Marketing Innovation and Customer Defection: Going on Defense

Most of the efforts in marketing innovation are focused on customer acquisition, e.g. going on offense. But to continue the sports analogy you have to be good at both offense as well as defense.  While you are trying to acquire new customers, so are your competitors and hopefully, you are better at retaining your customers than your competitors are at retaining their’s. You need to be sure you have customer retention initiatives as part of your marketing innovation efforts.

One time I was doing a project in Canada and we had a client with a 3% growth rate. We thought that reflected the fact the client was growing at the rate of GDP which made sense given the nature of the client’s product. When we dug into the data, we saw the company was actually growing at 6%, but was losing 3% of its customers and thus was netting 3% growth.  In another situation, increasing the retention rate of the customer base an average of six months was worth an additional five million dollars!  In other words if the average customer in the customer base remained a customer for an average of an additional six month, it was worth an additional five million dollars. In this day and age, there are a lot more “open” systems and switching costs are lower than ever. Yet, how many of the “shiny new things” or emerging technologies do we look at that have the potential to improve our customer retention?

Many companies do some sort of customer satisfaction study. But studying customer defection or dissatisfaction, is not the opposite of studying customer satisfaction, and very few companies do it. In a customer satisfaction study you typically look at how satisfied a customer is, using measures such as how many customers are likely to remain a customer, e.g. customer loyalty, repeat purchase, and/or how likely they are to recommend the product or service to a friend. The objective of such a study is to increase the level of satisfaction, probability of repeat purchase and probability of recommendation.

The purpose of a customer defection study is to understand why your customers are leaving, and where they went. The idea is to conduct a root cause analysis and determine customer defection by channel, segment, product, etc. and determine if customer defections differs by these groupings and why. For example, did we attract customers who were a bad fit or were attracted by a short-term offer? The second purpose is to determine if the customer defections were caused by a failure of the product or internal processes, or externally by competitors with more compelling value propositions.  Sometimes, fixing the problem as to why customers are leaving is the fastest and easiest way to grow a company.

People are familiar with the often referred to “funnel” analogy of sales where prospects become leads and leads become customers. Companies need to think of the reverse process that customers go through when leaving a company. For example, by analyzing web site data, companies can predict when a person is about to leave the site and provide one more offer, an opportunity to take a survey, etc. The same type of analysis should be done on customers who defect to determine clues that a person is about to defect. Knowing the triggers or clues that a person might leave can enable an intervention and/or a “win back” campaign.

The results of a customer dissatisfaction study provide opportunities or targets for marketing innovation.  Here are some ideas for conducing such a study.

1. Figure out what customers or customer segments you are losing and why?
2. Determine which of your competitors are acquiring the largest percentage of your defected customers and why. Which competitor seems to be attracting your most profitable customer? Why? Compare a chart that matches which competitors you are attracting your customers from to which competitors you are losing them to. How different are the two charts?
3. Determine why customers are defecting, is it product or process related? Or is it due to an external cause, a change in the market place or partner action?
4. How did you attract the customers you lost, try to segment by channel and other metrics, such as average purchase size, frequency, etc.
5. Pay particular attention to customers lost to emerging competitors. They may have gained a very small number or percentage of your customers, but the fact YOUR  customers found something attractive about this new competitor’s value proposition should be studied.

When you have completed the study, you should have an itemized list of processes or areas that if improved could increase customer retention. Having that list will enable you to identify potential new technology that could decrease customer defection.  The increasing amount of customer data will also provide insight as to the behaviors that are a precusor to customer defection. Being able to predict defection is similar to developing a personalization algorithm. Being able to predict customer defection provides an opportunity to prevent that outcome.

How are your competitors acquiring your defected customers? Are they using technology in a new and interesting way? Is there an emerging competitor that  has a new business model or value proposition that is attracting your customers? Should we respond by incorporating similar technology as part of our marketing innovation efforts? Similar to teams that have a good offense, you must have a good  defense as well. Companies should focus some of their marketing innovation efforts on retaining more of their best customers. But in order to develop a better product or process that would increase customer retention, you need to understand why customers are defecting in the first place.