Companies spend a lot of time and money to attract new customers, but less effort goes into figuring out why they lose customers. However, the cost to business of losing customers, as well as the impact on the overall company, is dangerously high, which is why it’s more profitable to expend your efforts on retaining existing clients.
The stats don’t lie
Here are some sobering stats:
- 68% of customer defection takes place because customers feel poorly treated
- 95% of people who have a bad experience do not complain
- 13% tell up to 20 other people, while a satisfied customer tells only five other people
- It can cost five times more to buy new customers than retain existing ones
- 1% cut in customer service problems could generate an extra R200 million in profits for a medium-sized company over five years.
A ripple effect
Let’s look at some of the most costly implications of losing customers:
A lost customer means lost feedback and no opportunity to improve.
Many companies use their existing customer base to research product improvement and development. When you lose customers, you lose their opinions, advice and criticism. Also, a lost customer is unlikely to want to communicate with you about the reasons for their departure. Identifying potential defectors before they leave can provide invaluable insight into where improvements can be made.
A lost customer means lost sales and revenue.
Remember the cost of replacing this revenue is much higher than the cost of retaining the business. Most companies pay sales people a higher commission for new business because it’s difficult to secure, which adds to the cost implications.
A lost customer has a negative impact on the confidence of the entire organisation.
From dispatch to the office of the CEO, the loss of a significant account not only affects the top line, but it can also have a devastating effect on confidence and self-assurance. It can also cause doubt about the validity of your service fulfilment and pricing strategies.
A lost customer demoralises sales and marketing staff.
Customer loss can be disheartening for the sales and marketing teams in particular, and may lead to all sorts of negative introspection about the products and services they are promoting.
A lost customer may become an opportunity for the competition.
Think about it – when a customer defects to the competition, they are able to give them all sorts of information about your processes and products. Your company becomes an open book.
A lost customer means a distraction from other important issues.
While your organisation is bemoaning the loss of revenue, you may be distracted from other important business needs, such as the question of seeking and retaining new customers.
A lost customer can be the beginning of a bad reputation.
You’ll become known for losing customers, which could hinder your ability to employ the right people. It can also degrade your image and reputation in the marketplace. There may also be a serious retail backlash as a result.
A lost customer can cause over-reaction and even panic in the marketplace, with people asking what your customer knows that they do not.
A lost customer can have a damaging impact on sales projections, cash flow, receivables, and payables.
The impact on cash flow and profitability goes without saying, but a lost customer can cut volume and prohibit meeting buying commitments with suppliers and vendors. It can affect your stock levels as you may be left with vast holdings of a product that you cannot move.
A lost customer can trigger spending un-budgeted funds on marketing, research and new customer acquisition.
It will require hard work to find new business, and you may have to spend vast amounts of money to replace a significant loss with far more accounts to cover the same volumes of purchase. You’ll be spending a disproportionate amount to replace the same revenue.
A lost customer can lead to an accounting, collection and legal nightmare.
When clients are unhappy they do not pay. The result is long collection periods, high write-offs, bad debts, and a mess on your balance sheet and cash flow.
A lost customer can devalue the worth and saleability of a business.
If you are trying to sell your business and you have significant account losses in the recent past, the buyer will most certainly be in a positive position to negotiate and even to devalue the business.
These are just some of the most obvious hidden costs of customer loss. They reveal how important it is to ensure customer satisfaction, and even to go to extreme lengths to prevent defection. In today’s economy, shifting focus to customer retention is a key means to give your business a real competitive edge.