers. In addition, the more individuals at a customer site who used one of the client’s products, the higher the likelihood of retention.
• Customers gave very clear signals that they were about to leave. For example, their usage dropped significantly in the prior 3-6 months, signaling movement toward an alternate provider. In addition, their customer service calls tended to spike before attrition, an indication that bad customer service experience was a key attrition driver. Also, many departed customers had reached out to their sales representative to express dissatisfaction, but the sales reps were not highly empowered to "make it right."
This deeper level of understanding about what’s causing your customers to leave can help you take concrete steps to address the issues and stop the leakage.
KARL STARK AND BILL STEWART | Columnist | Co-founders, Avondale
Karl Stark and Bill Stewart are managing directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself and is a two-time Inc. 500 honoree.