February 6, 2019
Customer Defection: The Unrecognized Drain on Sales
Grow or die – a dilemma of choices, and the reason firms like Apexx Group exist. We believe that companies survive and thrive through growth – and lack of growth leads to eventual decline. Stagnant companies can survive a long time, but they eventually end up in a boring decline into irrelevance. So how do companies ensure that they continue on a pattern of growth? In this article, we discuss an inhibitor of growth – customer defection – and identify controllable causes of leakage so that future growth isn’t being put into a leaky bucket.
Related: Missed Opportunities
Let’s start with an example – A mid-sized company came to us after a few years of stagnant growth (we know this is an oxymoron, but you know what we mean). It just so happened that this company was owned by private equity, which created more urgency to grow the business. A quick analysis of three years of customer/sales data indicated that while the company was introducing and selling new products, and acquiring some new customers, they weren’t growing because they were losing more customers than they were gaining. There was a significant number of customers each year that stopped buying from them – the phenomenon we refer to as customer defection. Management was concerned and their knee-jerk responses were defensive – “Some of those defections were the result of mergers and acquisitions;” “some are companies or facilities that have closed;” “some are customers that have not defected, but have simply gone dormant for a period of time.” All of these reactions have a degree of truth in them, but none of them tell the complete story. To get to a complete story a company needs:
- To analyze the data to understand exactly what your defection rate of customers is – both in numbers of customers and sales dollars.
- To better understand why customers are leaving you.
When research was conducted to understand why customers went away (telephone research, interviews and surveys), it became clear that about 5% of that defection could be attributed to uncontrollable factors, the other 95% was mostly controllable. Four clear issues emerged:
- There was no continuity of sales turnover on accounts. When a sales rep left or accounts were re-shuffled there was no plan to manage the transition of the account.
- Customer service was perceived to not even understand service issues let alone know how to solve the problems.
- Returns were slow, handled incorrectly or missed altogether.
- There was no clear on-boarding program so many accounts were acquired only to leave a few months later (never really becoming a stable customer).
The results were a sobering reality – the cost of saving defector customers would be much cheaper and more cost-effective than getting new customers.
Looking across several projects, Apexx found that acquiring new customers can be anywhere from 5 to 16 times more expensive than winning back defective customers. Defected customers are often neglected because it takes a bit of soul searching and hard data to both identify and fix it. It is very difficult to have sales or customer service reps do research to identify potential or actual defectors. If customers have relationships with individuals, they will rarely speak poorly of them when asked. It’s only when someone outside of the relationship asks probing questions that customers will feel safe enough (and also that they are not being disloyal) to admit the depth of damage to the relationship and the likelihood of defection.
When a customer defects it not only damages the reputation, but also the current and future revenue stream. It is important to remember that a business is not just losing one year of sales from a lost customer, but an annual (frequently growing) revenue stream. Couple revenue loss with the fact that really unhappy customers usually tell an average of sixteen people about a bad experience and you now have the potential for decline. Can your business afford to lose that kind of revenue and reputation hit? Understanding the volume of customer defection and finding the root cause is vital to the future success of a company.
Why Customers Defect
Customers come to you for various reasons and frequently it is because you have a unique position in the marketplace like a special product, better service, etc. Companies will at times, in an effort to attract more customers, do something that is a bit “out of character.” Examples of this are a one-time discount, special terms or to test new capabilities. As a result, they attract customers for the wrong reasons and these customers are immediately put at risk for defection
There are other reasons customers defect including product or service problems, delivery issues, ineffective account management, or because they feel ignored or unappreciated. Customers that defect are saying they no longer find value in the relationship, their needs aren’t being met and they’ve decided to get their needs met elsewhere. Businesses have to figure out what they’ve either done wrong or neglected to do, and then institute the change necessary to positively effect these customer relationships. The illustration below shows how Win-Loss paths can be helpful in understanding the reasons why you acquire and lose customers and the relationships between acquisition and customer loss or defection.
Over a decade of defector research helped us identify the following frequently occurring spell reasons customers leave a company:
Poor Customer Service: In the age of automated service and advanced technology, companies cannot afford to compromise the #1 reason customers leave – poor customer service.
- Customers are unable to access a customer support line or customer portal to get information
- Customer service reps are unable to troubleshoot issues
- Customers feel like they don’t have a voice, are not well taken care of, and are not kept up-to-date with important and new information
- Customer service reps don’t listen to customers and try to understand the issue(s) at hand
- Customers are treated with indifference
Sales Neglect or Ineffectiveness
- Sales reps are not communicating with customers frequently enough and are not easily accessible
- Sales reps only contact customers to sell more stuff
- Sales reps don’t understand how customers prefer to get their information (e.g. phone calls, emails or in-person visits) so reps don’t adjust the way they communicate with customers
- Sales reps don’t use active listening skills to understand customer concerns and do not provide viable solutions
- Sales reps implement the same type of solution regardless of the problem
Contact Person Leaving/No Transition Plan: Many customers leave because their sales rep or contact has left the company. The key issue here is not necessarily that the contact has left but that the customer felt lost in the transition.
- Customers have not been notified that their contact is leaving or has left
- The current contact has not reassured the customer that he or she will offer the same great service and attention
- The new contact hasn’t researched the customer to understand the unique needs at play
- The new contact hasn’t reached out to the customer with a phone call or personal visit to start building a relationship
Companies are focused on the wrong things
- Customers really want better service delivery but businesses create new services customers really don’t want or care about
- Companies are focused on selling or promoting products that customers don’t want or need
- Companies implement new websites that are confusing and customers don’t know how to use them
- Companies treat every customer the same instead of meeting or exceeding a customer’s expectations for results
Keep in mind any one of these factors can contribute to customer defection but if more than one factor is at work the likelihood that customers will defect increases substantially. Defections seriously damage profit margins, kill revenue streams, and can even negatively impact a company’s reputation. Depending upon how public that negative brand equity becomes and how quickly the sentiment spreads (think social media, Amazon reviews, etc.) it can lead to more customer defection. Stemming defection, developing early warning systems, and conducting periodic winback programs are some of the most cost-effective ways to grow sales.