Customer Retention is Overrated


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Remember the listening game you played in elementary school – the one where the first kid introduced a word or phrase to the group by whispering it to the next kid, and that kid whispered what he heard to the next kid, and so on, until the verbal transmission reached the last kid? A gauntlet of second-grade interpreters just magically transformed flobber wheels into worm gear. How cool is that?

We marketeers do the same thing, minus hilarity and amazement.

This week, I read a post reminding me, yet again, that “it’s five to twenty-five times more expensive to acquire new customers than to retain current ones.” Like many posts citing this statistic, this one linked to an October, 2014 Harvard Business Review article by Amy Gallo, titled The Value of Keeping the Right Customers.

The problem is, despite its prominence in the headline, the adjective right has been altogether ignored in conversations about customer retention. I suspect that’s not the outcome that Gallo intended. Unfortunately, like the elementary school game, a distortion has resulted, and it proliferates with a power and force of its own. And that distortion has wreaked havoc on customer strategy. Not all customers are worth retaining. Some customers are wrong for some businesses. Some start out wrong. And for many reasons, some become wrong. Regardless of their genesis, almost every business has a population of wrong customers. Some large. Some small. Divesting them is as natural and essential for businesses as breathing is for humans. Every company should have a plan and process for it, a topic I will cover in a later article.

It’s understandable that customer divestment as a strategic imperative got subsumed in customer-retention hype. Despite hinting at this critical matter in her Harvard Business Review title, Gallo doesn’t elaborate. Instead, throughout her article, she wags a shaming finger at vendors. “By the time you see an increase in your churn rate it is six or eight months after the point in time when you actually failed the customer,” and “Whether you prefer to look on the bright side or mourn your losses doesn’t matter — both figures look at the same thing.”

Failed? Mourn your losses? – Of what? Customers that aren’t profitable? Customers who expect you to waive your warranty terms? Customers who relentlessly pound your service team for support, and browbeat your sales force nonstop for price concessions? Customers who consistently drag out their payments, straining your cash flow? Customers who would rather have you patch their creaking IT infrastructure rather than investing to replace it? Those losses?

No doubt some customer churn is genuinely mournable. Tragic, even. But some, not so much. I can recall more than a few times when losing a specific account made me nearly as euphoric as when the Nationals won the World Series – a state I don’t reach very often. By casting churn as uniformly negative, undesirable, or emblematic of systemic failure, Gallo – and many others – overlook two realities:

1. A portion of customer churn is inevitable, and need not be lamented. Just planned for. I call this baseline churn. This segment includes companies that go out of business, merge, decide to discontinue or consolidate operations. Customers that change their strategies and no longer have need for a vendor’s product or service. Customers that move from the service area, including offshore. Any of these situations cause churn, and none result from a vendor deficiency or customer grievance.

2. Churn is essential for financial health. I call this vendor-initiated churn or account divestment. It’s as integral to revenue strategy as account acquisition, maintenance, growth, and win-back. With rare exception, endeavoring to hold all your accounts into perpetuity is a mistake. If you are not regularly asking “which customers are we better off without?” you risk becoming bloated with accounts that don’t fit your business model. Ones that are high-cost, and low-profit. Ones that perennially distract your staff from supporting more valuable opportunities. “Our churn numbers have never been lower! Too bad our profits are in the tank!” A possible symptom of account bloat. One that the retain-no-matter-what zealots should know quite well. My advice is different from theirs: instead of hemorrhaging cash attempting to satisfy customers that will no longer ever bring you joy, consider letting your competitors serve them. And if you play your cards right, those jettisoned customers will then bring down their profits. Schadenfreude.

Among the reasons account-retention zealots have gained traction is the squishy nature of retention costs to begin with. While capture costs are often tracked to the penny, retention costs often pass under the radar, parsed far and wide in the General Ledger, into accounts called Product Development, Customer Support, Product Returns and Allowances. Little wonder that the disparity between capture costs and retention costs appears massive. As Boeing’s executives know well, it takes just a cataclysmic event or two to upend the capture-retention math. On November 13, 2019 The Wall Street Journal reported that Boeing “has set aside an initial $6.1 billion that it expects to pay over the next several years in the form of cash, discounts and services” to compensate customers affected by the 737 MAX grounding.

As an IT Director back in the 1980’s, I remember my boss, the EVP of Sales, made a curious request. “When we get an order from [Company X],” he told me, “I want the pricing algorithm to up-charge our full-list unit price by 1.1.” When I asked him why, he replied, “because they’re a pain in the ass.”

His rationale was not without merit. [Company X] was difficult to support. Most of their orders were designated “urgent rush” – the bane of production planning. They regularly over-ordered for their needs, and always expected to return the excess for a full refund. Their outstanding invoices typically aged to 90 days. My boss wouldn’t have complained if [Company X] stopped buying altogether (this is, churned), and maybe that was his motive. But that didn’t happen. [Company X] kept buying. At least the extra coin took a little sting out of fulfilling their onerous demands, and likely discouraged them from placing more orders.

Investing in customer retention makes sense when the objective is keeping the right customer, and not keeping any customer. You probably heard it correctly the first time.

Related article: Acquisition and Retention: the Yin and Yang of Customer Strategy


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