Is the customer really always right? How far should a company go to satisfy their clientele or customer base? What is the lost opportunity cost associated with customer churn? Is there a point when satisfying the customer is actually harmful to the enterprise, or back to the original question, is the customer always right? In today’s post I’ll share my opinion as to the validity of this old business axiom, and also offer a few insights on where to draw the line…
I believe all businesses should use great care and concern when determining how their customers and clients are treated. The time, energy, and cost associated with acquiring a customer are substantial, the benefits of retaining customers are considerable, and the costs associated with customer churn are significant. I’m always amazed at how much money will be spent to acquire a new customer, but how little care is given to insuring customer satisfaction after the sale. There is great truth in the old axiom that states: “if you’re not serving your customer well, someone else will.”
If as an executive you believe customer service is someone else’s problem, you have a much bigger problem than you realize. While I believe most CEOs have a grasp on the concept of lifecycle value, I’m not sure they really understand the true cost of losing a customer. Let’s just assume that the lifetime value of a customer for company X is $2,000 dollars. If company X loses just one customer, the total lifecycle loss could run well into the tens of thousands, if not the hundreds of thousands. If you don’t believe me consider the following 7 points:
- The Initial Churn: First you have the $2,000 dollar lifetime value loss attributed to churning the account itself.
- Sunk Acquisition Costs: Don’t forget to add in the cost of acquiring the account to begin with. You spent very real dollars to acquire the account so you need to factor that into the total equation. I’ll let you pick the percentage you want to use and add that into the total number.
- Replacement Costs: Remember the cost of acquisition number you just calculated above? Well, you need to add it back in again, because now you have to go out and replace the customer you just lost. By the way, you should probably multiply the cost of acquisition number by 5 since it costs about 500% more to acquire a new customer than retain an existing one.
- Lost Ancillary Revenue: On average, a single account is good for a 30 -40% cross-sell/up-sell revenue increase over time as new products, services, joint ventures etc. are brought on line and offered to existing accounts. This means you can conservatively expect to lose another $600 dollars of upside in our $2000 dollar example.
- Lost Referral Revenues: Depending on your business, and whether or not you have a solid customer acquisition process in place, a single account should be good for a minimum of 2-3 referrals (direct or indirect) on an annual basis. Over a 10 year period of time, assuming only 2 annual referrals, without any cross-sell or up-sell value being added-in, you just lost another $200,000 dollars.
- Loss of 2nd & 3rd generation referrals: But wait; it just gets worse….Those lost referrals mentioned above would have also given you 2-3 referrals each year, and if you carry this formula out over 20 years the loss of a single account could easily cost your organization more than a million dollars in lost revenue.
- Negative Brand Impact: If it isn’t bad enough already, a lost account can easily have a negative impact on future sales due to spreading the news of their bad experience with your company. The average dissatisfied customer will persuade 10-20 other people from doing business with your firm. If the upset customer takes their dissatisfaction online and amplifies it via social media you could see a much bigger problem. This will not only impact your revenue, but can also taint your brand equity.
The bottom line is that it is very expensive to lose an account. That said, I also believe there is a point where customers can begin to abuse the good will of the merchants and service providers who work so hard to earn their business. So, when does a customer cross over to the dark side and become your worst nightmare? The answer is a fairly simple one – when the squeaky wheel becomes so loud that the brain damage involved in greasing it becomes too high, if an account doesn’t deal in good faith, if they become unprofitable to keep, or when you can replace them with more profitable accounts.
Regrettably, experience has shown me that a small percentage of customers/clients live for the chance to wield their perceived power over their merchants, vendors, suppliers and professional service providers. These customers are the proverbial “squeaky wheels” that demand to be greased. These are the verbally abusive customers who expect special consideration, and whose demands can far exceed the boundaries of reason. There is in fact a point where “bad customers” can erode margins, negatively affect morale, or even tarnish a brand. These customers not only are not right, they deserved to be fired…
The following tips will help you minimize the amount of bad customers served by your enterprise and will show you what to do once a customer crosses over to the dark side:
- Align Expectations: Where possible, and especially if your business has the luxury of choosing your customers, make sure that mutual expectations are both defined and aligned at the outset of the relationship. Ensure your client understands what types of customer behaviors will be accepted and what types of behavior will not be tolerated.
- Develop Customer Scorecards: You should actually profile your clientele such that you understand the difference between good accounts and bad accounts. Much like you have performance reviews for your employees, you should also conduct an analysis of how your customers are performing. Not all accounts are accretive, and more accounts than you think may in fact be dilutive.
- Turnover Bad Accounts: When a client is identified as being a bad account either not capable of being saved nor worthy of salvaging, you should strongly consider firing the client. Evaluate the bottom tier of your clientele each year, and look to upgrade your clientele either by improving account performance or by releasing the client and replacing that business with a better quality account.
Those of you who have worked with me know that I state very clearly at the outset of any new relationship that I reserve the right to terminate an engagement if said engagement turns out to be less than a fruitful endeavor. While I feel privileged to serve my clients, and am thankful for the opportunity to earn their business, I also believe that the relationships should be reciprocal in nature. Business as they say is after all a two-way street…