Few would disagree with the aim of increasing customer satisfaction - the more satisfied your customers, the more likely they are to buy from you in the future. And repeat business means repeat and higher profits.  This linkage has led companies to increase their focus on managing their existing customer base.  Today, many companies conduct extensive surveys to understand their customers' satisfaction levels.  This approach, however, presents managers with some tough problems. 

Take the situation of a manager who tracks the 'satisfaction rate' of its customers on a regular basis: 'We're at 90 per cent satisfaction today, but I still face three unknowns.  First, how do I know whether the key actions we have identified will achieve our target of 98 per cent satisfied?  Second, even if I achieve target satisfaction, can I be sure customers are going to come back again in the future?  Finally, will the investment cost of any actions we take be justified in terms of the amount of repeat business generated?' 

The basic problem which executives face is that traditional ways of focusing on customer satisfaction provide limited guidance on where and how much to invest to improve the ability to meet customer requirements.  It can't be customer satisfaction at any cost!  Customer retention is an approach to this dilemma which focuses the organisation on fixing things that are known to make customers talk with their feet.  If the major reasons why customers leave are identified, and the profit which is foregone when a customer leaves is determined, actions to prevent losses can be tied very tangibly to the financial performance of the business.  Identifying this financial linkage is a powerful means of increasing the organisation's commitment to being more customer-responsive.  Customer retention is as much about hearts as it is about minds. 

Losing customers is a very expensive business.  Every lost customer means profit walking out of the door.  However, this is not the end of the story.  Lost customers can damage a company's reputation.  On average a customer who has a 'bad experience' will tell nine other people about it - and usually exaggerate the story in the telling.  This makes new customer generation a much more challenging process.  At the same time, as little as 5 per cent of these customers may actually tell the supplier about their bad experience.  This makes it hard for the supplier to pin down the problem and increases the likelihood that the same problem will hit another customer - with the same results.  The impact on financial performance is compounded further as losing customers results in pressure to find more new customers.  This is costly - on average it is five times more expensive to acquire new customers than to keep existing ones. 

Customer retention and customer satisfaction are not, in our experience, the same thing.  Satisfaction focuses on learning from the customers you keep; retention, from those you lose.  Customer satisfaction is usually a highly subjective measure based on customer perceptions and may be interpreted differently by different customers.  Customer retention - which measures the proportion of your customer base that has decided to stop doing business with you - is both quantitative and uniform.  These differences make it difficult to use customer satisfaction measurement techniques to understand whether customers are likely to leave and why they decided to do so.  Customers may be satisfied today (when they fill in the survey return): but if one element of service goes wrong tomorrow, they might leave - according to the satisfaction survey returns, a 'satisfied' customer has not been retained. 

When the factors for which satisfied customers feel there is greatest potential for improvement and the factors which actually caused customers to switch suppliers are compared, their relative importance is dramatically different.  Existing customers would like to see significant improvement in after-sales service; but, at its present level, it is not a major cause of customers deciding to switch to another supplier.  The standard of account management, on the other hand, is felt to be pretty good by current customers, but when it goes wrong, the effect is devastating.  Understanding existing customer requirements is essential, but critical insights can be missed if you fail to focus on lost customers as well. 

Traditional measures of customer satisfaction usually bear little relation to measures of a supplier's financial performance such as revenue or profitability per customer account.  Whether customers are other organisations or individual consumers, performance will be dictated by a number of factors, such as the size of the customer organisation (or individual spending power), prevailing competitive and economic conditions and the stage of the customer's relationship with a supplier.  It is also notoriously difficult to get the 'appropriate' satisfaction rating for a customer, primarily because the person who 'scores' the satisfaction level may not be the person who decides which supplier to use.  The link between lost customers and financial performance is a simple one; the longer you keep customers, the more profitable they tend to be.  In other words, the lifetime profit profile of a customer is an increasing one.  There are five major factors driving this: 

Customers tend to increase purchases over time from suppliers with whom they have developed good working relationships (either through account growth or increased share of account). 

The cost of supplying customers declines over time as customer and supplier find more cost-effective ways of doing business. 

Delighted customers tell their friends - generating further business at low cost. 

Customers are prepared to pay more for products and services they know they can rely on - price premiums are possible, and 
 

New customers incur one-off 'acquisition costs' - the longer you retain them, the lower the amortised cost. 

Not all of these factors will necessarily operate in a given business environment or industry.  But there is a growing bank of evidence that the cumulative effect is to increase customer profitability as a relationship matures.  By analysing revenues and costs, it is possible to determine what the lifetime profit pattern of a customer (or customer segment) actually looks like.  From here it is a small step to work out the impact of improved retention rates (or keeping your customers longer) on financial performance.  If a company has a retention rate of 50 per cent, it is losing half of its customers each year - in other words average customer life is two years.  Likewise, with a 90 per cent retention rate, 10 per cent of customers leave each year so average life is 10 years.  Thus, if a company can increase its retention rate it increases its customer life and hence profits and profitability. 

The impact of improved retention rates on profits is substantial.  Most companies achieve retention rates of 60-85 per cent.  Applying this approach across a broad range of industries, including financial services, hotels and leisure, express delivery and office equipment, has shown that increasing retention rates by as little as 5 per cent can increase total company profits by anything from 20-50 per cent.  The time period in which this is achieved will depend on the effectiveness of the efforts to improve retention.  In the case of an office equipment company a 5 per cent increase in retention rates has been targeted over a three year period delivering a 4 per cent increase in profits in the first year and rising to a 30 per cent increase by year three.  There are two critical steps to realising the potential identified from improved levels of customer retention: 

Step 1: Identifying what things need fixing to prevent future customer losses. 

Lost customers are generally only too happy to tell you about what went wrong - and they will be very specific.  Through critical defection factor analysis from careful interviewing of lost customers, prioritised trigger factors which caused customers to leave can be identified.  Some factors will not be controllable (the customer went into liquidation) but most will be.  As lost customers are very specific about why they decided to switch suppliers, the information is highly actionable.  If customers are leaving because your service response time is two hours longer than they can afford, or because billing procedures and formats make their own internal administration process a headache, then you are getting very tangible feedback on what you need to change to keep their business. 

Listening to lost customers is not always enough.  Sometimes customers' honest perceptions of problems are misleading.  It may be necessary to make some internal comparisons of what service levels customers say they are getting and what they actually receive.  One company was told by lost customers that the unreliability of the product caused them to switch suppliers.  While customer perceptions of reliability matched actual levels achieved, the level of reliability they were expecting was significantly higher than the levels that were built into the supplier's (and competitors') products. 

The true root cause was not reliability, as lost customers suggested, but was actually setting excessive expectations during the initial selling process.  Identifying critical defection factors enables a company to focus its improvement efforts in areas that account for most customer losses - customer service actions can be clearly prioritised in relation to business performance. 

Step 2:  Identifying actions to achieve improved retention rates. 

Once critical defection factors have been established, functional or cross-functional teams can be set up to tackle the most important drivers.  These teams can use quality tools and techniques to conduct analysis and identify potential actions to remove key causes of losses.  There are several ways to approach this, including: 

Best internal practices: defection rates across different business units, countries, regions or depots can be compared to identify why some perform better than others. 

Benchmarking: identify which competitors customers defect to, and for what reasons.  If one competitor is taking a disproportionately high number of customers who were unhappy with your account management, this is a pretty good sign that you can learn something from them (and improve on it by understanding world-class practices in account management observed in other industries), and 

Talking to front line employees: people who are closest  to the customer are a crucial source of potential solutions to problems faced by the customer as they have to deal with these problems on a day-to-day basis.  Sharing critical defection factors with front line employees is a powerful way to identify action.  In one case a front line employee suggested that whenever a customer was lost, the sales representative had to make a verbal report to his branch manager explaining why this had occurred.  Losses decreased five-fold in just six months. 

Given that the number of losses caused by a particular factor has already been identified, the impact of recommended actions on retention levels can be calculated.  Taking the cost of the actions into consideration, the impact on profits can be identified.  Once actions are approved, implementation plans and retention targets can be established, and the business can be managed against these. 

Customer retention provides very powerful messages and focus for an organisation.  The level of losses, the value of a customer and the most important reasons why customers leave are all issues which everybody can easily understand.  Customer retention can be built into strategic priorities and policy deployment.  Processes can be developed to track and identify lost and vulnerable customers in order to regain and secure them.  Employees can be refocused in their efforts, trained, evaluated and paid at least in part on the basis of retaining customers.  In effect a customer retention-driven organisation can be created.  The effects of this focus, if properly implemented, are far reaching.  There is, for example, a virtuous circle relationship between customer and employee retention. 

A company-wide focus on customer retention provides a clear focus for employees, enabling them to become more productive and satisfied in their jobs.  This increases employee retention.  More experienced employees provide higher customer service levels and thus ensure higher customer loyalty levels.  At the same time, the need for extra recruitment costs is reduced, and there are increased funds available to support employee training programmes.  On the other hand, there is an opposite vicious circle whereby low customer retention feeds low employee retention. 

Customer retention is a powerful operational and strategic tool.  Operationally, it provides clear focus on where to invest in improvements in customer service and enhances understanding of the value of customer service to employees.  Strategically reducing customer losses is a 'low profile' way of gaining market share, providing improved profitability through both the retention of customers and the benefits of increased scale.