Customer Defection – 5 Causes to Consider
When your Marketing Managers gather and review your defection rate, what do you say? What are the causes? And what can be done?
Customers are simply unhappy with your product or can’t afford it? Intense competition? Service quality issues? Although these can be customer defection causes, there are additional reasons to consider, most of which are repairable and designed turn a disadvantage to satisfied customers.
Customer defection measures the rate at which existing customers leave your business. This metric is extremely important as studies show that only 20% to 40% of initial customers turn into repeat customers. Improving that percentage in your business can take your six-figure business into a multi-million-dollar enterprise. Moreover, that defection is a leading indicator of customer loyalty – so needs your focus.
Consider these defection rates – and ask yourself just how many bad experiences are being delivered by your own business. Moreover, how much bad publicity is being generated?
- 31% restaurants
- 28% Credit cards
- 21% Auto dealers
- 18% Retail
- 14% Mortgages
- 10% Retail banking
Remember that an exceptional customer experience is needed to prevent the termination of relationship between brand and customer.
In summary, a lack of individual care, customer dissatisfaction with your products or services, a break between pricing and product, finding no reason to stay loyal, and natural causes are five reasons that contribute to customer defection. The kicker is that almost all are controllable:
Reason #1: A Lack of Individual Care / Service (controllable) – 55%
Studies show that the top cause of defection is the customer perceiving that you don’t care about them, with 68% of respondents selecting this reason.
68% of consumers believe it’s important for businesses to tailor experiences based on the client’s tastes and preferences. (Oracle)
Making the customer feel like they aren’t important, not giving them time, or not effectively handling a complaint leads to resentment of your business. This defect can be wrapped up as poor customer service.
Over $62 billion is lost annually by American companies due to poor customer service. (New Voice Media)
It may be easy to tell when a customer is unhappy if they are screaming or blatantly being disrespected, but it’s more difficult if there is insufficient care despite trying your best. Customers want to feel valued, which is an accumulation of repeat customer service rather than just one instance. They may love your product or service, but if they are consistently disappointed in how they are treated, they will find an alternative. After all, Individual customers grouped together are the business so if you treat them well individually you will be erecting switching barriers.
Reason #2: Dissatisfaction with Your Products or Services (controllable) – 15%
Sometimes, your product isn’t a good fit for a particular customer and that’s okay. Whether it’s an honest mistake buying your product or bad marketing information, certain customers won’t return based on their moral compass. Think of an animal activist that accidentally buys a product tested on animals. There is no changing the mind of wrong customers once their mind once they learn from their mistake. In this case a bad product will harm the overall level of customer satisfaction so its best to move on.
Companies can create this problem themselves by targeting the wrong market. Revisiting your current advertising strategies will help uncover if you are reaching the right customers. Additionally, be sure you are transparent about your product or service information. A poor review from a lack of information may make other potential customers hesitant.
Reason #3: Pricing and Product Don’t Align (controllable) – 17%
Customers won’t become repeat customers if they don’t consistently see the value. The value customers see in your product or service isn’t uniform. One person could believe that your item is the best thing on the market while another may perceive the price as too high. Your value may be diminishing if any of the following situations occur:
- Competitors are now utilizing your competitive advantage, reducing your uniqueness.
- Your pricing model is not reflecting the current market. You might be overpriced or underpriced.
- The uses of your product aren’t changing with market demand. Less flexibility leads to seeking other alternatives.
- Your reputation isn’t the same household name. You may be perceived as less fashionable and trusted.
Marketing your value allows you to charge the prices you want. The higher value customers see from purchasing your product, the more likely they will stay current customers. Analyzing competitors and the features they offer with similar products will help you revamp your competitive edge and pricing.
Reason #4: No Compelling Reason to Stay (controllable) – 9%
Despite being intangible, loyalty carries significant weight when it comes to your customer defect rate. Customers that have a sense of loyalty to your brand are less likely to leave, even though there may be cheaper alternatives out there. Loyalty can be difficult to build in new customers, but prioritizing customer service and highlighting your product’s value are great starting points.
50% of U.S. consumers have left a brand they were loyal to for a competitor that better met their needs. (HubSpot)
Placing a customer’s loyalty on a spectrum is often the best way to see where your company stands. At the high end there is significant loyalty while at the low end is little to no loyalty to your company. Factors influencing loyalty include:
- The understanding the customer has of your product or service. Do they know the value?
- Experience related to using your product or purchasing your service. Did customers have a positive experience with a problem?
- Other consumers’ perceptions of your product. Is it an exclusive commodity?
- Rewards for continuing use. Is there a loyalty program?
- How frequently the customer purchases the goods. Is it something that lasts a year or needs to be purchased every month?
What have heard so far? – 80% of reasons leading to defection are business controllable
Reason #5: Natural Causes (not controllable) – 4%
Certain defects are outside of your control. This includes the customer moving away or dying. However, if your company is available globally, moving away is not a defect outside of your control. A lacking website with poor functionality contributes to a lost customer when they move out of the area of a brick-and-mortar store.
The age of your target customers will significantly impact your defect rate. Products and services tailored to an older generation will have a higher churn and a lower retention rate. Think of a company selling wheelchairs. How many customers under 50 typically purchase that product? Probably very few. Diversifying your customer base to include sales to hospitals and online retailers can help mitigate the high defect rate in this population.
Additionally, sometimes consumers simply won’t need your product anymore. For example, a daycare facility targets parents with young kids. Once the kids grow old enough to watch themselves, there is no need for daycare services. This factor is outside of your control even though it contributes to your defection rate.
These five customer defect reasons can have a significant impact on your business performance, and financial goals. 4 out of 5 of these are controllable. This means the business has huge influence on customer loyalty. The more reoccurring customers you can generate, the less you will need to spend on advertising and the more profit you will see.
More detail on this is found here at a talk delivered at Portland State University.
One of the most efficient and cost-effective ways to stop customer defects is to prevent them from leaving in the first place. On location feedback technology allows businesses to identify unhappy customers as they using the brand, fix the issue and recover the customer while they are still at the business through digital comment cards.
Check out the use case videos.