The Real Cost of Customer Churn
There are several phrases commonly used to define customer churn: defection, attrition, termination. Regardless of what losing a customer is called in your company, it can be one of the most frustrating experiences for senior leaders to deal with.
Customer churn can weigh on office morale, serve as an indicator of product or service issues, or be a sign of weak links within your team. While these are all adverse side effects of losing customers, the most damaging is its impact on your company’s growth rate and the future valuation of your business.
A Customer Churn Example
Imagine the following scenario. You return to the office after a lunch meeting with a prospective customer. The head of your service team alerts you to the fact that a customer acquired last year has terminated their engagement with your company. For reasons that will become apparent after a Customer Defection Analysis is conducted, you learn they are going to a competing solution. The loss of this customer means an immediate revenue hit of $100,000.
However, the implications of this news extend far beyond its revenue impact. What else is lost?
- The revenue your company would have earned for each year the customer was retained (“customer lifetime value”).
- The added revenue realized from expanding the engagement through the sale of additional products or services.
- The increased profit that often comes with longer tenured customers.
- The potential for referrals or testimonials generated by key contacts within the customer account.
It is not beyond reason to assess the overall financial damage at $500,000 or more. But, as they say in every late night infomercial – “Wait, there’s more!”
The lost revenue now needs to be replaced, which means your organization would incur new customer acquisition costs, such as sales commissions, travel expenses, marketing collateral, conferences, trade shows, and so on.
Then there is the damage to your business that is harder to quantify – your reputation in the market. Studies have shown that customers who have a bad experience are more likely to share that experience than those who’ve had a positive experience. This negative word-of-mouth can impact your brand for years to come. Just ask United Airlines about its “United Breaks Guitars” debacle or Comcast about its painful customer service call.
Now we get to the real punch line – the harm done to your company’s valuation. Whether you are looking to raise capital (private equity, venture capital or a public offering), use equity to purchase an asset, or sell your business outright, the value ascribed to your company is heavily dependent upon your rate of growth. Customer churn that is higher than average can easily translate into a valuation loss of tens or even hundreds of millions of dollars.
What steps can you take to retain your customers?
- Regularly assess customer sentiment
- Listen carefully to how well you are solving problems and providing value
- Act on the important insights shared by your customers
- Commit to continuous improvement
While delivering a leading customer experience isn’t necessarily easy, it is an investment that will handsomely reward you in the long run.
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