Wednesday, March 28, 2007

Churn, Baby, Churn: why customer retention matters

A few weeks ago, I heard management consultant/business guru Michael Treacy speak at the Syracuse Famous Entrepreneurs Series. Like so many other high-end business consultants, Treacy rides the horse of his latest book. In this case, Double-Digit Growth is already four years old, so Treacy's had a good long ride. But this nag is not yet ready for the glue factory, and the business wisdom contained within is more practical than faddish. And Treacy is an engaging speaker, and his presentation was first rate. 

I will likely be blogging further on Treacy's book - and on the businesses that Treacy's firm invests in. (Actually, I'm not sure if it's Treacy's firm, Gen3, or Treacy himself who's taking a stake in these places, and I'm not about to parse through things and figure it out until I actually go to post on it. Treacy's personal web site is plenty referenced in Google, but when I tried to check it out, it's surprisingly a dead-head that leads to no man's land.) In any case, Treacy seems to be an X-treme capitalist with a highly-developed money-making imagination.)

But for now, here's the 5-second summation of Treacy's book. (Source: Gen3)

He found that the companies that increase revenue significantly year in and year out manage themselves very differently than those that inch along. The most important difference is this: Fast-growers possess a rigorous management process that aggressively seeks revenue increases in five fundamental areas:

  • Retention of existing customers;
  • Market share gains;
  • Market positioning exploitation;
  • Adjacent market entry; and
  • New business investment.

I'm going to focus on the first item on Treacy's list: retention of existing customers.

We hear a lot about fleeting loyalty and the impossibility of customer retention in an era of perfectly imperfect information. But the customer you already have is one of your most important assets. They already know you, so - unless you've really botched things -  you don't have to convince them that you're worth doing business with. Having leapt this barrier - and, again, as long as you haven't done anything to damage the relationship - they're more apt to buy more from you. Not to mention act as an internal and external reference and a lot of other good things.

In the technology world, whether you're providing hardware, software, or services, your customers also provided a steady income stream for you. While it's one that you don't have to stay on top of in the same way that, say, Kellogg's needs to keep you loyal to Cheerios every time you walk down the cereal aisle in the grocery store, you still need to earn the right to keep your customer business. And you need to earn that right daily - not just at contract renewal time or when you want to cross-sell or up-sell.

Several years ago, when I worked at a managed services company, I had upfront and personal experience with how important and valuable it is to keep the existing customers satisfied.

At this company, which provided higher-end managed hosting, we had to struggle for each new customer in the face of commoditization of the fundamentals of the business, which resulted in colossal downward pressure on prices.

Fortunately for us - unfortunately for them - most of our existing customers were locked into multi-year contracts at rates that had quickly become high relative to where the market was going. Many of the customers were still living with "eyes bigger than stomach" service configurations implemented when it looked like the boom would never go bust.

We were also experiencing tremendous churn - averaging over 2 percent of our customer per month. In a business that relied on recurring revenues, looking for new customers while we were losing so many existing customers was demoralizing and exhausting. We felt like we were in a leaky boat, bailing with a tea-cup.

Marketing took the lead and, working with customer support, finance, and sales, came up with a plan - Defense of the Realm - to help stop the customer churn. The plan approach called for proactively solving customer problems and devising strategies for improving the customers' set ups - in some cases that meant upgrading, in some cases it meant downsizing. In a few cases, we decided to let customers who were costing us money go. In most cases, we were focused on retaining good, profitable customers - even if in the new scheme of things, they'd be paying us less money than they had been.

We were just starting to implement Defense of the Realm when we ran into a situation that was a deal-stopper for senior management. We found a customer that we had been overbilling for years. And I don't mean overbilling by the new market pricing standards - if that were the case, we were overbilling everyone. No, we discovered a couple of mistakes in our monitoring, measuring, and accounting that had resulted in tremendous overcharges over an extended period of time.

When we brought this situation to senior management's attention, they weren't happy. We weren't proposing a give-back. (That money was long spent.) What we were suggesting was an own-up, and a make-good: moving forward with some extras that we wouldn't charge for.

Our proposal met with a big NO WAY and the end, in fact, to the entirely program.

Churn, baby, went back to churn, and we continued to lose 2 percent per month while struggling to compensate for that with new customers.

One of the things that Michael Treacy pointed out in his speech was that, whatever percent of your customers you're losing every year, that's an additional percent that you have to grow by.  If you want to grow by 10%, and you're losing 20% of your business every year, guess what? You need to grow your business by a lot more than 10%. Just to stay in place, you need to make up for that lost 20%.

It's unlikely that any customer will ever achieve 100% customer satisfaction and retention. It just doesn't happen that way.

But, as Treacy pointed out, you've got to be crazy to keep letting good customers walk out your door. It's not a matter of blocking their way with "your stuck" contracts. It's a matter of doing whatever you can to make sure that they're not looking for the exit sign to begin with.


Anonymous said...

So, when was the last time you bought a box of Cheerios? They are made by
General Mills, not Kellogg's. Kellog's makes Corn Flakes ...where's your fact checker? :-)

Maureen Rogers said...

OK, so I mostly buy Shredded Wheat (Post, no?). And Kellogg's Rice Krispies (snap,crackle, pop).