Do you know how many customers you lost last year?
I’m not looking for a precise answer, just a rough approximation. Is it hundreds, thousands, or tens of thousands? In my experience, it is surprising how many businesses have no idea – maybe have never even considered the concept of a lost customer.
In my 40+ years as a management consultant, I have seen this situation many times.
One example comes to mind. This company was an industrial MRO business. The company was looking for growth, something more than the low single digit growth they had been experiencing for the past few years. Every manager I spoke with characterized the business as a stable business that, as evidenced by the flat top line, just didn’t have the market to grow.
The data told us a different story.
Underneath that top-line veil of stability, there was a whole lot of churn going on. As we looked at year-over-year customer purchases, we could see that they were losing close to one-third of their customers each year (over 4,000 lost customers).
These lost customers represented about $14 million in annual sales. They were working hard to bring in enough new customers to keep top-line sales stable and even grow it a little, but this was a very inefficient and inadequate business model.
When we applied analytics to the problem, it took the vague concept of lost customers and provided a quantitative and financial platform for the business. Losing customers has a compounding effect. The initial reaction is to assume that one loses that year of revenue from a lost customer. In our example, the $14 million from 4,000 customers.
But the reality is much more sobering – businesses lose the following when customers defect:
- The target year of revenue from the lost customer
- The ongoing revenue stream from the lost customer (this could have an impact for many years)
- The marketing cost requirement to replace those lost customers with new customers.
- The lost goodwill and brand equity
- The loss of any referrals that these lost customers would have made.
In this case, the actual lost revenue was an order of magnitude higher than the initial one-year estimate of $14 million. And this loss has an impact on the business for a number of years.
The first step is always measuring what you lose.
Hopefully it is a small number, but if not, it can be the impetus for change that many organizations need. The question for this business was what was it worth to save 100, or even 1,000 customers? What would they be willing to invest to save those customers?
In the short term, this measurement sparked a win-back program. This was a successful program – as they were able to win back almost 10% of these lost customers.
While the win-back programs provided some incremental revenue, they required an investment above and beyond what would have been required to retain these customers. And this is simply an inefficient way to run the business. It is a bit like catching the water that leaks out of the bottom of the bucket and pouring it back into the top without ever repairing the leaky bucket.
This dynamic is the reason that two-thirds of the Fortune 500 companies are using voice-of-customer feedback and Net Promoter Score to gauge customer satisfaction and loyalty and to determine the risk of customer defection before it occurs.
In this process, companies ask customers to tell them what they are doing well and what they are not doing well, and what elements of the business relationship are most important to them. With that information, companies are able to plug the leak and save some of those customers that would otherwise be lost.
This typically has a much better ROI than any lost customer win-back programs.
And it all starts with a greater awareness of the economic importance of customer retention. And the answer to that question: “How many customers did you lose last year?”
Learn more about how you can more effectively measure customer satisfaction.
Mark Peck is the founder and former owner and CEO of Apexx Group LLC, a marketing and sales firm that focused on helping its client’s drive breakthrough revenue growth. In his 40 years of management consulting experience, he has helped hundreds of distributors grow their businesses. His sales and marketing models and programs have generated over $1B in incremental sales for his clients.