Wednesday, July 6, 2016

In the previous post , we began looking at a suggested approach for analyzing lost customer data at an individual level in order to identify specific customers and the value they represented to the company prior to their defection.  To illustrate this approach, here’s a hypothetical example that can be generalized to a variety of lost customer scenarios that many companies, regardless of industry, typically experience.

In this case, the company has four groups of customers segmented based on lifetime value.  That is, the company has simply totalled the value of all purchases made by these customers and developed four segments each with their own purchase threshold.  Looking at the segments from lowest value (segment #1) to highest (segment #4) reveals that attrition over the preceding 12-months has been 8% for segment one; 4% in segment two; 5% in segment three; and 3% in segment four.

On first blush, we’d be tempted to conclude that segment one, with 8% attrition, requires immediate attention.  Looking at lifetime values, however, indicates that while segment four lost only 4% of customers, this represents 65% of the revenue the company earned in the last 12-months.  While these are hypothetical numbers used to make a point in this example, this is not an uncommon occurrence.  This variation on the “80/20 Rule” is often seen in lost customer analysis and it’s the primary reason why looking at a single retention value is often misleading.  

In addition to this lost customer value, it’s also compelling to look at the corresponding inflow of new customers to determine if the value lost is being replaced by that brought in by the new acquisitions.  While this may not be possible in all industries because the new customers have yet to establish a purchase history with the firm, this analysis can be done in whole or in part, for example, in financial services.  That is, when these new clients open and fund their new accounts, how do the initial deposits compare with the value of deposits the lost customers have taken with them?  Comparing this inflow and outflow is perhaps the best way for CX to make a business case for addressing dissatisfaction and the resulting defection of customers.  As such, an inflow and outflow metric should be a critical component of any CX performance reporting.

Informed by this insight, from a strategic perspective, CX should next seek a thorough understanding of why these high value customers are defecting.  While the responses to survey questions may reveal some “first-level” reasons for leaving, it’s unlikely that quantitative data alone will provide a comprehensive understanding of customer attrition.  This is because, in most cases, the reasons behind defection are multifaceted and complex.  Specifically, as discussed in a previous post, customer expectations around products, services and the overall experience typically focus on functional, social, and emotional “jobs-to-be-done.”  Obtaining a deep understanding will likely require qualitative research methods such as individual interviews and/or personal observations of customers who are using your product or service.

One-on-one interviews with lost customers often results in actionable insights that can subsequently be used to address the shortcomings in the product or service that contributes to attrition.  In her very practical and informative book, Buyer Personas, Adele Revella presents an interview format geared towards acquiring a comprehensive understanding behind the reasons customers elect to do business with a company.  Adele refers to her method as the “5-Rings of Insight” and I’ve modified her approach to make it applicable to conducting lost customer interviews.
  • What triggered your decision to find another company from which to buy this particular product or service?
  • What were your expectations of the product / service when you first purchased it? These expectations must be categorized into functional, social and emotional “jobs”.
  • In using the product/service, what were the hurdles to satisfaction…that is, where did your functional, social and emotional expectations not line-up with what you actually experienced?  
  • What was your criteria in selecting a new company from which to purchase the product or service?  From this, you’ll want to identify if the customer is looking to complete the original functional, social and emotional jobs, or if perhaps over the course of the experience with your company, the list of jobs has been modified.
  • How did you go about selecting the company you’re now with?  Here, you’ll develop a  journey map depicting the trigger moment of defection from your firm and continuing all the way to the selection and use of the competitor’s product or service.

In the next post, we’ll use another hypothetical case to look closer at the lost customer interview.

Sunday, April 24, 2016

A Suggested Approach for Developing a Customer Experience Strategy - Lost Customers, Part 1

In the course of completing a strategy assessment of your company’s customer environment, you may get lucky and come across data regarding lost customers or prospects.  If an exposure to lost customers is not included in the assessment, you’re strongly encouraged to investigate this particular group of customers as this often represents the low hanging fruit that, if addressed, can pay immediate financial dividends for both the company and your CX efforts.  Surprisingly, many organizations ignore lost customers all together. But that said, it’s quite likely that the company’s finance department thinks about all about the foregone revenue that lost customers represent…they just don’t know what to do about it.  This is where a well thought through CX strategy can make financial inroads while establishing immediate credibility for the importance of customer experience.

The inflow of new customers and the outflow of lost customers speak directly to the basic economics of the organization…even not-for-profit organizations need to maintain a reasonable balance between customer inflow and outflow.  In the case of for-profit companies, it is imperative that over an extended period of time, the outflow exceeds the inflow in order to sustain the firm.  

If minimizing the outflow of customers is so critical, why do relatively few companies track it as a key performance indicator?  Across many industries, the sales function has a leading role in a company’s operations, and consequently, there’s a heavy emphasis on new customer acquisition while lost customers are often ignored.

That said, some firms do track lost customers…typically reported in the form of a retention value…but as we’ll see, this can be a misleading view of the firm’s economics. 

Drawbacks to Using a Single Retention Metric
As a rule, maintain a healthy skepticism about the insight that can be drawn from a single metric.  As the saying goes, “the devil’s in the details” and that certainly applies when trying to understand the dynamics around lost customers.  

Consider, for example, a company’s claim to having 75 percent customer retention.  Depending on the industry, that may well be a healthy retention rate, but it may also lull the company into a very dangerous complacency.  Delving a little deeper we should ask…who are the 25 percent who left?  How much of the revenue and profit did these customers account for?  What are the demographics of this group…were they younger and potential long term customers?  Were they older, more affluent and, at one time, loyal customers?  And, what about the 75 percent who stayed…how many are profitable?  Do they generate referrals?  These are just a few of the questions that should be asked to arrive at a more thorough understanding of the financial implications associated with customer retention.  As mentioned previously, one of the most effective ways to establish the credibility and importance of the customer experience role in an organization is to draw a direct link with the firm’s economics…the potential forgone revenue associated with losing key customers.

Lost Customer Analysis
As an alternative to reporting a single metric retention value, here are some suggestions for developing a more informative and actionable view of customer defection…
  • Start by determining on a monthly or, at least quarterly basis, the inflow of new clients and the outflow of lost clients.  This information can usually be sourced from a company’s CRM system or a sales database.  Ideally, you would depict four values…in the reporting period there were x number of new customers who brought in y revenue, and there were x number of lost customers who represented y value of lifetime purchases or account balances.  Walk the proposed metrics around to the various functional areas…Marketing, Customer Service, Sales, and especially, Finance, and get their input.  Ultimately, you’ll want to have agreement on these four metrics.
  • Once the high-level inflow and outflow numbers have been assembled, it’s time to disaggregate these values and get into the details…this is where the real insights will come from.  Focusing on the outflow number, unpack this, if possible, by client segment and the corresponding value.  This is where you’ll likely need some help from a database expert who can query your customer database and identify, at an individual level, those customers who have closed their accounts, or who have not renewed a subscription, etc.  In some industries and companies, identifying a lost customer is relatively straightforward.  In financial services, for example, it’s the customer who has closed all their accounts and no longer has any money with the firm.  The same idea applies to a subscription business where it’s clear whether the customer has renewed.  In other industries, identifying a lost customer is a bit more ambiguous.  In automotive, for example, identifying a customer a lost lease customer is similar to a subscription model where there’s a definite end-date to the contract.  In other contexts, tracking lost customers can be more challenging because there likely isn’t a clear indicator of customer defection such as a cancelled contract or an expired subscription that’s not renewed.  In cases like these, a suggested proxy for a lost customer is a purchase recency / frequency approach.  In analyzing their sales data, for example, an online retailer could identify those customers who had an established purchase cadence…monthly, for example, and establish a business rule to define a lost customer as one who, in this example, has gone three months since the most recent purchase.  Again, if this is the case, you’ll need to reach agreement with all stakeholders as to the proposed proxy for lost customers.
  • With the lost customers assembled by some type of segment classification, analyze the numbers and ask some questions.  Which segment is bleeding the most outflow?  How much…relative to the entire outflow?  It’s quite likely this will be a take on the 80/20 rule…20% of the lost customers represent 80% of the lost revenue.  Very importantly, be sure to identify trends in this data…for the past six-months, for example, has the same segment seen the largest outflow of customers and/or revenue?
In the next post, will discuss where to go next in addressing the lost customer issue.

Friday, January 22, 2016

A Suggested Approach for Developing a Customer Experience Strategy - Part 1

First things first…”strategy” is one of the most misconstrued concepts in business, so let’s start with a definition of what it is, and what it isn’t…here are some references I’ve come across in books and in various media:
  • “Our strategy is to be the most trusted and admired company in the ___ space.”  This may be a worthwhile mission, but it’s not a strategy.
  • “Our strategy is to sell 100,000 units this year, while reducing costs by 10 percent.”  These are objectives, not strategies.
  • “Our strategy is to improve on our customer and employee satisfaction scores this year.”  These are goals, not strategies.
In his book, Deep Dive, Rich Horwath presents a simple and useful way to correctly define some commonly (misused) terms…
  • Goal - what you’re going to do…generally (e.g. improve our customer satisfaction score)
  • Objective - what you’re going to do… specifically (e.g. improve our customer satisfaction score from 80 to 85 by the end of our fiscal year)
  • Strategy - how you’re going to achieve the goals and objectives…generally (e.g. we’re going to improve our customer satisfaction score by implementing a formal customer experience function in our company).  This definition of strategy is a good starting point, and I’ll build on it shortly.
  • Tactic - how you’re going reach your goals and objectives…specifically (e.g. improve customer satisfaction by implementing a CX function that includes hiring two staff with CX expertise and investing in a data analytics solution)
Let’s elaborate on the initial strategy definition by adding three key MUST HAVES that are critical components of any strategic plan…
  • Identify the precise Business Challenge, Opportunity, Issue or Problem:  In his book, Good Strategy / Bad Strategy, Professor Richard Rumelt writes, “A good strategy recognizes the nature of the challenge and offers a way of surmounting it.”  Rumelt goes on to say, “When you cannot define the challenge (going forward, “challenges” will refer to any opportunity, issue, problem the company is facing), you cannot evaluate a strategy or improve it.  Tying this back to Horwath’s reference to strategy as “how to achieve goals and objectives…generally, the strategy articulates how the organization will deal with the challenges that must be addressed in order to attain the goals.
  • Identify the Resources and Activities that will be used to address the challenges: As Professor Rumelt says, “The most basic idea of strategy is the application of strength against weakness.”  That “strength” consists of those resources and activities in which the organization excels relative to its competitors.  It is in the application of those key resources and activities that the company gains an advantage or is differentiated from its competitors as judged by customers.
  • Develop choices for achieving the goals and objectives, and select those most appropriate:  An organization may have identified its goals, issues and required resources, but it still falls short of having completed its strategy if it hasn’t also developed at least two viable choices for how to proceed.  Unfortunately, many companies stop their strategy development after coming up with only a single potential solution. In 99 percent of cases, there will always be at least two (if not more) approaches a company can take to achieve its goals.  Consequently, a robust and rigorous approach to strategy design will always thoroughly consider a group of potential options and select the one(s) that best fit and make use of its resources to achieve the stated goals.  

Goals, objectives, strategy and tactics, taken together, are the interrelated components of an integrated and coherent strategic plan…an absence of any one of these results in an incomplete plan.  

In previous posts , this blog has introduced various tools (e.g. surveys, journey maps, audits) that can be applied at the tactical and design levels to address specific customer experience activities.  Now that we’re focusing on CX strategy, over the next few posts, I’d like to introduce and explain a couple of new tools, that we’ll use to develop the customer experience strategy for the HealthScan company introduced in the previous post’s case study. 

Crafting a strategy is often overwhelming because it involves a lot of “connecting the dots” among seemingly unrelated items.  The essential purpose of these tools is to help organize our thinking and ensure we’ve addressed all of the components of the strategic plan.