CUSTOMERS: THE SCARCE RESOURCE
Economists agree that the first principle of economics is scarcity. And, in free market economies customers are the scarcest resource: precious commodities, expensive to acquire, and in hot demand by the competition. These same precious commodities, however, are all too easily squandered through poor service practices. It is no wonder that according to a worldwide customer satisfaction survey conducted by consulting giant Accenture, 59 percent of consumers quit doing business with suppliers for reasons having to do with poor service.
In a very real way, poor service saddles a business with a “tax” that makes anything a governmental body might levy seem like kids’ play. Even in the United States, which experiences the highest marginal tax rate on corporate earnings of all industrialized nations at 40 percent, not all income is necessarily taxable due to the exemptions, credits, and deductions available courtesy of the tangled mess which is the tax code.
Poor service has the same effect on a business as a tax has: it creates economic inefficiencies for the enterprise and distorts a clear picture of the firm’s operating cost structure and thus its ability to price its goods and services properly. As with any tax structure, the higher the tax rate the less money there is to spend. So it is with poor service practices which lead to increased customer attrition and churn.
CUSTOMER ATTRITION IS A TAX
Customer attrition arithmetic is elementary: if a company has 1,000 customers and loses 100 of them over the space of a year then the attrition rate is calculated at 10 percent per year – a modest ratio in many industries. Continuing our example, if a company’s gross profit is $2,000,000, then each of 1,000 customers is worth $2,000 on average. If the company’s attrition rate is 10 percent, then the annual cost of attrition is $200,000.
In my experience, though the math might be straightforward, few executives know their own company’s customer attrition rate to any degree of accuracy. This is unfortunate as it cripples the ability of the executive to have a sound grasp of the cost of acquiring and keeping a customer. Knowing your company’s attrition rate is a necessary first step in gaining that understanding.
A reduction in customer attrition can translate into significant cost reductions for the supplier. All things being equal, a supplier with a lower attrition rate clearly has the added flexibility of operating at a lower cost posture. Money saved by mitigating attrition can be channeled into new service initiatives, it can be used to more aggressively price the product or service or it can be returned to stockholders among other options.
The analogy of poor service to taxes, however, is not a perfect one: taxes are involuntary payments and clearly outside of our control. Customer attrition, on the other hand, is clearly within the control of the enterprise and is not inherently a cost of doing business unless the enterprise chooses to ignore its ability to formulate strategies designed to retain customers.