Churn has gone from being a familiar term only in the Marketing environment, to being a prominent word in any company’s strategy. The reason is as simple as it is worrisome: abandonment rates are skyrocketing to alarming levels in all industrialized countries, in all sectors, and in all companies. The activity, profile, and size are not important anymore. Churn affects all companies, and they still do not know how to react to this phenomenon that weighs down their results.
In terms of telecommunications – perhaps the most mentioned sector when talking about client abandonment, but far from the only one – churn rates in some cases top 30%. In banking and insurance, it fluctuates between 7 and 18%; if we talk about retail, distribution, or leisure and tourism, the rate is between 5 and 15%. Nobody is safe, and the worst part about it is that few people react accurately.
Many companies opt to accept abandonment rates as a natural occurrence, doubling theirobtainment. This position is as inadmissible as it is absurd. Inadmissible, because with tough competition, it is not acceptable to allow an annual percentage of client leave without a solution. Absurd, because it’s no secret that client obtainment is much more difficult and, above all, more expensive than retaining clients already in the portfolio. Daemon Quest show that retaining a client costs between five and fifteen times less than obtaining a new one. 1.
Let’s think, for example, of an insurance company with close to 2 million portfolio clients and an abandonment rate of 18% -average numbers for the European insurance sector- 2. This rates translates into 1,500 clients abandoning every workday. Can losing 1,500 clients be considered just another incidental expense? Does it make sense to double the expensive efforts to obtain clients without applying the same effort to portfolio clients? The answer is a resounding “no”.
The numbers speak for themselves. In the U.K., where churn rates are reaching very alarming rates, telecommunications operators spend close to 122 million euros per year on “replacing” lost clients for new clients. 3 According to a survey by the U.S. firm CRMGuru, 80% of general directors consider client loyalty to be an issue of “high or extreme importance”. However…something must be failing when 40% say they give priority to obtainment of new clients and only 22% prioritize retention of portfolio clients.
Opting for obtainment to the detriment of retention is a clear error. It’s not that retention is more important than searching for new clients, but it is clear that both processes must go hand in hand and that retention is easier, more logical and profitable in economic terms.
If it’s clear that retention strategies must be as critical as obtainment strategies…How do we avoid clients migrating to the competition? How do we know when they are ready to abandon us, in order to prevent it?
The first thing a company must do is make a clear portrait of the situation. It must trace an abandonment map that details what type of clients are leaving, what sales channels are most prone to abandonment, what establishments are failing, what geographical areas are most affected…The abandonment map is a descriptive situation of the state, which is useful for in-depth diagnosis.
This first stage serves as one of the most critical steps in any churn prevention plan: the segmentation of clients that abandon in order to establish profiles that tell us who leaves and in which segments the retention effort is worth it. Throughout this process there is a factor that must be clearly prevalent: the client value. It’s not only necessary to know who leaves, but also how much we lose if they leave. It is essential that any company know exactly how much their abandoning clients are worth in order to know how much they must invest in each segment to avoid abandonment.
A study carried out in the European insurance sector shows that losing 10% of the most profitable clients diminishes insurance company profits by 40%. However, if 10% of clients that abandon are from the unprofitable sector, profits can increase up to 25%. 4 So not all clients that abandon should be retained. Churn prevention strategies must never lose sight of the value factor as a critical element.
Segmentation and profiling of abandoning clients allows us to establish abandonment paths and alarm systems that alert the company to “moments of danger” in clients prone to churn. Using analytical techniques, it is possible to know when a client gives signs of exhaustion. Each sector will have its own alarms according to the client’s habits and moments of purchase, although factors such as transactionality, the frequency of purchase, or complaints are common denominators to almost all activities.
If we take the example of the banking sector, analyzing the behavior of clients who left in the past, we will see that the first thing a client who wants to abandon does is cancel several direct deposits or direct billings, reduce the frequency of deposits, and if they are decide to retract their mortgage or pay slip, the process is almost irreversible.
Reconstructing the abandonment path of clients who left a company is perfectly possible, creating alarm systems, whether they are isolated or connected, that alert us to similar situations in order to act before it’s too late.
Although it’s necessary to know when a client begins to show signs of fatigue, this point is not enough. The analytical aspect is imperative (who goes, and when), but the explicative aspect is no less imperative. In any churn prevention strategy, it is obligatory to know why clients leave. Which abandonment drivers begin the abandonment process. Only by knowing why clients leave will it be possible to avoid their abandonment, acting exactly as the client demands, with appropriate retention plans.
It is necessary to pay attention to a point of vital importance that distracts the attention of many companies in their war against churn. Price is not the detonator for client abandonment in the majority of cases. It is time for companies to understand that it is their customer service, not prices, that holds the explanation for abandonment.
Some information that vouches for this theory: a study carried out in the “top 10” European roadside assistance companies reveals that variations of up to 40% in prices between companies do not influence in the company’s market share: there are more expensive companies with more clients, and there are more affordable companies with less market share.
More information: a 15% increase in three of these company’s premiums did not change their churn rates at all. And what’s worse, one of the companies saw its churn rate rise, despite having reduced prices.
5 Insistence on the price factor as the detonator of abandonment and a measure of retention explains many of the failures in the fight against churn. A multi-sector survey carried out among clients and directors from important companies with high churn levels shows surprising results (see graph on pg. 5). Consulted on the reason for abandonment, 73% of consumers alluded to “customer service” as the main cause, as opposed to 21% of directors. However, almost 50% of directors attributed abandonment to the price factor, while only 24% of abandoning clients alluded to price as a detonator. 6 This disparity speaks for itself about the effort companies must make to understand the phenomenon, if they want to stop the client drain and know exactly how to retain them.
In order to establish retention plans and strategies, it is not only necessary to know when the client is about to leave, but also why they are going to leave, because if we know the reasons, we will know how to retain them. This is where the element of “cause” comes into play, and where Sales and Marketing Chiefs must know how to respond appropriately. For example, we know that generally the long-standing clients are less prone to churn than recently obtained clients; that older clients usually present fewer problems than younger clients…combining the possible causes with clearly defined profiling that combines the current and potential value factors, any company will be able to determine what retention actions to take.
With clients of a lesser value, a simple phone call may be enough. If the client is clearly unprofitable, there is no action to be taken, but the challenge comes when the client’s value is high or very high. In this last case, the efforts should be intense, not in quantity –which is often counterproductive- , but rather in quality. Impersonal calls or indiscriminate offers are useless. The contact should be personal and always with valuable proposals appropriate to the client’s needs. The processes could even be systematized. Daemon Quest’s experience in various retention projects in contact centers, proves that you can segment not only clients, but also calls. According to these calls, we can determine which actions to take with complete accuracy (see graph on pg. 7)
On the other hand, it is imperative that in these processes the sales forces be clearly and intelligently involved, because without the participation of the sales network, nothing is possible. One initiative to consider in this sense is why we wouldn’t penalize client loss, in the same way we reward obtainment. Companies should seriously consider this option, shuffling around new retributive models based on the clientele.
One last thing to deal with is the case of clients that don’t leave, but don’t act either. What to do with inactive clients? How can we awaken that mass of clients that don’t take away from us, but don’t add to us either? Any strategy must this none too small percentage of “lethargic” clients in mind. They neither advance or retard our course. Often, a good activation plan avoids unnecessary investments in churn prevention and retention. Banks, insurance companies, pharmaceutical labs, distribution or mass consumer goods companies, hotel groups...almost all companies have a large number of clients that haven’t severed relations yet, but don’t promote them either. It is the obligation of the provider to find out who is behind these profiles, what their current and potential value is, and to act accordingly with activation and loyalization plans.
What if the client has left for good? Basically, there are two strategies, always considering that the client is profitable. Either try to fish them out again with recuperation strategies (Service Recovery Strategies), such as rewards with products and services, price reduction, made-to-order offers…Or, simply facilitating their exit. Many companies boycott abandoning clients. That is an inexcusable mistake. If the relationship has ended, and it was the provider’s fault, or at least the clients sees it that way, the most intelligent thing to do is let them go in the most sportsmanlike manner, because we can’t forget that the client, besides purchasing, also recommends. According to Daemon Quest, a disappointed client contaminates an average of nine people with their bad experiences…
Companies must choose whether to let their clients leave when it is inevitable, or to barrel them out, not only losing that client, but erasing a good number of potential clients from the list. If the client decides irreversibly to leave, the only option is not to get in their way. The cure could be worse than the disease.