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> Customer Satisfaction
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Understanding Customer Retention
By Joe Cardosi
While many firms have some program termed "customer satisfaction",
the sad truth is that most of them have no idea just how important
the customer's attitude toward them can dramatically impact the
bottom line. It is that attitude (positive or negative) which will
ultimately determine whether a customer is retained or lost. What
happens if they are lost?
What's the Financial Impact?
Let's start with the obvious—loss of lifetime value to the
organization. Those firms that sell a product which has a service
or maintenance fee associated with it receive a substantial amount
of money from each customer on an annual basis. In the business to
business software industry those fees range from 15% to 20% of the
then current license fee for the product. If the license fee for a
company's product averages $100,000 to $150,000 per sale, then the
annual maintenance fees can be anywhere from $15,000 to $30,000
per customer. If the customer base is 150-200 customers, then you
might generate annual maintenance/support revenue of $6 million
dollars. Now, each time you lose a customer because you have
failed to meet their needs, you are impacting that annual residual
that provides a baseline for your support operations. If the
average customer longevity in your segment is 7-8 years, and you
are losing customers after 3-4 years to the competition or
in-house initiatives, then each loss depletes your baseline
revenue by as much as $120,000. If the turnover reaches 20%, then
you could be losing $4.8 million of expected revenue from those
lost customers. That is significant.
What's the Staffing Impact?
What other impacts can we expect from not having a clear focus on
customer retention? The most obvious one is the need to reduce
support staff headcount as maintenance revenues start to decline.
That creates a downward spiral of fewer resources to meet
customer expectations. It puts pressure on the remaining staff to
work harder which can cause unplanned turnover and further
exacerbates the problem. The customer base will certainly be
unhappy with the reduced support which leads to increased
customer churn.
What's the Growth Impact?
In order to keep a revenue level sufficient to maintain the
needed support staff, Sales will need to acquire new customers to
replace the lost ones. Now you must factor in the cost of
acquisition of a new customer on top of the lifetime value loss
when you assess the impact of each lost customer. But there's a
new problem looming on the horizon which can be devastating to
the Sales organization—lack of references. As you begin to lose
customers to the competition or to in-house systems, the
marketplace will be aware that this is happening. The lost
customers can no longer be used as referrals and can even start a
negative undercurrent in the marketplace especially if they are
vindictive. The remaining customers will have been impacted by
the reduction in support services and will be less willing to
take calls from prospective customers or worse, will take the
calls and undermine the sale. The good and loyal customers will
be overused as references and will grow to resent being asked.
So now, it becomes not only more difficult to replace the lost
business but even more difficult for you to be able to grow the
business year to year.
The Snowball Effect
Customer erosion can be a slow and non-obvious process as
one-by-one they begin not to renew their maintenance. Other
times, it can be dramatic when a particular policy or pricing
decision has them in an uproar. The mass exodus then will be
very obvious and can have devastating effects on your bottom
line. Swift and decisive action will be required to avoid a
disaster.
Some of the not so obvious impacts of customer erosion are what
happens to the support center call volume when lower maintenance
revenues cut documentation and training projects. When the
majority of support calls are due to lack of customer education
or availability of documentation, the result is obvious. Call
volumes steadily increase because the customer either does not
know how to use the product (lack of available training
classes/trainers) or they can't find the answer to their
questions because user manuals and on-line help are woefully
out-of-date. And so we compound the pressure on the
under-staffed support center by unwittingly increasing call
volume.
Depending on how a company is organized, there can be even
further ramifications to revenue loss from poor customer
retention. If support center personnel (who are often the most
product knowledgeable) are used for sales support such as RFP
responses or quality assurance such as product testing then
staff reductions caused by eroding maintenance revenue will
impede sales and contribute to product bugs. The
result can be
less sales revenue and increased support chasing down the newly
created software bugs. Neither one of these has a positive
impact on your organization.
Companies who depend on annual support/maintenance revenues
must pay careful attention to customer
retention. The
consequences of ignoring the customer's need for a positive
experience with their firm can prove to be extremely damaging
and in some cases even fatal. It should be noted that customer
satisfaction should not be confused with customer retention.
Customer satisfaction is only a measure that will help
determine if a customer is to be retained.
What Needs To Be Done?
Every deliverable that a company provides should afford a
positive experience for the customer whether it is product use,
training classes, responses to support calls, RFP responses,
or even the invoices they receive are all chances for the
customer to have a negative experience, which could impact
their retention. Successful organizations have made a
significant effort to ensure that each of their deliverables
has been carefully planned and flawlessly executed.
One of the sad but common occurrences is that many companies do
not know what their deliverable are. That may sound ridiculous
but what happens is they become product focused instead of
customer focused. Software companies often spent all of their
time and money trying to keep their product competitive in a
fast-paced environment. They are certain that "feature/function"
is the key to success. To the customer, while "feature/function"
is very important, equally important are all of the other
deliverables that make up the "total customer experience".
Specific Examples:
How about something simple as the maintenance bill? Is it
timely?
Is it easy to understand? Are the payment dates reasonable? Is
the format one that allows easy processing? All of these things
seem pretty mundane until you get a customer who can't understand
why they are being billed for extra documentation and the payment
is due 2-days after they actually receive the bill and the ink
color while attractive, can't be copied. An irate VP of Finance
who only sees the bill and does not use the product can become an
opponent of maintenance renewal when careful attention isn't being
paid to the deliverable called "the bill".
How about a deliverable called annual updates? Do they always come
to the customer at year-end or quarter-end when they are very busy
with their own billing and production cycles and having the
additional pressure of an update isn't welcome by the IS staff.
This is compounded when the update must be completed by a certain
time frame to keep the contract valid.
What a deliverable called documentation. How handy is it to use?
Does it lay flat on a desk or does the spine binding make it close
the minute you let go of it? Does it help you perform a task or is
it just a listing of various functional elements leaving you to
figure out how to use it?
What about the big support deliverable called phone support? Is
it 24/7 or just during normal business hours even though most of
your customer work weekends? Do you have your best people on phone
support or just trainees reading from a script? Is your executive
staff available for escalation through cell or beeper contact or
must you wait until Monday morning to solve your customer's Friday
night major system crash?
Even sales support deliverables can set the tone for customer
retention. If the sales documentation does not match the product
capability, (you removed a little-used feature that the customer
really needed) then a surprised customer won't be a good reference.
Or even worse, the proposal that they got doesn't match your final
bill for the product because the model hadn't been updated with
the "new" prices. The old adage about "first impressions" only
happening once can certainly set the tone for creating a
distrustful customer who can quickly turn negative.
Summary
The point being made here is simply this: Identify and pay
attention to and everything that touches the customer if you want
to ensure that you maximize your full revenue potential from them.
Manage your deliverables to maximize retention!
Joe Cardosi was president of Timberlake Consulting. He can be
reached at JoeCardosi@aol.com
Posted 5/05
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