Editor’s note: Kathi McGregor is chief operating officer at Service Strategies International, Inc., a Dallas research firm.

In a way, packaged goods companies have a big advantage over service providers when fighting for market share. That is because if they sell a product such as crackers, they can gain share by selling a little of their product to millions of people, who also buy crackers from several other companies. Service providers, on the other hand, may face a situation of earning either 100 percent of a customer’s business in their category or none of it at all. This is particularly true in businesses like telecommunications, where most providers are bundling products and services in an attempt to meet all of a customer’s needs.

Since many telecommunications companies are targeting the lucrative small-to-medium-size business market, the loss of a single customer has real impact. And as the cost of obtaining the business customer is higher than for individuals or residential populations, it is essential that a company retain every customer it can.

Many companies realize the importance of tracking the success of their loyalty efforts, and conduct general customer satisfaction studies to create and refine business strategies from the learning they obtain. Some companies add interaction-based satisfaction studies to their research mix, recognizing the importance of measuring the impact of customer service reps on their customers. They then make changes designed to enhance the customer service experience and further drive loyalty. While these studies are very important, unless a company understands the impact and causes of churn, it is missing a big piece of the puzzle.

Understanding churn generally starts with a review of the entire customer database. This can reveal patterns, such as when in the customer lifecycle churn tends to take place.

Chart 1

The chart above illustrates an example of the number of small business customers churning in the first year of their service agreement. It clearly indicates a period of extreme vulnerability from three to six months of service.

Assuming an average billing of $500 per customer per month, the lost revenue for customers who churned during the third to sixth month of their original one-year term of service alone would be $1,290,000. If you add to this the cost of acquiring the customers, and then replacing them, the impact of even a “small” amount of churn becomes obvious.

Once a company understands the impact of churn, it naturally reaches to understand its causes. Some companies have their customer service reps call a sample of customers who have already churned and ask them why they left. A typical response received is “We didn’t need it anymore,” or “We were dissatisfied.” While any information obtained about churn might be somewhat helpful, responses like these are clearly not sufficient to develop actions plans.

The company looking to aggressively combat churn often contracts with a qualified research partner to thoroughly investigate its reasons, and to be able to quantify the degree of impact of individual issues. For example, churn generally falls into three categories:

  • the customer is no longer in business;
  • the customer was “pushed” away due to unmet expectations, either by something your company did, or failed to do;
  • the customer was “pulled” away by a competitive offer.

Loss of customers who are no longer in business is not something a company can control, and would not be included in a churn study. Customers who were “pushed” or “pulled” away are considered to be controllable churn, and would be taken through a series of questions to determine what factors caused them to leave, and what remedies might have prevented their defection.

Advanced analyses could determine segments of churned customers by identifying what characteristics they hold in common. By applying this information to the company’s current database, you could identify new customers at risk for defection, and take preventive action to reduce the incidence of churn.

Chart 2

In addition, the research should suggest which internal processes need to be modified to minimize or eliminate problems that lead to customer defection. The chart above shows the impact of reducing the amount of three to six month churn by 20 percent.

Assuming the same average monthly bill of $500 per customer, the reduction would result in the retention of over $250,000 in sales for this group of customers in the first year alone.

By adding a well-designed churn study to your customer loyalty efforts, you can quickly improve your bottom line, while minimizing future costs associated with replacing lost business.