The Real Costs of Losing Customers

By JoAnna Brandi

Another customer walks out of the door or hangs up the phone vowing never to return to your place of business again. What’s the big deal? You can’t please everyone, right? There’s more where they came from, right?

That’s the attitude of many employees these days, or so it would seem from their behavior. Advertising campaigns would have you believe that customers are “kings,” “queens” or the “reason for our existence.” If this were true, why are so many customers angry, irritated or cranky? Customer dissatisfaction is running high and the Internet has given it an outlet for expression.

In today’s world, negative customer experiences seem to outnumber positive ones at an alarming ratio. Customers who have bad experiences become “detractors” in the marketplace. They are highly likely to say something negative to a friend or colleague about their interaction. And if the experiences they have with a company become too difficult or don’t provide enough value for them, the company loses them as a customer and as a potential advocate.

The Real Costs of Losing Customers

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Companies usually lose between 10% to 30% of their customers annually, and even more in the online world.

In this recession economy—with so many people not buying—that number is higher than it’s ever been.  That’s a crisis in almost any company—not enough customers to buy and there is no reason for the company to exist.

Customers leave for many reasons. Some move, some die, some go out of business,  some are wooed away by the competition, but overwhelmingly customers  leave because they simply feel you don’t care enough about them or their business. You may care, but if they perceive you don’t, well then, in their minds—you don’t.

The financial reality is that it takes several interactions with a customer before you’ve even made back the cost of acquiring them. Many customers quit you after only the first or second interaction. It’s impossible to understand the cost of losing a customer without looking carefully at the cost of getting a customer in the first place.

Most companies use a variety of methods to acquire customers, all at a different expense. The cost of an email interaction, a direct mail piece, an advertisement, a phone call, a visit from a salesperson all need to be understood to determine exactly how much that customer costs you to acquire. While individual departments usually have a good understanding of their budgets, it’s rare to find a company that has aggregated its information in a way that gives a good picture of the cost of bringing the customer to the door and getting him or her to buy.

Companies that typically begin the investigation of customer cost find that the number is much higher than they would have guessed. In calculating the cost of getting a customer, remember to include, along with the hard costs of things like mailing and expense accounts, the related softer costs like sales training and meetings, strategy sessions and research.

Add the costs of your time and energy as well, and you could be shocked to discover the total investment of resources involved to get that customer to say “yes” the very first time. Use the newfound knowledge of your “Cost of Acquisition” to determine how much money you simply waste if customers leave before they pay you back for your investment. In most companies, it’s a BIG number.

Let’s take a look at how one financial institution used their “Cost of Acquisition” number to set into action changes that helped them keep more of their customers.

Using as much data as we could get, we helped them determine that it cost approximately $500 to get a new customer to walk in the door. With that $500 as our starting point we then assembled other data that would help us further understand when the new customer actually became financially valuable to the company.

We discovered that an average new customer didn’t become profitable until their second year of doing business with the firm, so we set out to see how many customers got past the point of profitability and grew the relationship and how many closed their accounts and left before that point. We were shocked to find that 22% didn’t even make it through the first year, let alone through the break-even mark, which we determined to be somewhere between 18- 22 months.

Not only was their $500 investment lost but each and every time that customer was serviced, the cost of that activity was lost as well. The next part of our customer-retention project became clear, we had to find a way to help them keep more customers. We asked the question, “What could individual branch managers do to keep the customers long enough for them to get profitable?”

In highly customized workshops, that actually included 10-12 customer “guests,” we began to encourage creative thinking at the local, neighborhood level. We encouraged our traditional branch managers to shift from thinking “risk management” and start thinking “relationship management.” We started by revealing what we had discovered and putting some financial projections together based on an increase of only 5% in their retention rate. The evidence was stunning. Keeping even a small number of the profitable customers they were losing now would boost their bottom-line profits substantially. It didn’t take much more than that to get them to look at their business differently.

We helped them focus their attention, and that of their staffs, on the individual moments of truth and opportunity that occurred thousands of times a day. A “moment of truth” is any time a customer has the opportunity to make a judgment about the quality of the service you are delivering. It’s at that moment that a service giver can choose to pay attention, be present, smile and be genuinely welcoming to the customer. It’s at the moment of truth that we can create the “Wow” experience customers remember, and reinforce the company’s brand in a very visceral way over and over again.

Not all customers are profitable, but the likelihood for profitability increased with the number of products the customer used. The more positive the experience, the more likely the customer was willing to discuss deepening their relationship with the company.

Little by little, moment by moment, month by month we progressed. With attention to building trust, showing respect, expressing appreciation, being competent as well as courteous, we watched as our clients created more relationships that flourished, took root and moved into the profitable zone. Their investment in understanding the true cost of losing so many customers was paying off. Their new attitudes and behaviors paid off in real dollars.

It takes dollars to get a customer in some industries, tens of thousands of dollars in others. Common wisdom these days estimates that the cost of getting a customer is between six and 30 times more than it is to keep one. Do you know what’s it’s costing you?

Do the math.

What does it cost you to get a customer, and what does it cost to keep them?

How long does it take you to break even on the cost of your sales and marketing investments before they become profitable?

If you could keep just a small percentage of the customers you are now losing, what would it mean in real dollars to your company?

It’s well publicized that an increase of only 5% in your customer retention could mean a boost of 25% to 100% on your bottom line. The yield in your business depends on your fixed costs—the higher the fixed cost the higher the boost in profitability. I encourage you to do the math and discover the cost yourself.

What real-dollar advantage will you get from keeping customers happy? What’s the value of a customer’s relationship with you over the potential lifetime of that relationship?

While you are at it, take a look at how many more referrals you’ll get a year if you keep more customers. How much more positive word of mouth will be put out into the market place when you make customers happier? What’s the true lifetime value of a happy customer?

There are hard and soft, tangible and intangible results of losing vs. keeping customers. The company that loses customers has a high customer churn rate and therefore a less-stable customer base. If you are losing 30% a year and replacing 30% a year there are other hidden costs. There is a cost of “training” the customer in your system of doing business; they need more help to do business with you. There is a smaller stable base, only 40%, to use for research, development and forecasting.

Companies that lose a lot of customers spend a lot of money on sales and marketing to replace the ones they lose. That diverts budgets from service and the growing needs of employees. Let’s face it, when you have to worry about replacing customers, you are not worrying about replacing the worn-out chairs in the cafeteria or brightening the office with new paint.

These days when employees see that you don’t invest money on their behalf to make their environment more comfortable and more inviting, they spend your time online browsing the available jobs at other companies. And when they find one, they leave, taking with them valuable knowledge and competitive secrets.  Don’t be fooled. The recession has people staying put longer, but it hasn’t made them any more loyal. It’s incumbent on leadership to create a great place to work if they want employees to go the extra mile for the customer.

It’s important to recognize and remember that a “satisfied” customer is not good enough—up to 80% of the customers who told you they were satisfied on your last survey are just as likely to defect as those who weren’t. Without the “wow” to make the experiences positive, memorable and worthwhile, your future success hangs on the whim of the customer because they have not formed an emotional attachment to you and so they are easy prey for your competitor coming along with a great deal.

The more customers you lose the harder it is on your staff. Morale suffers when customers leave and the new ones require more patience and more time. Companies that lose a lot of customers also tend to lose a lot of employees. There is a direct correlation between customer happiness and employee happiness, customer unhappiness and employee unhappiness. Losing customers impacts every area of your business, especially your ability to grow.

So, have I convinced you that the cost of losing customers (and the advantage of keeping them happy) is high enough to get Executive attention? I certainly hope so. My experience dealing with C-level execs for over a dozen years tells me that most don’t have a good grasp on the impact of customer loss on their ability to grow. Most relegate “customer service” to a department where people get paid less than many others in the company and never spend any time there themselves to understand what goes on. (Although that’s changing, it’s not fast enough.)

There’s never been a time when it’s been more critical for leaders to tackle the “customer-keeping” issues in the business.

This means understanding how to attract the most potentially profitable customers for your business, how to retain those customers by providing more value than they expected and how to nourish and grow the relationships by engaging the customers so you can anticipate their future needs. There’s a huge payback when you focus your attention on how these activities work in your business. Customers who feel valued and appreciated are willing to spend more and to refer others, they say nice things about your company, which gives you more credibility in the eyes of potentially new customers. Win, win, win. (And it stands to reason that employees who feel valued and appreciated are going to be the ones to engage the customers in becoming your raving fans. Another win.)

Most execs don’t know the actual costs of getting or losing customers and so focus their attention on cutting costs rather than creating more value.

Most don’t understand the connection between employee happiness and customer happiness and a company’s ability to grow. Most dismiss “soft skills” as less valuable than technical skills. That’s a big mistake. The more “positive leaders” we train the more the evidence is mounting that by discovering and building on people’s strengths, focusing on what’s right and creating an environment of trust, respect and appreciation, employees respond by bringing their best selves to work. Soft skills yield hard, measurable results.

So here are a few suggestions to rise above what most are doing and help your company keep more customers and keep them happy enough to become your “promoters” in the marketplace.

Broaden your vision.

Stop thinking that “servicing” customers is something you need to do. Start thinking about building customer loyalty. Loyalty is an emotional attachment a customer makes to your company when they feel good about doing business with you. They perceive that you have delivered value in the way they needed it—and that you do it consistently over time.

Know your numbers.

Make sure you develop an ongoing system for tracking the actual cost of getting and keeping customers. Know your breakeven points and put your attention on what it takes to keep more customers profitable.  Really understand the dollar value of taking better care of the customers you have. Pay close attention to spot changing patterns.

Bring it to the C-level.

Make sure that customer loyalty becomes a C-level strategic concern. Develop a strategic plan to build loyalty and affection in both your customer and employee bases. You can’t separate the two. How an employee feels at work impacts their ability (and their choice) to treat customers well. Some companies have begun to appoint “CCO’s” or “CXO’s.” (Chief Customer Officer; Chief Experience Officer).

Get the word out.

Once you have the numbers and the plan, let everyone know what the customer’s lifetime value is, how much it cost to get them and how much it takes to make back the cost of the investment you made. That consciousness alone changes people’s behaviors. Train everyone in the company that the role they play is creating value for the customer. Make sure that the continuous improvement of the customer’s experience is happening everywhere in the company every day. Help everyone get smart about the customer.

Recognize that soft skills yield hard, bankable results.

Too many companies dismiss the real value of good relationship skills. In today’s crowded marketplace, relationship skills—like trust and respect—are a real competitive advantage. Teach people all over the company to master relationship skills.  Ongoing training and learning activities are a must. They’re all customers of each other.

Put your money where your mouth is.

While everyone says the customer is important, only a few savvy, smart companies invest the time, effort and financial resources to do what needs to be done to build a more loyal customer base. Executing a loyalty strategy takes a true understanding of what it takes to create the kinds of experiences the customer will come back for, and tell their friends about. It takes the time and commitment to get educated, a willingness to do business differently and the discipline to break old mindsets and habits. A loyalty strategy takes a real shift in the executive focus from short-term gain to long-term value.

Companies that are courageous enough to challenge their old ways of looking at business and embrace a value creation mindset will grow stronger than those who don’t. The power has shifted from those who sell to those who buy. Keep them happy; they’ll keep you happy.

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