Customer churn is costing business billions per year. In Australia, businesses lose on average between 6-8 percent of their customers each year. Utilities and telecommunications sectors take the biggest beating with losses of between 20-25 percent. Unfortunately most business leaders believe there is little they can do to rectify the problem.
How much does customer churn cost?
The Australian energy retail market boasts one of the highest rates of market churn in the world. Much of this churn has been attributed to the liberalisation of energy retailing which has seen a succession of new entrants streaming into the market. While competition at the best of times is good, constant switching between providers is significantly detrimental to profitability.
In their attempt to drive customer acquisition, many energy retailers, particularly in Victoria, have become pests with incessant telemarketing and door-to-door campaigns. As well as driving prices down, these campaigns are expensive to execute, annoying to customers and ultimately contribute to the problem of customer churn.
Australia’s health insurance sector, another group struggling under the yoke of unusually high customer churn, understands this all too well. It is seeing around 10 percent of policy holders switching providers each year. According to health insurance industry consultant, Avnesh Ratnanesan, churn in that industry alone is putting $2 billion of revenue at risk on an annual basis.
While it is difficult, if not impossible, to determine what churn overall is costing Australian businesses, (these figures are not publicly available, in fact most businesses prefer not talking about customer attrition) best estimates put it at billions of dollars each year. Sadly these losses, in the main, are viewed by most organisations as a part of doing business and something they have to live with.
Churn is not inevitable
There’s a general consensus that acquiring more customers and generating new business will in time balance out these unavoidable losses. This thinking loses sight of the fact that it costs business 2-3 times more to acquire a new customer than retain an existing one (and in the case of the utilities sector, 6-7 times).
Businesses often forget that the cost of losing a customer is not just determined by the costs associated with recruiting replacement customers. There is also the loss of the ‘life-time value’ or the revenue the customer would ordinarily have brought in during their relationship with a business, not to mention the loss of revenue during on-boarding process.
These additional costs have the habit of just slipping under the corporate radar!
According to Sanjivrao Katakam, principal consultant, Energy and Utilities, Wipro, losing customers also has implications beyond loss of revenue. This includes the loss of market share, a decline in brand image, not to mention the threat of acquisition should a company perceived to be haemorrhaging customers.
The tide is slowly turning
It’s not all gloom and doom, however. Businesses are increasingly sharpening their focus on better understanding the key drivers of churn and how to step in and address an issue before it becomes a full-blown problem and a customer leaves.
The good news is that price is not the main reason customers leave. According to a recent article in Forbes, “68% of all people leave a business, because of ‘perceived indifference’ “. As consumers, if we feel our suppliers are looking after us, we stay: even at a price premium in many cases. Improving customer retention is not only about retaining customers but retaining profitability.
The truth is that unless customer satisfaction is known to be high across the board in a business, there are probably a whole range of reasons customers are not happy and therefore, deciding to leave that business. If these issues can be identified and resolved before a customer leaves, should lead to significant reductions in churn.
Churn can never be fully eliminated but it can be greatly reduced.