Monday, December 4, 2006

Stamp Out Customer Churn - Plugging Holes In The Bucket

Learning A Costly Lesson From The Wireless Industry

It has been a well known tenet in business that it costs five times more to acquire a new customer and retain an existing one. It seems like good business sense, therefore, to make a concerted effort to keep the new ones happy and contented and plug that expensive "hole in the bucket". More often than not today, executives place too much emphasis on the acquisition side of the equation as evidenced by the bulk of their brand's marketing budget dedicated to "filling the bucket" with little committed to "fixing the holes".

Take the major wireless carriers, for example, and their relentless battle for market share of the over 220 million wireless consumers in the the country. Cingular, Verizon, and Sprint Nextel account for 168 million of the total, or roughly over 3 of every 4 wireless consumers in the market.

The chart below illustrates the Wireless Big Three Report Card Of Acquisition vs. Retention.

Roughly, for every one new subcriber each month, they lose two so they have to keep acquiring that many more to compensate. There are, obviously, large holes in their respective buckets and it is very expensive to keep ahead of the curve. In an article by USA Today, the CEO of Sprint/Nextel admitted that he and his management team "made some tactical errors in execution. "One was a whopper." the article goes on to say, the management team "did the one thing no service company can ever afford to do: neglect its customers."

The following chart illustrates the impact of churn. Customers that have a better than expected experience, for example, are a low risk to defect. The opposite is also true. A bad experience will almost always guarantee a lost customer. Most people, however, fall into to the "okay" category. It should be noted that these customers are highly vulnerable to poaching by competitors.

The recognition marketing lesson here is clear: recognize and fix the holes in the bucket. Customer retention and recognition must get the management attention it deserves.