Short Essays on Learning from Customer Defections

Short Essays on Learning from Customer Defections Matthew A. Brown California University of Pennsylvania

Short Essays on Learning from Customer Defections

Question 1. What is the purpose of the study? (Summary of the study.) In this study, author Frederick Reichheld examines one of the most important, yet apparently least understood business metrics; customer defections. Business leaders and executives intuitively know that customers are important, yet seem to lose themselves in bigpicture discussions regarding profits, selling, and promotion. In the process, executives seemingly forget that it is the customers needs that should be driving the business's goals. Furthermore, repeat customers are most valuable to companies, buying more, taking less time, and bringing in new customers. Repeat business implies a sort of customer loyalty. There is clearly a link then between customer loyalty and the value to a business. For example, decreasing customer defections by 5% can double profits, in some instances. Once Reichheld establishes the importance of customer loyalty, he asks a seemingly obvious question; why do businesses not try to learn from customer defections? After all, defections represent the clearest possible sign that customers see a deteriorating stream of value from the company. Business is a kind of balancing act between what a company produces, what customers want, and what competitors are doing. Understanding how a company is succeeding in the marketplace can be complex indeed, a seemingly impossible task in today's global economy. In this context we should look to the metric of customer defections as a pure sign that a business is failing in some way. Much of the study is devoted to understanding why corporations do not use this critical data, and how to change a business culture that fails to understand the importance of studying customer defections.

Short Essays on Learning from Customer Defections

Question 2. Does the article present a conceptual study or a quantitative study? What implication does this have for the study's findings? One definition of conceptual study is that it is focused on clarifying/refining networks of conceptual relationships1. Basically, conceptual thought means thinking about a subject in a different way. The author is convincing the reader to think about business profits and revenue with respect to customer loyalty, arguing that certain customer defections can be economically staggering for a given company. To this end, some shocking facts are presented, including that on average, U.S. corporations lose one half of their customers every five years. Given that customer loyalty is important to a business then, the author continues to study the reasons corporations fail to properly analyze customer defections. Essentially then, the study is concerned with two concepts. The first is customer loyalty, the reasons for defections, and the value of defections as a business metric. The author acknowledges that many companies attempt to measure, or quantify, their customers loyalty through satisfaction surveys. The author argues that executives get caught up in driving the satisfaction number higher as a kind of goal into and of itself. The true measure of customer satisfaction is whether the customer returns to do business with the company again. The second concept is about failure, specifically the reasons business culture is unwilling or unable to look to closely at defections as a clear signal of failure. Because this is a conceptual study, we might infer that the findings will relate more to attitudes, ideas, or procedures than about specific, measurable performance. This in turn might mean that the prescribed changes will be more difficult if they are ingrained into the psyche of
1 http://www.conceptualstudy.org/

Short Essays on Learning from Customer Defections

the business or its personnel. This particular conceptual study might produce insights that will be useful for a longer period of time. For example, the measurable reasons for customer loyalty (perhaps a phone has a higher data speed; a company might determine that they lost 10% of their customers in a year because they didn't produce a sufficiently fast phone) are of a limited use. Although important in their own way, they will likely not guide any long-term strategic thinking by company leadership. In contrast, the concept of customer loyalty and what it means for company profits might remain relevant for decades and is the kind of thing leadership can structure a company around.

Question 3. What are the findings of the study? (What did the researcher's find.) The bulk of the study is devoted to rooting out the reasons most corporations ignore, or fail to learn, from customer defections. The author identifies seven principal reasons. The first reason is that executives are unaware to the extent that repeat customers are valuable. Most corporate leaders have a vague idea that keeping customers is good, but are unaware that reducing defections by 5% can double profits in some cases. More broadly stated, leaders don't fully recognize the relationship between customer loyalty and profits. An interesting insight is that eventually, the majority of the marketplace will be filled with customers having firsthand experience with a company's inferior value proposition; a position that is impossible for a company to recover from. The second reason is simply that it is unpleasant to study failure (what customer defections represent) too closely. The author Reichheld writes that businesses are too focused on

Short Essays on Learning from Customer Defections

success, although they will learn far more from their failures. He continues, that success is a result of many subtle things working just right in the marketplace; many of these are not under the company's direct control. It seems important to realize that some company's success therefore may rely less on what the company does and more on, for example, economic conditions. Or perhaps being more lucky than good. The third reason that companies fail to study defection closely is due to the difficulty of defining defection. When customers shift business away from a company over time, the gradual defection is less likely to be identified as one. Related to this is the fourth reason; which is defining the core customer. Some customers might be potentially very valuable to a company, but do not look like it because so much of their custom goes to other organizations. Every organization should know that customers who are more valuable to competitors will shift to them over time. The worry is that, in accepting defections, the company will not fight to keep customers that are actually more valuable to it. A fifth reason is the difficulty of discovering the root cause of defections. The author finds that it takes five whys to get to the root cause of a problem. Perhaps a customer is lost due to a call to a customer support representative who is unable to help them. Why couldn't the CSR help them? Perhaps they weren't trained well, or their script isn't flexible enough. Why aren't they trained well? And so on, until the root-cause for the customer defection is discovered. This specific kind of analysis is time-consuming and expensive. The author recommends mapping out entire life-cycle of customer interactions with a company along a customer corridor, determining which interactions lose customers, and working on solutions from there.

Short Essays on Learning from Customer Defections

The sixth reason is often times relevant information about defections does not go to the right people. Or perhaps the people the information does go to define their jobs too narrowly. For example, market research may be intended to help set prices, not provide a catalyst for better service. Related to this problem, and compounding it, most research is done outside the company by specialists and experts. These people can never possibly have the same holistic view of a company's inter-related operations, and can never have the deep insights necessary to provide the most helpful solutions. The author also mentions that getting people to want to learn about failures (and then solutions) is important. This would require changing incentive structures and even career paths. The final reason is the difficulty with which an organization has to set up a mechanism for turning the analysis of customer defections into an ongoing strategic system. The author writes that the first step is building a measurement system to determine if the solutions implemented actually reduce defection rates. He continues on other metrics must be created to track the defection rates of groups of customers, including core customers, and the ones you wouldn't mind losing. These effective measurement tools can foster the insightful decision making required for ongoing success.

Short Essays on Learning from Customer Defections

Question 4. What are the implications for future research? (What are the implications of the findings to marketers and researchers.) For this question, I'd like to focus more on the concept of customer loyalty and less on the finding that customer defection is a failure that is difficult for businesses to deal with, which I discuss later. The most obvious implication for marketers and the business community is that companies should focus on meeting customer needs rather than meeting sales goals. As was established previously, customers will remain loyal if you are providing them with more value than they would derive from a competitors products. Perhaps a relevant adage is to let the product sell itself, rather than relying on advertisement, promotion or personal selling. It's certainly worth wondering whether the millions or billions of dollars in advertising couldn't be better spent improving the products they tout. Would the improved products earn a larger market share for the company, and eventually larger profits? This in turn could mean that there is a real incentive for companies to differentiate their products from competitors or even create innovative products or services. If we think this through logically, it makes perfect sense. When two products are almost identical, the chance a customer will defect is very high, because they value the products more or less equally. A good example of products that are so similar as to be identical are Pepsi and Coke (although I am sure some people would disagree!) By contrast look at how Apple has used differentiation (in terms of laptops and computers) and innovation (with their iPod music players and iPad tablets). Driving customer desires rather than sitting back and watching the market could be the best strategy. The classic example is illustrated by a quote from legendary automaker Henry Ford; If I had asked people what they wanted, they would have said faster horses.

Short Essays on Learning from Customer Defections

Question 5. What are your thoughts about the article and its findings? How do these thoughts pertain to marketing as we know it? Perhaps the most important thing this article brings to light is how customer defections are an indicator of failure on the part of a company. The author is essentially arguing that not recognizing and addressing the failure is what is truly devastating to a company. I think the author really nails it when he mentions that in some companies, analyzing failure can be hazardous to careers. Nobody wants to fail, and it can be personally and professionally devastating to be labeled a failure when an idea or product does not work out as anticipated. At the same time, it is important to realize that failure is a part of business. Not one single product design has ever sprung fully formed from the mind of an R&D member to the manufacturing line, each has required revision, tuning, or reinvention. Certainly not every product that has made it to market has been an absolute success. Part of the reason is because businesses must anticipate customer needs. When businesses operate on a national or global scale, they must anticipate the needs of diverse populations, which can be difficult or impossible. Due to the nature of the business cycle, there is of course lead time required before introducing products. In some cases this means spending years developing products that might never be commercially successful. Because anticipation of customer needs and competitor actions is such an integral part of the business climate, failures (some relative, some absolute) will be inevitable. How then does taking risks, anticipating the future marketplace, and failure relate to marketing? Well, marketing involves much more than just advertising and promotion; it is instead more recognizable as the implementation of business practices as a whole. Marketing

Short Essays on Learning from Customer Defections

involves meeting customer needs, and doing so in a way better than competitors can. Because true marketing encompasses almost everything a company does, including product creation, it must be recognized and accepted that failures will occur. Accepting failures and learning from them can be accomplished by shifting corporate culture away from blame and recrimination. When one hears the term marketing, one does not not typically think about a faultless, egalitarian work culture. But I would argue that if the result of a work culture that produces something that customers derive more value from, then the process could indeed be considered marketing. After all, when customers defect, they are telling you in no uncertain terms that your business must change to accommodate them. In a way, all you have to do is listen. In this circumstance, it means having an organization that is capable of listening. If everyone in the company is defending themselves and blaming others for failure, the organization will not learn from this clear (an perhaps expensive) message. Moving forward can be difficult. Creating this kind of work atmosphere is I'm sure much easier said than done. Perhaps for a company on a global scale, such a thing is next to impossible. After all, in any sufficiently large group of people you will run the gamut of personality types and backgrounds. Large organizations may inevitably have some people that are argumentative or defensive, which could lead to finger-pointing. At the same time, work today is increasingly specialized, requiring more communication between groups to get anything done. On an assembly line (or supply chain, or product development team), for example, one can literally point to a problem area. With such specialization today, recrimination may be too easy and too tempting for many people to pass up. I don't know if anyone has the perfect solution for holding an organization above the fray, but it certainly worth thinking about and worth exploring for any serious company.