In these tougher economic times, it is important to plug every profit leak.
Lost customers represent a substantial profit drain for most firms. Every year, the average company loses 20 percent to 40 percent of its customers. For online companies, defection rates can be higher. When a longtime customer defects, the negative effect on profit is substantial. This is because the profit contribution of a mature customer who has bought from a firm for several years is dramatically higher than that of a customer who has been buying from the same firm for one or two years.
And do not think a longtime, high-value customer is easily replaced. Research shows that every market space has a limited number of best customers.
In his book, “All Customers Are Not Created Equal,” Garth Hallberg points out that, “for most categories of business, one-third of the buyers account for at least two-thirds of the volume. The high profit segment generally delivers six to 10 times as much profit as the low profit segment. Moreover, they are critical, not only because of their profit contribution, but also because of their relatively small number.”
Without question, the best way to win the war on customer turnover is to ensure that the customer never leaves in the first place. But churn happens and having a process for winning back high-value customers is vital to every company’s profitability.
The dismal state of win-back. Very little is being done at most companies to win back lost customers. In my company’s national win-back study, we asked senior marketing managers from a wide cross-section of companies whether they knew how many customers they lost per year. Almost half of the respondents said no. Those who said that they knew their annual defection rates estimated their losses at 7 percent to 8 percent when, in fact, the average company loses, at minimum, 20 percent of its customers.
These marketing managers knew surprisingly little about their win-back success rates. When asked, “Do you know what percentage of your customers you are able to win back?” a whopping 50 percent said that they did not.
Finally, the managers were asked whether they conduct defection interviews among lost customers. Forty-seven percent said they did not.
Most companies are not informed about customer loss and do not have strong win-back policies, programs or monitoring systems.
Customer win-back is a sound investment. Why are many firms so apathetic toward lost customers?
Our research shows most companies consider churned customers as dead-end opportunities, with no hope for revival.
Yet, many of these lapsed customers are simply dormant and awaiting resuscitation. The odds are surprisingly favorable for turning lapsed customers into active customers.
A study by Marketing Metrics, Paramus, NJ, found that the average company has a 60 percent to 70 percent probability of selling again to active customers and a 20 percent to 40 percent sales probability of selling to lapsed customers and only a 5 percent to 20 percent probability of making a successful sale to a new prospect.
Lost-customer recovery represents a wise investment for any company.
Get smart about reactivation and consider the following steps that can help your company:
• Practice the 80/20 rule. The overriding issue in any win-back strategy is customer asset valuation. Estimating what a lapsed customer is worth in future purchase potential should dictate how a company appropriates its win-back resources.
Experience shows the 80/20 rule is alive and well in lapsed customer valuation. Some lapsed customers are simply more valuable than others. Some are worth winning back and others are not. Identifying which customers represent the most long-term value is key to wisely prioritizing your win-back resources.
• Identify defection drivers. Consider BellSouth Mobility, Dallas, the premier provider of wireless services in the southeastern United States. At the time this case study was prepared, the company had 1 million subscribers in its 28 cellular systems. Even though the company was growing at an annual rate of 45 percent, and adding more than 2,500 new customers each day, it was losing 500 customers each day.
BellSouth realized that winning back just 10 percent of these lapsed customers could make a substantial difference in profits. In order to achieve this 10 percent win-back goal, BellSouth launched a test market study and began by conducting focus groups among switchers. In focus groups, lost customers revealed that they preferred BellSouth’s call coverage, customer service and billing system to competitive carriers. However, these same customers terminated their service with BellSouth because of one or more of the following problems: They were denied credit for dropped calls, given no free gift promotions, or were denied the “free airtime” promotions offered to prospective customers.
• Put your best foot forward. Applying this learning, BellSouth addressed the defection drivers head-on in carefully designed promotions. BellSouth sent 3,500 switchers a direct mail reactivation offer for free phones, free airtime and credit for dropped calls. However, this offer resulted in a disappointing 3 percent response rate from direct mail and a 1 percent reconnection rate.
Additional customer research revealed that although respondents rated the offer strong, current contracts with other cellular companies, and misplacing or never receiving the direct mail card prevented lapsed customers from switching back.
• Timing is everything. BellSouth now understood where its earlier win-back promotion fell short: The initial win-back offer to 3,500 former customers did not take into consideration the customers’ termination date. This meant many lapsed customers had contractual agreements with other cellular companies, which served as a barrier for switching back.
Recognizing this barrier, BellSouth repeated the offer to 1,000 former customers who left 11 months before with the rationale that these customers’ existing contracts with competitors would soon be up for renewal and, as a result, these former customers would shortly be free to switch back. BellSouth followed up the letter with a friendly phone call. The results were much improved. This time the offer produced an 8 percent response rate and a 3 percent connect rate. By adding the phone call to the win-back protocol, a 10 percent connect rate was achieved.
With the economy slowing, it is increasingly important to spend resources wisely. For any company, customer win-back is an untapped opportunity just waiting to be leveraged. Now is the time to build processes and systems that turn customer dormancy into dollars for your organization.