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.