When customers churn, it hurts the bottom line, and it also hurts acquisition as negative word-of-mouth from churning customers hampers efforts to gain new ones.
The biggest challenge to churn reduction, however, is that the causes of customer churn are largely misunderstood. Companies that wish to extinguish customer churn must identify the different causes and address them with the right strategies.
Strategies for Addressing Drivers of Customer Churn
Every business has a churn composition, which is a distribution of the 4 unique sources of customer churn across a business.
Churn Driver #1: Service Failures
Service failure can be simply defined as any service or interaction that doesn’t meet the customer’s expectation. Service failures are common, preventable, and usually the most emotional form of churn.
- Type 1: Ordinary. Common failures such as long wait times, a poor-performing website, lost luggage, products out of stock, poor product experiences, or missed delivery dates.
- Type 2: Catastrophic. Irregular but highly damaging occurrences such as a loud verbal altercation with a restaurant server, identity theft from a company database, or a credit card decline for an important client dinner.
Interestingly, research has shown that — compared to catastrophic service failures — ordinary service failures have a much higher impact on explaining customer satisfaction (more than 20x bigger) and market share (2.5x bigger)! To combat this type of churn, companies deploy two approaches.
- Redesign service blueprints. Examining service failure at scale typically reveals root causes owned across multiple teams. To systematically repair these failures for the long-term, leaders must define the customer pain, calculate its cost to the business, and agree on an improved omnichannel service design to deliver experiences that meet people’s needs. These service redesigns should include XM practices for digital transformation and be executed with some urgency because everyday systemic issues go unfixed, there is potential for more churn.
- Resolve customer issues with speed. When a service failure occurs, the most precious variable is often time. Following a negative experience, a customer begins creating a residual memory which will inform future behaviors, so it’s important to diffuse that quickly. Fast action to assure the customer that the issue is known and is being resolved, combined with following through to resolve complaints, will reduce customer churn. Doing this exceptionally well can de-risk future interactions as well.
Churn Driver #2: Failure to Compete
Failure to compete occurs when a competing product or service is more attractive than an existing offering and customers gravitate toward superior value, even when no service failure has occurred.
- Type 1: Inadvertent. When a company is blind to the existence of competitor offerings, the value competitors offer, the true value produced by their own products and services, or the value customers seek.
- Type 2: Intentional. When a company makes a decision not to compete for a customer segment (or even a unique customer) for any number of strategic business reasons.
Contemporary marketplace dynamics present a formidable challenge to businesses as both competitor brands and their offerings shift regularly. Responses to this driver of churn are sharply determined by which type of competition issue exists.
- Configure winning products. When customer churn is increasing (or already-high) as a result of being outmoded by competitors, organizations should re-examine the quality and competitiveness of their offerings and lean into disruption. Use marketplace, customer, and employee listening systems to do value co-creation exercises. Early concept testing, TURF analysis, conjoint, path-to-purchase, and competitive landscape insights will either confirm the potential value of an offering or pinpoint needed adjustments to its price, quality, or composition.
- Forfeit some customers. Though counterintuitive to some business people, not all customers are right for every business. Every company has a “whale curve” where the value of every customer can be plotted and their attributable prospect lifetime value accounted for. When customers are both unprofitable and also intend to churn, it is best to let them simply walk away. And while lack of profitability alone may warrant letting some customers go, beware that exiting them incorrectly can be a brand risk.
Churn Driver #3: Category Retirement
Category retirement occurs when a customer, cohort, or segment no longer has a need for a product or service. This often occurs due to natural, cyclical, or conditional changes in the customer environment.
- Type 1: Avoidable. This occurs most frequently for products and services which are targeted at specific chapters of a larger customer journey. Businesses typically build this churn into their forecasts and business planning.
- Type 2: Inevitable. Less frequently, customers may simply elect to leave a category when a suitable substitute is present. This usually occurs when the total value of a product or service is misaligned to the customer’s “jobs to be done.”
When addressed, this type of churn — because no service failure has occurred and no competitor has outperformed an existing product or service — can transform into a tremendous growth opportunity for businesses.
- Synchronize customer and product lifecycles. The best way to stave off avoidable category retirement is to stitch together products and services across customer lifecycles. Customer segmentation that is applied to a CRM (or XM Directory) and filled with X-data and O-data will drive insights as to which new products should be dovetailed into the next product lifecycle and which ones should be retired. The introduction of new products and the retirement of old ones can then be tested using customer communications or personalized marketing. When done well, this provides a continuous loyalty stream and reduces both customer acquisition costs and overall churn.
- Off-board with grace. Inevitable category retirement is typically devoid of emotional interference against any single brand. As a result, by gracefully off-boarding true category retirees, organizations can retain these former customers as a good booster of prospect acquisition. Recognizing customers as they go, thanking them for their business, and providing reference-driving mechanisms will yield effective, authentic, and positive word-of-mouth.
Churn Driver #4: Structural Barriers
Structural barriers prevent customers from acting as they normally would when choosing companies with which to do business. Barriers can exist — or be created — as a result of conditions owned by either a company or a customer.
- Type 1: Organic. Organic barriers are simple yet also enduring. Pricing or store locations, for example, often exclude certain clients but are based on decisions related to the survivability of the business.
- Type 2: Synthetic. Synthetic barriers are frequently unconquerable. Examples of this barrier type include changes to legal restrictions on markets, competitor-owned intellectual property, and more.
Churn owed to structural barriers is often difficult to mitigate without institutional appetite for significant investment because the source of churn itself is typically years in the making.
- Attack new markets and categories. Defeat organic barriers with thoughtful market entries (existing products sold to new buyers) and deliberate category entries (new products sold to existing and new buyers). Market sizing and advanced analytical techniques can determine the right play.
- Survive and thrive with M&A. If synthetic barriers are the root cause of customer churn, mergers and acquisitions are oftentimes the shortest paths to success. While investments in legal efforts, lobbying, and joint ventures are also valuable, they are often too tenuous and less productive against time-sensitive challenges like churn.
Luke Williams is an XM Catalyst with the Qualtrics XM Institute