Research Reveals Reasons for Lost Loyalty

Recent research has shown that a poor understanding of what drives customer loyalty, coupled with a failure to monitor retention rates, is resulting in businesses losing excessive numbers of customers and employees.

According to Frederick Reichheld, author of The Loyalty Effect and the creator of Bain & Co's loyalty practice, the average company loses 15 to 20 per cent of its customers each year--equivalent to around half its customer base over five years. The rate of attrition among employees is even higher, ranging from 15 to 30 per cent.

Speaking at eGain's annual user conference in San Francisco in May 2000, Reichheld updated research undertaken by Bain ten years ago into the impact of improving customer retention. While it costs money to acquire new customers, the administrative costs of servicing existing clients drops during the lifecycle, leading to big improvements in profitability as the business relationship progresses.

Pointing to research due to be published in June 2000 in the Harvard Business Review, he demonstrated that a five point increase in customer retention leads to explosive improvements in cashflows over the course of a customer lifecycle, with the most dramatic impact being felt in e-tailing. "There is a real economic underlying loyalty," he said. "And loyalty is more relevant economically in the e-space." Yet most businesses, he argued, fail to monitor customer churn.

Reichheld added that many organisations make the mistake of focusing on customer satisfaction in general, rather than on the key functions of a business that create value for the client. One insurance organisation undertook research into customers that had defected, and discovered that up to 80 per cent had been generally satisfied with the service they received, but had left during critical lifecycle moments, such as buying a new car or moving house. The company subsequently switched its service efforts to improving quality at those flashpoints, rather than incrementally improving all of its systems.

Reichheld also urged organisations to reward the right results. In the cellular phone market, for example, defection rates actually rise the longer customers are with an operator, largely because most service providers give better deals to new customers than to existing ones.

Meanwhile, the low levels of employee churn experienced by one of the biggest U.S. car rental suppliers were attributed to its decision to keep teams small, splitting them as a matter of policy once they grew past a certain size. "Smaller teams really work, but generally companies get bigger teams and it kills them. Loyalty only works in small teams," said Reichheld.