First-Customer Retention in the Critical Zone

by Jack Malcolm

Ultimate sales success is scored in terms of net customer acquisitions: it’s not just how many new customers you win, but how many you keep, and slight increases in customer retention can have an enormous impact on profits. Besides preventing the revenue drain from losing customers, retaining customers longer leads to higher average sales, higher margins, lower costs, and additional referral business. [1]

Ahead on points but still losing

Is your sales organization so focused on winning new business that you drop the ball on existing customers? You could be losing your customers and not even know it. Although most customers take time to make up their minds to defect, they don’t always let you know they’re unhappy. In fact, “customer satisfaction” as most companies measure it does not correlate well to customer retention: many dissatisfied customers never complain, and many satisfied customers defect.

For most business-to-business customers, the decision to change suppliers is not taken lightly. Customers rarely leave suppliers because of a single incident or complaint, because they usually have a large investment in the relationship, including the time and cost of selecting vendors, adapting their operations and processes to your product/service, and getting used to a certain way of doing business. They must also overcome the psychological hurdles of admitting a mistake and risking a change to something that may not be better.

That said, why do so many customers defect? Ultimately, it’s about deciding they can get better value elsewhere. They may be running from you or to a competitor. In the first scenario, growing dissatisfaction gradually wears down the relationship. Maybe a minor incident or two that is not detected and resolved starts the customer to question the relationship. Sometimes it’s a one-time event and the thought passes but in some cases the incidents continue, and each succeeding one adds to the list and also tends to grow in perceived seriousness.

On the other hand, the customer may not be dissatisfied at all. When your competitors call on them, they tell them they’re happy. But the other salesperson persists, and gets an opportunity to discover and exploit existing gaps between the customers’ expectations and your delivery, or to present a new idea that will improve the customer’s business.

Because either reason for leaving takes time, there are steps you can take at the sales team and at a company-wide level during this critical time that can significantly increase your customer retention.

Recommendations:

Customer retention is an integrated process which should engage the entire company. After all, it is about the preservation and growth of your most critical assets—customers. Listed below are recommendations for action at three critical phases: prevention, identification, and response.
Prevent:

Begin immediately. The courtship of the customer should continue after the first sale is closed. After ensuring satisfaction with the initial delivery or installation, consolidate your position in the account by expanding and strengthening relationships both vertically and horizontally. Look for additional ways to add value.

Write and follow a key account plan. At least the same level of planning that went into winning the first sales opportunity should be devoted to consolidating and expanding the relationship.

Constantly look for ways to add value. Often, customers leave not because they’re unhappy with what they are getting, but because a competitor comes along with a new idea, product, or promotion that trumps your value. If you don’t constantly find ways to steal your own customers, someone else will. The inexorable dynamics of competition are constantly trying to turn today’s consultative triumph into tomorrow’s commodity.

Know your costs and measure customer profitability. You may need to make some concessions for rescues or win-backs, and having a good handle on customer profitability will help you make intelligent decisions. The largest customers may not be your most profitable customers.

Know your own value. Ultimately, customer retention is about continuing to deliver superior value. Do you know why customers buy from you and which attributes of your product/service they value the most? You should regularly poll your best customers and create a matrix plotting the importance of attributes vs. the customer’s perception of your performance and quality in those attributes.

Hard-wire customer feedback into your communications with customers. Develop formal systems to consistently communicate with your customers, including regular top management communications with your most profitable clients to keep their finger on the pulse of the relationship, look for strategic ways to add value, and make the customer feel special.

Communicate the value of retention to the front lines. As we saw earlier, a one-point difference in customer retention rates can have huge impact on total profits. Make sure your sales and customer support staff understand this, as added reinforcement for more direct means of generating incentives as follows:

Measure and reward the sales organization for retention, not just wins. Salespeople build excellent relationships with customers. Give them an incentive to strengthen and maintain those relationships. Above all, make sure you don’t have disincentives to customer loyalty. In industries with a lot of customer “churn”, for example, salespeople love lost customers, because they’re prospects again!

Identify:

Rely on your champions within the account. Close communication with them will alert you to potential problems or opportunities, and they will let you know when competitors are getting close. As you find new ways to add value, you will be able to cultivate more champions.
Be especially alert when the customer decision process changes. New purchasing agents or decision makers may be looking to make a mark by changing the established order.

Look for” hidden” defections. Most defections may not be as obvious or dramatic as losing a customer entirely. It’s even possible for a customer to defect while keeping purchases steady, if the volume they buy from you is a declining percentage of their total purchases. Pay attention to “wallet share” as an early indicator of customer loyalty.

Don’t rely on surveys alone. Actively seek out problems and tackle them before they grow. Talk to customers and ask proactive questions. For example, instead of asking, “How are we doing?”, you will get much more if you ask, “What can we do better?”, or “What else can we do?” Then just shut up and wait for a response. (It’s impossible to be paranoid, because someone is out to get you. If you’re not getting complaints, that’s when you should worry. Maybe it means your customers have already disengaged.)

Respond

Decide on the level of response. If you have a good handle on customer profitability, you can decide how far to go to save the relationship. Some customers will justify heroic efforts, and some just a gentle admonition not to let the door hit them as they exit.[2]

Customer rescue. When a break is imminent, your first role is to stop the bleeding. Listen carefully, let the customer blow off steam, and take care of the immediate issue that precipitated the break. After you’ve stabilized the situation, don’t make the mistake of stopping at this point. Because the triggering event is usually only the tip of the iceberg, you must re-evaluate the value you deliver to the customer and look for meaningful things that can and should be fixed. Finally, revisit the original reason the customer switched to you and ensure it is still valid.

Learn from customer defections. Even if you follow all these recommendations, you won’t win them all. Losing a customer is painful, but it becomes tragic if you don’t learn from it. Interview lost customers and analyze the reasons for defections. This may help you avoid the same mistakes in the future, and may even pave the way for winning that customer back, especially if you let them know what you’ve learned and how you’ve changed as a result.

© Falcon Performance Group, Inc. May be copied for internal distribution.

[1] Frederick Reichheld shows how a 5% increase in customer retention can double profits in “ Zero Defections: Quality Comes to Services,” in Keeping Customers, Sviokla and Shapiro, editors, page 311.

[2] All kidding aside, it’s always a good policy to keep bridges intact for potential win-backs and avoiding negative referrals.

<< Back <<