10
Vibrant retention
For want of a key…
After a hard day at the office, a business executive goes out to his new car, gets in, turns the key. Nothing. Zip. Not even the fateful ‘errrr’ of a dead battery. It turns out that there’s nothing wrong with the car – it’s the key. It’s got a new-fangled security device that has malfunctioned. He travels home by train.
The next day his wife calls the dealership where they bought their car and asks them to replace the dud key. She encounters a guy with an attitude problem. He calls her ‘Honey’. He says she’ll have to come in and wait while they sort it out. She asks to make an appointment so she won’t have to wait: she’s busy and probably already annoyed at having to run her husband’s errands. The guy says no can do. Oh, and he calls her ‘Honey’ again.
She calls her husband, who gets angry. The car is under warranty and it’s their job to fix it – now. He’s also mad at his wife’s abusive treatment. He calls the dealership and growls. He uses strong language and an aggressive tone. He speaks to a different guy, who sorts the problem out in just five minutes and promises to have the key ready to collect when he comes by. In theory, this gesture should have ensured satisfaction for this customer, but it’s too little and too late.
One bad moment of truth has transformed this man and his wife into Desperados. They’ll certainly never use the dealership again. In coming years, they will probably warn many others about the service they received. Even worse, the husband writes an article about their experience for Fortune.1
The previous chapter showed how customers can become seriously dissatisfied because of little things that could have been easily resolved – things like that dud key. Customers make decisions about companies based on their ability and willingness to solve problems. Firms that fail will lose them. When dissatisfaction becomes intense enough, customers will run away. For this dealership, the business executive and his wife are no longer just Desperados – they have become Runaways.
Loyals and Runaways
Keeping hold of targeted, truly valuable customers is one of any firm’s most important tasks, because customer retention has a staggeringly strong impact on long-term growth. We have already seen how vibrant satisfaction can accelerate customer momentum once a power offer has been designed and executed. Like customer satisfaction, if customer retention is vibrant enough it can become the next stage in this chain reaction, and it has a much more obvious effect. It has a direct impact on revenues, profits and growth – it accelerates momentum.
Retaining customers is not enough. As with every stage of the momentum execution model, it is the vibrancy of retention that counts. Vibrant retention is much richer and more nuanced than it might appear. For one thing, a business shouldn’t run after every potential customer. Employees tend to subconsciously focus on the painful ones – customers who shout loudest for attention – but high-maintenance types who scream louder to get more for less may actually be liabilities. Customers of this sort are so difficult and expensive to serve that they shouldn’t always be kept.
Also, customer retention is influenced by customer satisfaction, certainly, but satisfaction does not guarantee retention. Satisfaction is a state of mind, whereas retention is an action. Not every satisfied customer is a retained customer, and not every retained customer is satisfied.
Sometimes dissatisfaction instantly leads to defection, as in the case of the woman treated badly by her dealership. The Runaways are these unhappy customers who decide not to buy from the company anymore. But many dissatisfied customers may linger. We all know people who bad-mouth a company whose products they continue to buy. Retention is indeed different from loyalty, despite the fact that these two words are often used interchangeably. Retention is about customers who keep buying the same product over time, whereas loyalty refers to people who have positive emotional feelings about a company. Loyal customers tend to be retained, but retained customers are not necessarily always loyal. The Loyals are those who keep buying over time a product for which they have strong positive emotions. It is these emotions that determine the vibrancy of their retention.
The emotions beneath retention
In the same way that vibrant customer satisfaction is a deeper, far richer concept than a series of percentage ratings can show, understanding vibrant customer retention involves much more than analysing statistics of repeat buying. There are two key aspects of human nature that have a particular impact on retention – freedom and temptation.
‘Freedom inside’
Just as the human animal was invented with dissatisfaction inside, it was engineered with a lust for freedom. Born free, people resent being forced to think or behave in certain ways. It’s even stronger than that – we actively resist it.
Yet on a daily basis we are prepared to sacrifice some of our freedom in exchange for something else we value more. The difference is that it’s our choice. Buying a house, a car, a mobile phone, a drink – all these actions engage us and reduce our freedom for a time, each to its own degree.
Freedom is an essential ingredient in the bartering process between customers and companies. Customers add up the costs and benefits of reducing their freedom. Sometimes, when customers surrender that freedom, they don’t even perceive it as that because they have trust. Some customers will repeatedly buy the same product because it simplifies their life, as long as they don’t believe they’re losing too much of their freedom in exchange.
However, if they perceive that they are forced to buy the same product, either because of a quasi-monopoly or because the switching cost is too high, then they resent it. These undercurrents and nuances of customer behaviour would never be spotted by glancing at corporate statistics on retention. But an understanding of ‘freedom inside’ is important for anyone who aspires to create and nurture momentum. Equally it is vital to understand that it is the perception that matters, not objective reality. Take Apple for example. Many of its products could be seen as restrictive of their users’ freedom but they are not perceived as such by Apple users.2 On the contrary, they feel that Apple’s products set them free from the frustrations of the poor usability and graceless design of competing products.
‘Temptation outside’
‘I can resist anything but temptation,’ Oscar Wilde quipped one day. Human nature has always been tempted by alternatives. Well, customers today are bombarded with temptation from every angle.
The dynamism of business, the flexibility of technology and the forces of globalization mean that customers have more alternatives than ever before. At the same time, information walls have come down so everyone is aware of the multiplicity of options through the media, advertising, the Internet and international travel. Word of mouth now travels, if not literally at the speed of light, then at least at the speed of a pretty good broadband connection.
Temptations, temptations, temptations – as far as the eye can see. Retaining customers is not easy. Gaining their loyalty is even harder. There is an ever-increasing pressure for customer defection. The more that customers are bombarded by enticement, the stronger is their perceived need for freedom. They might briefly be lured by a great offer, but they’ll soon be on the lookout for the next, even better one.
Temptation and freedom reside inside, side by side. Firms need to understand these human drivers because the evolution of technology and communications is constantly increasing the potential for customer mobility. While this poses a serious threat to mediocre firms, increasing customer mobility offers opportunities to create customer momentum via power offers – and for momentum-powered firms to snatch customers from their competitors.
The captive customer is slowly becoming a thing of the past. Firms that rely on captive customers may still enjoy short-term growth, but they will be unable to sustain it in the long term unless they turn to value origination based on an understanding of and respect for customers. Captive users around the world knew very well that they were being outrageously overcharged for telephone services, especially long-distance calls – millions of them fled gleefully to new operators and to Skype as soon as they could.
Retention metrics
Bartenders and small shopkeepers who see their customers every day undoubtedly have an intuitive grasp of customer retention levels. They see the real thing and don’t need metrics. Most of us, physically distant from our customers, have to measure it.
Indeed, just as with customer satisfaction, it should be compulsory for large firms to measure customer retention using formal processes.3 After all, customers are a firm’s most valuable asset. It is extraordinary that conventional management practice places enormous emphasis on internal audits, while the measurement of customers is less of a priority – especially as these assets are more able to disappear and more likely to do so than any other.
The problem is that measurement is valuable only if it measures the real thing. There is no standard measurement for customer retention, but the most commonly used method tells a firm how many of last year’s customers are still doing business with it.4 This is the easiest measurement to use for most business relationships and for situations that consist of repeated multiple transactions.
Everyone in an organization should understand precisely the implications of customer retention numbers, and why they are important. What precisely does a retention rate of, say, 50 per cent mean? Well, it obviously means that a firm is losing half its customers every year. But what is less appreciated is that if this retention rate continues, and 50 per cent of customers keep leaving every year, the average length of time that a customer continues to do business with the firm is just one year. This is a very short average customer lifetime.5 A 50 per cent retention rate is mathematically the same as if a firm kept all of its customers for one more year and then lost them all at once. It’s shocking but true. Admittedly, the emotional impact on employees, shareholders and management is not as dramatic if customers leave over time, but the financial impact is the same.
The calculations underlying this observation may not interest everyone in a firm, but the result will because it’s more than just a percentage – it’s about the future of the company. It is a figure that will shock management and employees and make them realize how essential customer retention is to a healthy business.
The business impact of retention
The business impact of retention relates directly to its effect on average customer lifetime – and that effect is dramatic. For instance, while a 50 per cent retention rate means that, on average, customers stay with the firm for one year, if a firm was able to achieve a retention rate of over 90 per cent, that figure would stretch out to 10 years, as shown in Figure 10.1.6
Figure 10.1 The accelerating impact of retention on average customer lifetime
We believe the minimum retention rate to qualify as a momentum-powered firm must be 90 per cent. Only momentum-powered firms with a vibrant retention rate as high as this can consider customers as assets. This is because of the acceleration effect that each progressive gain in retention delivers. Anything below a 70 per cent retention rate means that the average customer lifetime is insignificant. Even at an 80 per cent retention rate, which sounds good on paper, the average relationship with a customer lasts just four years. Retention provides a stunningly progressive acceleration. Just look at the chart and consider the relative impact of a 1 per cent gain at different points. An improvement in customer retention from 50 to 51 per cent adds only two weeks to the average customer lifetime. But the same 1 per cent gain from 95 to 96 per cent adds five years!
Any increase in retention automatically increases average customer lifetime, which in turn increases the value of customers as assets. Of course, it also works in reverse – a drop in retention rate can have a disproportionate impact on the future equity represented by a firm’s customers. I recall listening to a pre-float presentation by some very bright young entrepreneurs. Doing some back of the envelope calculations about their figures, it was easy to estimate that their projections assumed a customer retention rate of 90 per cent. A bit optimistic and risky for the investors, you might think. Especially as, if they only managed a 50 per cent retention rate, their customer equity would have been out by a factor of 10! In other words, if the retention rate they achieved turned out to be just 40 per cent lower than their implicit promise, then the projected worth of their business would prove to be at least 1000 per cent overvalued! It is fair to say that a misunderstanding of the accelerating impact of customer retention on lifetime value is behind some of the more unfortunate investment mistakes.
It is this acceleration effect that momentum-powered firms are able to exploit to power their exceptional growth. We are unaware of any other aspect of business in which the impact of each progressive improvement in performance increases so dramatically in terms of its ability to boost the value of an asset.
How does average customer lifetime increase the value of customers as assets? First, it improves the efficiency of acquisition spend. To take a simple example, imagine a gym that finds that every year 20 per cent of its members don’t renew their membership. It must spend money advertising to acquire new members. But before it can increase its total membership, it must replace every member it lost with a new one. If it managed to keep its members longer on average, it would grow at a higher rate with the same amount of money spent on promotional activities. Furthermore, the longer that retained members stay the better it is – a member staying five years means 25 per cent more cash to the company than one staying only four year, all for the same acquisition cost.
So in terms of revenue growth, an increase in retention has two positive effects – the total customer base increases more rapidly and customers provide revenues for a longer period of time.
But improving retention also increases profitability. Again, consider the gym. New members are less profitable than established ones. Not only do they cost money to get, but during their first few months they take up more staff time than existing members do – they must be given a safety induction, they need to be shown how to work the machinery, they ask questions about lockers and class timetables and so on. After the first year, they are pretty much self-sufficient and so the cost of serving them decreases and, as the cost of acquiring them has also now been earned back, they generate much more profit per unit of membership fee than a new member. The higher the ratio of established customers to new ones in a company’s overall customer mix, the more profitable a firm will be.
In short, more customers staying longer means both greater revenue growth and improved profitability. This is why customer retention is such a formidable booster of momentum strategy.
The rocket-like take-off of the customer retention rate curve in Figure 10.1 should be enough to make any employee’s eyes pop, and we cannot recommend its use strongly enough in motivational exercises. Suddenly, at 90 per cent, the firm goes into orbit! Everyone in the firm should be helped to appreciate the huge impact – not obvious and therefore commonly underestimated – of the retention rate on future sales and a company’s health.
Vibrant retention
Unfortunately, not all 90 per cent customer retention ratings are equal – a bald retention statistic is merely a number. The real essence of retention lies not in percentage ratings but in a qualitative understanding of retention. To gain the full potential of retention, one should always remember the richness of human behaviour lying behind the numbers.
Our typical bartender is directly in touch with the real thing. He knows his customers directly, eye to eye, but large firms can’t get that close to all their customers. A bare retention figure does not tell us anything about the origin, the power or the sustainability of the retention.
Facebook, the social networking service, has quality retention. Started on US Ivy League universities but subsequently opened up to anyone over the age of 13, Facebook helps its users keep up to date with their friends and colleagues. It has become an essential part of daily life for many of its vast number of users. In October 2007 it had 43 million active users – people who keep coming back to the site at least once a month. More importantly, of those 43 million half of them visit the site every day. The site is perceived as so vital by its users that they spend an average of 20 minutes per day on it.7 Nobody forces them to – they just find the experience so compelling that they can’t imagine spending even a day away.
As Facebook shows, the real essence of retention lies not in the retention rate alone but in the quality of the retention. The difference can be further illustrated through the example of two retail banks we examined. They had similar retention rates, but the nature of the relationships between the two banks and their customers were totally different. On investigation, we discovered that one had a level of customer satisfaction much lower than the other. It was clear that although both retained customers at a similar rate, the quality of their retention was different, and this significantly affected performance. In the first, customers kept doing business with the bank but at a minimum level, as if reluctantly. In the second, they were easy to serve, reacted positively to new products and recommended the bank to their friends.
The first bank had passive retention – a momentum-deficient firm. The second enjoyed vibrant retention – a momentum-powered firm. High-quality, vibrant customer retention is needed for maintaining customer momentum.
This example also demonstrates the potential discrepancy that may exist between customer satisfaction and customer retention. As mentioned at the beginning of this chapter, one does not always follow the other. What is needed is a tool to track both the quantity and quality of retention within a firm’s population of customers – the customer retention portfolio shown in Figure 10.2.
Figure 10.2 The customer retention portfolio
To achieve momentum, one really needs to create not only retention but the right form of retention – vibrant retention. To this end, the next sections will analyse the customer retention portfolio further in terms of three different types of retention – passive, forced and vibrant.8
Passive retention
Passive retention describes customers who buy the same product but have no emotional attachment to it. It is routine – they are apathetic. We start with it because in many companies it is the dominant form of retention. These customers are not usually actually dissatisfied, but neither are they particularly satisfied. If they have no great motivation to change, it may be because they don’t believe a better alternative exists.
Our customer retention portfolio distinguishes between two types of passive customers – Settlers and Switchers. Settlers are retained, but although they will not actively pillory the firm, they will not actively extol it. They have no real engagement. Switchers, while having no strong feelings – good or bad – about the firm, defect easily. They too are simply not engaged with the company but, being more mobile than Settlers, will accept an alternative, albeit without any real passion.
The pharmaceutical industry has a huge challenge and opportunity with passive retention – non-compliance, as the industry calls it. It describes patients who have in hand a prescription from their doctor but either don’t collect the medication or don’t complete the treatment. When they do pick up the medication or start to use the product, these patients fall into the category of Settlers. But their involvement is not really committed. They are one step from quitting the treatment and becoming Switchers. They will not necessarily use another drug – they will just stop taking the prescribed one. The key to this problem is getting the patients more involved, and developing an active retention by turning them into Loyals – for their own good and the good of the company.
This issue is costly for both the patients and the healthcare industry. Different studies show that in some categories between 60 and 80 per cent of chronic patients are non-compliant after 12 months. Patients become unwell, develop complications, or even die. In these cases, the money invested by healthcare providers – in the diagnosis and in the treatment that the patient followed until the point of non-compliance – does not deliver its full potential. Beyond the lives and well-being of patients, there are billions of dollars at stake for pharmaceutical companies. And it all hinges on the lack of active retention.
Forced retention
Forced retention occurs when dissatisfied customers stay with a product or a firm reluctantly. In terms of their satisfaction levels, they are Desperados. In terms of retention, they take on one of two personas – Prisoners or Runaways. We’ve already encountered Runaways, those customers who leave the company, like the executive and his wife who vowed to never return to the car dealership. Their Desperado status leads them to behave negatively toward the firm and purposefully try to destroy its reputation.
Prisoners are also Desperados, but they have not yet summoned the courage or motivation to defect and are retained by the firm. This doesn’t mean they’re any less damaging to it. Unlike Settlers, Prisoners feel trapped – their dissatisfaction has gone beyond the cognitive state and has become emotional. They will actively behave in a negative manner toward the firm, intending to damage its reputation. One day, when they find the right alternative or become even more emotional, they will defect and run away.
There are three common forms of forced customer retention – the quasi-monopoly, switching costs and ‘loyalty’ programmes.
Forced retention through a quasi-monopoly can be a result of restrictions imposed on competition due to a patent, or in heavily regulated industries such as many utilities. In the pharmaceutical industry, sales of drugs can plummet by up to 90 per cent when a patent expires, demonstrating the extent to which the previous retention was forced.
High switching costs can force retention. Customers may be dissatisfied but are either contractually tied in or lack the time or energy needed to find a better alternative. High switching costs are common in the retail bank sector, as illustrated by the traditional bank we profiled earlier with high retention but low customer satisfaction.
So-called ‘loyalty’ programmes are another form of the same thing. Remember the difference between the words ‘retention’ and ‘loyalty’. While genuine loyalty creates positive affection and emotion toward a product or service, ‘loyalty’ programmes rarely engender these emotions. Rather, they entice customers to stay because of economic benefits. ‘Loyalty’ programmes are misnamed – they certainly build retention, but few of them create any loyalty.
Consider frequent-flyer programmes, which often manage to create both higher customer retention and higher customer dissatisfaction. Of course, these programmes create retention but in the long term they are a liability if they lead airlines to mistake retention for commitment, and hence reduce the urgency for a more customer-focused approach that could create momentum.
Naturally, loyal customers should be rewarded, but that’s different from imprisoning them. Virgin Atlantic’s loyalty programme understands the importance of rewarding customers for their loyalty, rather than forcing them to act in a certain way. Virgin’s emphasis is on satisfying customers first and rewarding them second. Its rewards can be reclaimed for other experiences aside from flying Virgin – a trip in a hot-air balloon, for instance, or a stay on Richard Branson’s Necker Island in the Caribbean. Virgin’s customers actively choose the airline. Their retention is not forced; they have chosen to stay. This is infinitely more powerful.
Vibrant retention
Vibrant retention describes customers who are really committed to a firm. In terms of satisfaction, they are your Champions. Apart from repeatedly buying your product, they play a vital role in promoting a company to their friends and family. In terms of retention of customers, Champions fall into two different categories – Loyals, those champions inside the firm, and Adventurers, the champions outside.
Loyals are so satisfied that they have actively decided to carry on buying a product or service, despite being offered real alternatives. They’ve weighed a product’s costs and benefits and remain loyal customers. They will actively promote the reputation of a firm, boost the front-line staff’s morale and contribute to the firm’s operations. They are your most valuable customers.
Adventurers are also satisfied but will continue to shop around, perhaps because they are curious or simply because they enjoy exercising their freedom. Despite the Adventurers’ desire to try alternatives, they are extremely valuable because they will always champion the firm, even when they’re not using its products or services – and they may return, stronger Champions than ever, after trying other options and determining that they are no better.
When going on a vacation, most people first chose a destination and then an airline. Many customers of Virgin Atlantic do the opposite – they first look at where the airline is flying and then choose a destination. This is real loyal retention – it is vibrant retention, so much so that it turns the paradigm of vacation decisions upside down and, of course, contributes to the company’s momentum.
The quality of this sort of loyalty is of fundamental importance. Momentum powered firms aim at high customer retention, but they also make sure that their high retention rate is matched with retention quality. The majority of their retained customers choose to stay with them through satisfaction and loyalty, not because they are passive or trapped. Both retention quantity and quality are essential for momentum.
Strategies for vibrant retention
As with vibrant satisfaction, firms seeking to actively develop and nurture vibrant retention should follow the MDC framework – mobilize, detect and convert. It should build on previous actions to create vibrant satisfaction and further accelerate the momentum of a power offer.
Mobilize for vibrant retention
Vibrant retention can be achieved only if a firm is united behind this aim. The objective should trickle down to all levels of employees, from management to the front-line staff.
As is the case for vibrant satisfaction, the mobilization of management and employees is the first step in building vibrant retention. A critical mass of the organization must be inspired. Achieving this will require targeted training, coaching and measurement metrics.
In order to tap into the momentum potential of vibrant retention, employees need to be educated, inspired and empowered. This can be achieved, for instance, by organizing workshops for selected groups to debate customer retention in terms of specific situations. Remember that simple calculations are inspirational and can be understood by everyone in the organization. Let’s return to the story of empowering a pizzeria’s employees by demonstrating that the average individual customer is worth $5000. Now the question could be: How do our actions have an impact on this figure? The graph in Figure 10.1, showing the relationship between retention and average customer lifetime, can be used to answer this question. It shows that the $5000 figure can drop by half if the retention rate falls from 90 per cent to 80 per cent but can rise to $10 000 if it increases to 95 per cent. These observations strike the imagination and are a strong source of motivation for exploring potential actions.
What happens when a company already enjoys a high retention rate? If it is a vibrant retention earned by merit, then mobilization is not an issue because the workforce has already been committed. The real problem is when in fact the high retention rate includes a high proportion of Prisoners and Settlers in the portfolio. If this is the case, the retention rate’s true nature should be exposed and put on display so that employees understand the importance of combining quality with the quantity of customer retention. Prisoners are all too ready to become Runaways.
One approach to achieve this involves asking groups in a workshop to estimate their company’s real active retention rate. The discussion on how to define active retention will already be enlightening and motivating. The general guideline is that it should represent the proportion of customers who are eager to maintain or increase their relationship with the firm. In the case of the retail bank we mentioned earlier, this exercise revealed an estimate of 30 per cent as opposed to the official retention rate of over 90 per cent. This lower number demonstrated that there was great room for improvement, and it motivated the team to investigate new solutions for increasing active retention. The final point is that vibrant retention is not just a high retention rate – it is a high active retention rate.
In the short term, passive and forced retention may give the illusion of contributing as much to the economics of an organization as vibrant retention. However, there are costs involved in forced retention – they include discounts, low staff morale and negative word of mouth. These costs build inefficiencies and underline the need for an alternative – only vibrant retention can drive sustainable profitability. Management and employees alike must grasp this essential fact.
Detect sources of defection
In many companies, customers leave and go unnoticed. Look out – once customers are lost it may be too late to get them back or, at least, much more expensive. You have to be proactive, systematically seeking out and identifying potential sources of defection.
Customers often take a long time to leave. Reasons that could lead to their defection can be investigated and corrected before they make the irrevocable decision. In the financial services sector, alarm bells should ring when customers don’t use their credit cards as regularly as before. Car dealerships should notice when customers stop bringing their vehicles back for servicing once the warranty expires. Business-to-business firms should prick up their ears as soon as a client company’s management changes or key contacts move on. There are often early signs of trouble ahead, and the proper alarm systems should be set up to detect them.
Another approach is to investigate this issue in depth with the customers’ active cooperation. While this may be too expensive and time-consuming to carry out on a large scale, it is easy and rewarding with a selected group of customers. The customer retention portfolio is a useful tool for focusing on customer groups with different retention challenges – Prisoners, Settlers and Loyals. Within each group, who are those most likely to defect and become Runaways, Switchers and Adventurers? Taking each of these groups separately helps to see different perspectives and detect a broader range of different problems. The objective here is not to convert them individually – that is the next stage – but to identify potential sources of defection that could affect a larger number of customers.
The hunt for potential sources of defection must be continuous. When there is urgency, for instance because of an intense competitive struggle, it should be carried out in stages, focusing first on the customers with the highest equity. Not only are they most important in terms of the firm’s future, they are also the most likely to defect because their economic value makes them the preferred target for competitive initiatives.
This approach was adopted by one of our clients where we focused our retention investigation on the top 10 per cent of its customer base. The company organized workshops and invited these valuable customers to share reasons that might cause them to do less business with the firm, or to switch to another. It was obvious that in this group of top customers there were Loyals, Settlers and Prisoners – some were already contemplating an exit. The discussions were lively, and, interestingly, they centred less on the price of products as on other issues such as flexibility and customer service. The company addressed these observations, which were also relevant for a wider range of customers. And it created a special programme for its most valuable customers, whose retention rate increased by 18 percentage points.
Convert defecting customers
The next stage after detecting and eradicating sources of defection is to convert customers toward a more active form of retention. The ultimate objective is to have no Prisoners, no Runaways, no Settlers, no Switchers, no Adventurers – only Loyals! Only vibrant retention! Although this is unrealistic as a specific goal, it is a stimulating vision that clearly communicates the real issues underlying retention.
There are two vectors of conversion – changing customers’ action from defecting to staying (moving from bottom to top in terms of the retention portfolio in Figure 10.2) and simultaneously altering their state of mind from that of Prisoners and Settlers to that of Loyals (moving from left to right in terms of the retention portfolio).
Companies with a low retention rate should first concentrate on mobilizing employees and detecting sources of friction. The holes in the bucket must be plugged before there is any point in trying to recover the water that has leaked out.9 They should then prioritize their defector recovery on those customers who represent the highest equity for the firm. This does not necessarily mean only financial. If, for instance, a highly prestigious and visible client is considering switching to another supplier, then it is crucial to concentrate on this particular challenge and do whatever it takes not only to recover the situation but also to secure him or her as a Loyal Champion.
With companies enjoying a high retention rate, however, the picture is rather different. These happy firms gain more value in converting those few customers who do defect, and they can engage in a systematic recovery of defectors. It is one of the trademarks of momentum-powered firms. They understand that a high retention rate is no cause for complacency – indeed, it is a motivation to do even better. This is because a small increase in a high retention rate has a proportionally greater impact on the average customer lifetime than the same size increase has on a low retention rate.10 Think back to the rocket-like curve that kicks in at around 90 per cent. This is why, rather paradoxically, defector recovery is even more crucial for well-performing firms.
Whatever a firm’s customer retention situation, an effective programme to systematically recover potential and confirmed defectors involves the following components – open communication, identification and actual recovery.
The first step is establishing a two-way communication with existing customers that makes it easy for them to report their concerns. This should be above and beyond normal internal hierarchical reporting, where defensive mechanisms have a tendency to bury problems rather than share them out in the open. Staff must be committed to speed and efficacy of response, in order to ensure continuous communication beyond the initial phase of enthusiasm for the novelty of the initiative.
The second component is to set up systems to identify potential defectors. Obviously, their unsolicited complaints must be managed, but beyond that proactive surveys should also be undertaken periodically and, just as obviously, any reduction in the activity of specific customers with the firm should be monitored and treated as the early warning sign that it is.
Finally, potential defectors must be approached to gain an understanding of their position and the reason for their change in behaviour. An initially soft approach will often go a long way in showing potential defectors that the company cares. While such an approach may create a change in attitude by itself, it must be followed by specific actions to resolve the concerns. This must continue until there is evidence that the customer has become a Loyal. In the case of business relationships with major customers, this could involve ‘SWAT teams’ whose mission is to solve customers’ concerns to their total satisfaction and the renewal of a contract.11
Nothing less than vibrant
Everything up to now has been building to this moment – vibrant customer retention. Here’s where the traction starts to really bite and accelerate momentum. But it will do so only if the ambition is high enough. The traction built through the successful execution of a power offer and the positive emotions resulting from vibrant customer satisfaction finally starts to show tangible returns with vibrant customer retention.
To review the steps we have outlined in this chapter, there are five guiding principles to maximize the potential momentum of a power offer at the customer retention stage.
- Unlike satisfaction, customer retention is not just a state of mind. It is an action – the result of the customers’ decisions to either continue or abandon their relationship with a supplier. It is influenced by the perceived value contained in an offer, but it also expresses the customers’ desires to exercise their free choice in a world marked by an increasing number of alternatives.
- The business impact of retention is generally woefully underestimated. Retention offers an extraordinary acceleration of profitable growth by exponentially increasing average customer lifetime and, as a result, by lowering customer acquisition costs.
- The quality of retention has at least as much impact on the future of a business as the actual rate of retention. Although passive or forced retention does contribute to short-term profitability, it is only vibrant retention that offers sustainable profitable growth. Without the positive and active customer behaviour that characterizes vibrant retention there can be no momentum.
- The customer retention portfolio helps by analysing a firm’s customer mix in terms of six groups – Runaways, Prisoners, Switchers, Settlers, Adventurers and Loyals. Each of these groups has to be handled specifically, with a view to creating and retaining as many Loyals as possible. It is the Loyals who display the vibrant retention that fuels momentum.
- Customer retention is vital for establishing a sustainable momentum. As a result, a specific strategy is required to boost vibrant retention. The three main components of such a strategy are mobilize for vibrant retention, detect sources of defection and convert defecting customers.
This chapter has highlighted the importance of retention and provided the tools to increase it to the point where it can fulfil its role as one of the main driving forces of momentum growth – vibrant retention. The aim is to have zero Prisoners, zero Runaways, zero Settlers, zero Switchers and zero Adventurers. Only Loyals! The next chapter will explore the final booster of momentum – vibrant engagement.