Home   |   FAQ   |   Awards   |   Reports   |   Library   |   Jobs   |   Chapters   |   Join   |   Order
   Inside
Library index

The ASP Library contains reports and articles of interest to tech support managers. We're actively looking for additional articles;
if you'd like to contribute, please drop a note about your proposed topic to ASP executive director
Jeffrey Tarter.
      ASPonline.com   >   Library   >   Customer Satisfaction


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