Learning from customer defections

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On average, the CEOs of U.S. corporations lose half their customers every five years. This fact shocks most people. It shocks the CEOs themselves, most of whom have little insight into the causes of the customer exodus, let alone the cures, because they do not measure customer defections, make little effort to prevent them, and fail to use defections as a guide to improvements. Yet customer defection is one of the most illuminating measures in business. First, it is the clearest possible sign that customers see a deteriorating stream of value from the company. Second, a climbing defection rate is a sure predictor of a diminishing flow of cash from customers to the company – even if the company replaces the lost customers – because new customers cost money to acquire and because older customers tend to produce greater cash flow and profits than newer ones. By searching for the root causes of customer departures, companies with the desire and capacity to learn can identify business practices that need fixing and, sometimes, can win the customer back and reestablish the relationship on firmer ground.

But if so much useful information can be wrung from a customer loss, why don’t businesses learn or even try to learn from customer defections? In ten years of studying customer loyalty, customer defections, and their effects on corporate cash flow and profits, I have uncovered seven principal reasons:

  • Many companies aren’t really alarmed by customer defections – or they’re alarmed too late – because they don’t understand the intimate, causal relationship between customer loyalty on the one hand and cash flow and profits on the other.
  • It is unpleasant to study failure too closely, and in some companies trying to analyze failure can even be hazardous to careers.
  • Customer defection is often hard to define.
  • Sometimes customer itself is a hard thing to define, at least the kind of customer it’s worth taking pains to hold onto.
  • It is extremely hard to uncover the real root causes of a customer defection and extract the appropriate lessons.
  • Getting the right people in your organization to learn those lessons and then commit to acting on them is a challenge.
  • It is difficult to conceptualize and set up the mechanisms that turn the analysis of customer defections into an ongoing strategic system, closely supervised by top managers and quickly responsive to changing circumstances.

Read the full article on Harvard Business Online.