stop customer churn before it starts
TRANSCRIPT
Stop Customer Churn Before It Starts
Satisfaction surveys and exit interviews won’t reveal the secret of customer retention. You need to develop a deeper understanding of what really drives
customers’ behavior.
by Martin Kon
HE ARRAY OF SUBSCRIPTION-BASED
services for whichthe average consumer writes a monthly check has ex-
panded sharply over the past two decades. Between Inter-net service providers (ISPs), cable/satellite services, cellphones, Wi-Fi, gym memberships, and so on, consumersmay spend up to three times what they once did. What’smore, greater choice exists in every category, where oncethere were but a few local monopolies.
Exit surveys offer notoriously generic and
unhelpful feedback about churn reasons.
In such a rich competitive landscape, companies withsubscription-based businesses—indeed, any companythat relies on long-term customer relationships—mustfocus as much energy on retaining customers as they do onacquiring them. Businesses that do not will find that rivalswith better retention strategies are rapidly overtakingthem.
Understanding how and why customer churn occurs iscritical. The churn occasion comes about when the qualityof the consumer’s experience falls below a certain thresh-old relative either to competition (
comparison churn
) or tothe consumer’s own expectations (
frustration churn
). Buthow do you discover what part the consumer’s experienceis to blame?
Customer satisfaction surveys and palliative “rescue”initiatives do not provide an accurate guide to what con-sumers value and which deficiencies could lead them toleave. A mobile phone customer does not say, “Tendropped calls in a week is unacceptable, so I’d better makea note in my diary to cancel in three months’ time. Nowwhere is that customer-satisfaction questionnaire?” Shesays, “That’s enough, I’m out of here right now!” Churnevents are sudden moments of clarity when customers’perceptions of their service change. Customer-satisfactionsurveys don’t catch enough customers who have had theseepiphanies because the customers have already left.
For one European ISP, we found that almost 80% of ex-customers had described themselves as “satisfied” or “very
satisfied” in the survey they filled out within the 12months before they dropped the service, indicating that, atthat time, they were not aware that they would leave. Inthis case, focusing on self-stated customer satisfactionwould lead to costly errors.
Another common approach, the exit survey at or afterthe point of cancellation, offers notoriously generic andunhelpful insights; responses such as “too expensive” or“poor quality” do not help management focus its effortson the most important areas. Often a disgruntled cus-tomer is in no mood to answer questions, is unclear abouthis motivations, is eager to end the debate, or wishes toavoid causing offense. Attempts to save the customer atthis stage are usually too late.
Businesses should instead invest in developing a supe-rior ability to understand customer churn. Such a capabil-ity allows churn to be reduced cost-effectively and will fuelgrowth even in mature markets.
An effective three-step approach starts with a fresh lookat customer-satisfaction data to understand the relation-ship among customer experience, customer perception,and customer behavior.
1. Understand the link between self-stated perception and churn
The drawbacks of self-stated satisfaction are twofold: first,that frustrated customers are underrepresented in thesample because they leave so quickly, and second, typicalratings and rankings research gives rather bland results.(For example, everyone agrees that reliability is important,yet no one is satisfied with the price.) For example, theEuropean ISP client that my company, Mercer Manage-ment Consulting, worked with had focused on chronicallylow satisfaction scores relating to both reliability andprice, and concluded that a cheaper offer and massive in-vestment in infrastructure was the only solution. But bylinking data from a regular customer-satisfaction trackerwith our client’s customer-cancellation database, we dis-covered which satisfaction responses actually converted tochurn behavior on an individual, de-averaged basis. In thiscase, self-stated dissatisfaction with the basic service (spe-cifically, its speed and reliability) turned out to be a poor
T
Stopping Customer Churn
(continued)
predictor of subsequent churn. However, dissatisfactionwith two more-advanced features of the service—naviga-tion and interface, and content—clearly did lead to churn.
2. Quantify the link between real performance and churn
In the previous example, the real impact of performancerelative to other components of the customer experiencewas unknown. This made us keener than ever to take thenext step, which is to see how different elements of serviceperformance directly drive churn behavior. By linkingcustomer-level data and cancellation data, we could estab-lish a direct relationship between performance and churn.The crucial data usually already exists in different parts ofthe organization; the challenge is how to interpret it to ex-tract the relevant information.
3. Identify the root causes of performance deficits
Identifying and quantifying those elements with the great-est impact on churn is only valuable if the root causes ofthese performance deficits can be identified and dealtwith. Again, a customer-level analysis of potential perfor-mance drivers allows firms to isolate the underlying causes
and quantify the impact that realistic improvementswould have on the key performance drivers and, based onthe relationship determined before, on churn.
Managers should then focus quickly on high-impactmoves. At one French service company, for example, theanalysis showed that customers on a certain type of techni-cal configuration experienced much better performance inone critical aspect. The operator was able to replicate thisconfiguration for all users, directly tackling one importantaspect of churn.
Strategic implications
Several principles can guide managers initiating a pro-gram to reduce churn:
Focus on reducing the root causes of churn.
Virtually all subscription businesses have a “customersave” policy that sets out how to handle customers callingto cancel their service and details the offers of free hours ormonths, discounts, or other incentives that can be made toconvince them not to leave. Much less effort and invest-ment generally goes into retention initiatives for thosecustomers who are not yet at the point of churn. Expend-ing more resources on this could result in less spending onsaving irate exiting customers or on acquiring new ones totake their place.
Avoid misleading customer surveys.
Many companies spend heavily on capturing and eval-uating customer satisfaction and put a great deal of cre-dence in these results. However, stated customersatisfaction is only relevant if it indicates how these cus-tomers will alter their behavior in the future. For subscrip-tion services, poor customer satisfaction with reliabilityand quality can mean something different when seen inthe context of customers’ expectations and experiencewith competitors’ services. There may be elements of theirservice experience that would prompt them to changetheir supplier, though. It’s critical to properly interpretcustomers’ stated satisfaction with the various elements oftheir experience and devise a satisfaction index that con-siders the relative significance of individual components.
Establish the link between actual customer experience and actual customer behavior.
The most relevant measure of customer satisfaction insubscription businesses is churn itself. Companies thatgrasp the direct relationship between various measurableelements of the customer experience and actual customerbehavior at an individual customer level will have a signif-icant competitive advantage in identifying and treating
FOCUS ON CUSTOMER INTERACTION
There are three important elements of a customer’sinteraction with a subscription business to considerand understand:
•
Customer experience:
What measurable service experience is the customer exposed to?
•
Customer perception:
How does the customer claim to value the experience?
•
Customer behavior:
How does the customer actually behave after his experience?
Understanding these three areas in depth and howthey relate to one another is essential to improvingthose elements of customer experience that will trans-late into loyalty. Fortunately, for most large compa-nies, the answers are within reach. IT systems capturelarge operational data sets at the customer level, andbusinesses can learn to condense critical informationabout churn from this data.
The analysis is not always simple, but it can revealstartling insights, allowing management to trade offcosts and benefits with new precision and make maxi-mum investments in their service.
Stopping Customer Churn
(continued)
the real drivers of loyalty and churn. At one Germansubscription-based company, poor performance on onekey metric resulted in a high intent to churn. However, adifferent metric was by far the biggest driver of actualchurn. Not making this direct link would have resulted inthe company spending significant amounts of money onthe wrong area without having any positive impact onloyalty.
Know that a better understanding is valuable only if followed by a better plan.
Many firms fall victim to paralysis by analysis. Develop-ing a robust understanding of churn should lead to achange in approach. Among the solutions that some lead-ing subscription companies have implemented are the re-
design of “customer save” scripts and actions, targetedproduct performance investments and service design im-provements, and outbound customer communicationsprograms.
Understanding and addressing the root causes of churnleads to a more effective and cost-efficient churn-manage-ment capability and shows customers that the service pro-vider is looking out for their best interests. Spending lessmoney for more impact and getting kudos from customershas to be considered success.
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Martin Kon is a New York City–based director of Mercer Management Consulting. He can be reached