Chapter 36
Customer Losses

For planning and budgeting purposes, marketers need to see how many customers have been lost versus retained, so that future marketing plans can be adjusted to reduce losses.

Customer loss refers to the number of customers that stop purchasing a company’s products or services over a given period of time. The simplified formula below uses the same variables as that in the measure New Customer Gains, but the measure now focuses on customer attrition versus gain over the same period of time:

Where

Cbt = number of active customers at beginning of time period t

Cet = number of active customers at end of time period t

Verizon, a U.S. telecommunications company, introduced an unlimited data plan in early 2017 in response to losses of 398,000 monthly phone customers. The customer losses motivated the unlimited data plan program to stem the damage arising from these steep customer losses.ii

Losing customers is expensive since money and resources have been invested to educate and attract them. Once customers have “voted” in favor of the company’s solutions (by purchasing them), a marketer’s next step is to leverage the initial purchase into a long-term, profitable relationship. Customer loss is an effective tool for assessing the continued value of an existing product to customers as it matures over time. If an existing product is losing customers or revenues, marketers are faced with three choices: (1) invest in new strategies and tactics to improve customer acceptance of the product and increase the product’s profitability as well, (2) stop doing business with unprofitable or low margin customers, or (3) remove the product from the portfolio.

The logic of the formula assumes that Cbt is larger than Cet, resulting in a number equal or greater than zero. The reason is simple: if Cet were larger than Cbt, then it would suggest a gain in total customers over the same period of time. Assuming customer losses are larger than customer gains during the time period being measured, marketers can begin analyzing the defections to determine if there are any patterns and their potential causes. If the customer losses occur in only one period and not over several periods, then it may be an anomalous event requiring only minor analysis to ensure the causes are limited. However, if customer losses persist, then it may signal significant problems, including:

While marketers do not like to lose customers, it is important to measure the losses and understand the causes to eliminate or at least minimize them in the future. A persistent pattern of customer losses will inevitably negatively impact cash flow unless those customers that remain are extraordinarily profitable (which would suggest the customers lost are acceptable since they were generating losses). Determining the actual causes of customer loss is, of course, easier said than done since the influencing factors can be numerous and quite complex. However, the potential complexity should not deter marketers from undertaking the analysis, since the resulting benefits will include a clearer understanding of the variables that impacted customer loss.

Marketers should create a plan for retaining high profit customers and enhancing their value further. However, this can be a difficult analysis to get right since high value customers often have complicated relationships with companies across multiple business areas, from products and services to support and finance. Customers may encounter difficulty in determining high value customers due to other factors that influence the final measure. Customers may switch from one line of product to another, but within the same company. Some managers may consider this as customer loss for one product, while others may see this as a gain for the company, just in a different area.

The U.S. auto industry used customer satisfaction scores for years, assuming incorrectly that it was a predictor of happiness with the product and, indirectly, an indicator of product and even financial success. Yet through the mid-1990s, while the customer satisfaction scores remained high, the repurchase rate stayed between 30% and 40%, suggesting a customer loss of 60% to 70%. Interestingly, one can easily imagine the bottom line impact if the auto industry could reduce customer losses to “only” 50% or 55%.iii

iNatio nal Business Research Institute, Customer Loss Review Surveys, N.D. Retrieved May 21, 2017 from https://www.nbrii.com/products/customer-surveys/customer-loss-review-surveys/; Thabiso Mochiko, MTN Dips on Customer Losses, May 4, 2017. Business Day. Retrieved May 21, 2017 from https://www.businesslive.co.za/bd/companies/telecoms-and-technology/2017-05-04-mtn-dips-on-customer-losses/

iiAaron Pressman, Verizon Reveals Huge Customer Losses Before Unlimited Data Plan, April 20, 2017. Retrieved May 21, 2017 from http://fortune.com/2017/04/20/verizon-customer-losses-unlimited/; Chris Mills, Verizon Is Losing Customers Like Crazy Even with Unlimited Data Plans, April 20, 2017. Retrieved May 21, 2017 from http://bgr.com/2017/04/20/verizon-earnings-customer-loss-stock-price/

iiiF. F. Reichheld, “Learning from Customer Defections,” Harvard Business Review (March–April, 1996): 4–5.