Retaining customers and reducing churn has never been more important. Yet, rather than addressing this, many businesses try to tackle the issue by constantly topping up with new customers to replace those that churn. It’s an expensive and inefficient way to approach customer retention at a time when delivering profitable growth is vital. So what are the causes of churn, and what can you do about it?
1. Acquisition
The first and perhaps the largest cause of customer churn is acquisition, the first part of the customer lifecycle. Many acquisition and business-growth strategies are very aggressive, and can create customer management problems in the future. Most companies have embraced the use of digital channels as a way of delivering more cost-efficient acquisition, but that is not enough.
The current vogue for credit crunch discounts and special offers can damage cross-sell and up-sell opportunities further down the line. Many companies are volume-driven, with resultant sales strategies that heavily discount their products to customers. So substantial discount offers are made to customers to meet short-term sales targets.
What must be remembered is that customer value expectations are defined during and soon after the point of acquisition. Once a business customer is on board and value expectations have been established (on a discounted basis if lots of acquisition offers have been used to acquire those customers) it will be very difficult to change value expectations. A business intent on volume will struggle to manage its retention and if it does, it will be at a high cost. After all, if you are giving away goods at acquisition, then you will be expected to do the same at the end of the cycle, if you want to retain your customers. Subsequently, you end up spending more than ever on both acquisition and retention.
In my view, a misplaced argument is that without an aggressive acquisition strategy, a business risks losing sales to competitors. Lowering the barrier to entry for customers through unsustainable propositions to get them to buy a product they can’t afford at full price is one of the biggest contributors to customer churn. Why would a business want customers who can’t afford to buy from them?
2. Segmentation
The second step in retaining customers and so delivering growth is to really understand their business and respond to and predict their behaviour.
That means segmenting prospects and customers by shared demographics and characteristics; such as propensity to buy, behaviour, performance, attitudes and motivations. Increasingly, segmentation needs to be focused away from pure products and redirected to business characteristics and for smaller businesses the individual responsible for purchasing.
Another area to focus on is why customers stay with you? Do they value what you do for them, or they are tied to a contract? It’s important to look at the impact of contracts, business rules, and terms and conditions. Are contracts and tie-ins forcing your customers to churn or downgrade en masse at a particular time? Very few businesses proactively try and influence when a customer will churn. Most take action when a customer appears about to walk.
If a business has a churn problem, they usually throw money at it in reactive retention. Experience suggests they would be much better throwing effort into proactive retention. This would involve identifying and focusing on the most at-risk customers. Activities such as service messaging, or ‘exclusive’ offers can significantly improve churn over time. It’s a long-term approach, which is why many give up and rely on reactive quick wins. However, if businesses are serious about regaining profitability in their customer retention activities, then they will need to focus on proactive rather than reactive retention.
3. Customer focus
The final part is good customer service. That doesn’t just mean call centres. Customer service is really about customer experience. Customers want joined-up and consistent communications through the channel of their choice. And in today’s world it is unacceptable to not have systems that can remember and record previous customer interactions!
The final note of caution is that in order to properly fix customer retention, you need: a talented and sizeable team of people focused on the customer and a cross-business-team that works together. All the causes of customer churn are a result of the business not working to the same goals. The best sports teams are those where the players have a deep understanding of each other, what they do, and play as a team think Manchester United perhaps, not Chelsea.
