How many customers does your company lose every year?

If you’re like the average company, up to 40 percent of your customers walk
out the door and never come back. What’s worse, the “average” business is totally
oblivious to its actual churn rate – so it does nothing to correct the problem.
Even companies that do track customer defection rates usually assume a lost
customer is gone forever, a lost cause.

Happily, nothing could be further from the truth.

With churn increasing and customer loyalty fading, winning back and keeping
lost customers has never been more important. Lost customers mean lost revenues.
Negative word of mouth. Sagging employee morale. Worst of all, it can put your
sales and business development team on a treadmill of constantly finding and
wooing new customers just to replace the defectors – a costly and exhausting
predicament.

What’s the status of customer loss in today’s corporations? In April 2007
a customer loss survey was conducted by The Griffin Group and research partner,
CustomerSat. Over 500 marketing, selling and corporate buying executives were
surveyed. When compared against The Griffin Group’s 1999 winback study, an
even greater deterioration in loss customer policies, programs and monitoring
systems were revealed. With few exceptions, the majority of the firms surveyed
report critical deficiencies around customer risk, loss and winback. Highlights
include:

• 71% – The number of marketing and sales executives with no process
  for identifying customers who have defected;
• 46% – The number of marketing and sales executives who do not know
  how many customers they lose each year;
• 68% – The number of marketing and sales executives whose firms have
  no process for identifying customers at high risk of defection;
• 62% – The number of marketing and sales executives whose firms have
  no process for determining which competitor got the lost customer;
• 60% – The number of marketing and sales executives whose firms do
  not conduct interiews with lost customers; and
• 77% – The number of marketing and sales executives whose firms do
  not know how many lost customers they successfully win back each year.

But here’s good news: An effective customer winback program can transform
these problems into increased customer loyalty, while actually decreasing your
customer acquisition costs. Here’s how.

Knowledge Is Key

Overall, you have a much better chance of winning back a former customer than
signing up a new one, according to a study by Marketing Metrics. On average,
you have:

• A 60 to 70 percent chance of successfully selling again to a current customer;
• A 20 to 40 percent chance of winning back an excustomer; and
• Only a 5 to 20 percent chance of turning a prospect into a customer.

Statistically your chances of winning back a former customer are two to four
times higher than landing a new one.

Even harmless-sounding or “average” defection rates can be misleading. One
college boasts an 80 percent student retention rate. That sounds healthy, even
robust. But look closer. By the time a freshman class of 1,000 students enters
its senior year, that 80 percent retention rate means the class has shrunk
to just 512 students!

Now suppose those 500 lost “customers” had been retained. Imagine the savings
in unspent customer acquisition dollars alone.

Knowledge is key to successfully winning back your lost customers. Today’s
computer information technology allows unprecedented access and analysis of
a wealth of detailed customer data. But you need to know which infomation to
capture and what to do with it.

Grade and Segment Your Lost Customers

Customers defect for different reasons, and some customers, frankly, aren’t
worth winning back. Careful evaluation and segmentation lets you select the
most important customers to target, then develop individualized strategies
to win back each segment.

Not all defecting customers represent legitimate winback prospects. Some proved
too costly to serve and are better left alone. But others represent important
recovery opportunities.

To separate the wheat from the chaff, you must grade and segment them. The
best lostcustomer segmentation plan my co-author, Michael Lowenstein, and I
found when researching our book, Customer Winback, is a two-step process developed
jointly by Bernd Stauss, chairman of the Services Management Department at
Catholic University of Eichstaett (Germany) and Christian Friege, former marketing
director for Doubleday Direct, Inc.

Step 1: Segment Customers by Second Lifetime Value
Most marketing professionals are familiar with the lifetime value (LTV) of
a customer. But Stauss and Friege suggest that the LTV of lost customers
is not as important as the value of the relationship once the customer has
been regained.

Stauss and Friege call this new metric the second lifetime value (SLTV). They
suggest a customer’s second life cycle can actually be more valuable than the
first, and offer four important reasons why:

1. The defected customer is already familiar with your products and/or services.
2. You have more data about their buying preferences than any first-time customers.
   That lets you offer a more targeted service.
3. The personal attention and recognition you show customers in your winback
   program can spur better sales than the typically anonymous treatment they
   probably received when they were a first-time customer.
4. Cross-selling and upselling may catapult the customer into higher buying
   levels more quickly in the second lifetime, due to their familiarity with
   your products or services.

All of these variables represent important considerations when you estimate
the SLTV of each lost customer. Once you’ve assigned SLTV estimates to each,
segment these customers in tiers. Stauss and Friege recommend dividing lost
customers into four SLTV segments:

1. The top 10 percent
2. The next best 20 percent
3. The next 30 percent
4. The bottom 40 percent

A Case Study
What if you have the names of lost customers but very little other data from
which to predict SLTV? Here’s how one of our clients solved that problem.

An optical retailer with three stores in the Northeast contacted The Griffin
Group with a familiar problem. Their database contained the names – and not
much else – of 15,000 former customers. They wanted help winning them back.

To determine their SLTV, we recommended surveying a sample of these lapsed
customers by phone, starting with customers who had made the most recent purchases.
We discovered that, generally speaking, the lapsed customers with the highest
SLTV were those who:

1. Were still wearing prescription eyewear.
2. Used multiple types of prescription eyewear (reading glasses, prescription
   sunglasses, etc.).
3. Had multiple family members with eyewear needs.
4. Expected to make a prescription eyewear purchase within the next six months.

These insights enabled the optical retailer to effectively segment its lost
customers and launch a successful winback program.

Step 2: Segment Customers by Reasons for Defection
Estimating SLTV is an important first step. The second is to classify customers
according to the reason they defected.

Stauss and Friege identified five distinct defector categories:

1. Intentionally pushed-away customers. These customers were unprofitable
   to begin with, so little or nothing was done to win them back.
2. Unintentionally pushed-away customers. These are customers you wanted
   to retain, but they left because your company’s performance didn’t meet their
   expectations in some way.
3. Pulled-away customers. These are customers who were lured away by
   competitors offering a better value (not just a lower price).
4. Bought-away customers. This group was lured away by competitors
   with low-ball, introductory pricing offers.
5. Moved-away customers. These customers drifted away because their
   needs changed due to age, life cycle changes or geographical changes.

In addition to Stauss and Friege’s five categories, I’ve uncovered another
defector category to consider:

6. Variety Seekers. These are customers who are not likely to remain
   loyal to one product, because they want the experience of using many different
   ones. For example, a high-performance car enthusiast who trades his BMW for
   a Mercedes, then a Porsche and finally a Bentley is a variety seeker. He
   loves each of these autos, but is unlikely to remain loyal to only one brand.
   Investing money in winning back this customer would be a mistake. His hunger
   for variety will likely blunt any automaker’s winback initiative.

So Who Do You Woo?

Sometimes uncovering the real reason you lost a customer is easy. At other times
it demands detective work. Capture all the clues you can in advance, in the customer’s
data file. Of course, particularly in retail settings, customers often do not
announce their intentions; instead, they simply walk away.

In these cases, you
must become a sleuth. Carefully review their purchase behaviors. Keep your eyes
peeled for things like lagging visits, low purchase rates compared with previous
periods, a frustrating encounter with a staff member, etc. Contact the customer
and address any issues at the earliest possible stage.

If the customer still
leaves, consider conducting an exit interview to uncover the reason(s).

Common
sense, confirmed by Stauss and Friege’s research, suggests that the best winback
candidates are the unintentionally pushed-away and pulled-away customers in each
of the four categories (A–D). These are the ones you want your winback program
to target.

By contrast, bought-away, moved-away, intentionally pushed-away customers
and variety seekers leave for reasons that would probably jeopardize any chance
of keeping these customers loyal in the future. Forget about them.

Luring Back
the Lost

Once you have determined which lost customers have the highest winback
potential, research their current needs.

One interesting case we uncovered involved
a major international retailer of jewelry, apparel and collectibles. This retailer
reached customers via a television shopping channel. They queried their database
to identify those customers who’d once had a high value, but who had not made
a purchase in over two years. Many of these customers had made over 10 purchases
from television offers. While they represented only a tiny percentage of the
retailer’s total customer base, these were good consumers who each spent thousands
of dollars since they first became buyers.

Many companies would have dismissed
these lost customers as a lost cause. But this retailer was unwilling to give
up without first determining why they had stopped buying.

Targeted research uncovered
two important findings:

1. Although they hadn’t bought anything in a long time,
   these customers still considered themselves active customers of this retailer.
   Mentally and emotionally, they hadn’t defected at all; and
2. While they still
   had the economic means to continue purchasing at or near their prior rate, their
   interests had become more specialized.

Using this knowledge, the retailer recontacted
each customer and asked them to complete a product interest profile. Based on
their feedback, a customized shopping program schedule was then sent to them.

As a result of these simple winback actions, more than half of these jewelry
retailers’ dormant customers were reactivated.

Measure, Understand, Evaluate,
Refine

In preparing your own re-approach strategy, learn as much as possible
about your lapsed customers and why they stopped buying. Then approach these
customers with offers specifically tailored to them.

That was BellSouth Mobility’s
strategy when they conducted focus groups among former customers who had become
active customers of competitors. BellSouth was tackling its nationwide churn
problem: They were adding 2,500 new customers every day – but losing 500.

Ironically,
the focus groups found that most of the lost customers felt BellSouth’s system
coverage, customer service and billing systems were better than the competitors’
service they were currently using. So why had these customers left?

The key reasons
were related to credits for dropped calls, free phones and airtime available
to new subscribers but not to existing customers.

Equipped with this information,
BellSouth designed a direct-mail reactivation offer to include a free phone or
free airtime, and featured news about the 50 cents’ credit for dropped calls.
But the offer produced disappointing results. After 30 days, it received only
a 3 percent initial response and just a meager 1 percent reconnection rate, versus
the program’s goal of 10 percent.

Additional research uncovered the reason. The lapsed
customers found the offer compelling, but couldn’t take advantage of it because
their current contracts locked them in with other cellular companies. Misplaced
or never-received direct mail cards prevented others from switching back.

So
BellSouth repeated the offer to people who could say yes: 1,000 ex-customers
who had defected 11 months before. BellSouth also followed up the letter with
a phone call. This time the results were much better: The carefully timed letter
and follow-up phone call produced a 10 percent reconnect rate. Given the positive
results from this test market, BellSouth began expanding the program into its
other 27 markets.

Lost and Found

Customers come and go; it’s a fact of business
life. But as you’ve seen, a “lost” customer doesn’t have to be lost forever.

By implementing an effective customer winback program, you can lure back lost
customers, improve loyalty, increase revenues and actually reduce customer acquisition
costs – all at the same time.