Understanding Customer Loss

But what if the customer that leaves is yours? What then?

Customer loss is, of course, part of running any business. But because existing customers typically account for upward of 70 percent of a solution provider's annual revenue, according to VARBusiness 2005 State of the Market research, customer defection is acutely painful in the IT market, where new customer acquisition costs typically run double, if not triple, the cost of maintaining an existing account.

Fortunately, separate VARBusiness research reveals that roughly 80 percent of customers are typically satisfied with their solution provider of choice. (Our recently released midmarket research suggests that more than half of those customers say they are "very satisfied" with their solution provider of choice, a good indication of who they will buy from next.) That's great—until you look at the inverse. Think about it: As many as one customer in five may not be satisfied with your services or products. Worse yet, you may not even be aware of which customers they are.

Smart and savvy solution providers, including many systems builders, are awakening to the potential dollar loss this problem presents. They are combating it in several ways, starting with basic polling of their own customer bases. In a formal, systematic way, many solution providers are asking their customers to rate them in terms of product quality, technology ingenuity, technical capability, price competitiveness and customer service, to name a few. What is more surprising, however, is the number of solution providers that have no means or way of measuring customer satisfaction. So not only do they not know which of their customers may be looking to defect, but they also do not know what the potential financial impact to their businesses these defections could bring with them.

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For those struggling with this problem, help may be on the way. Third-party companies such as Walker Research, a specialist in customer satisfaction, and industry vendors including Cisco could be of assistance. Cisco, for one, is working on an initiative to help its partners understand the true cost of customer loss. By helping partners understand the financial impact of such losses, it is hoping that its solution providers will better understand the importance of customer satisfaction, even more than they do today.

"What we are doing is going to the next step in customer satisfaction," says Dan McNally, director of business operations with Cisco's worldwide channel group. "No longer is this about a conversation centered around helping a partner understand the difference between a customer satisfaction rating of 4.2 to 4.25, but instead it's about monetizing the potential revenue loss a solution provider faces each year due to customer defection."

Working in conjunction with Walker Research, Cisco is finding that customers fall into four basic categories: truly loyal, satisfied customers; customers who may have an issue or two but are generally accessible and approachable to sell additional technology to; those who feel trapped by either a technology and/or supplier; and those who are truly at risk and not likely to buy from an existing supplier again. Those four basic types of customer can be plotted along a grid to give a solution provider a snapshot of his or her customer base.

Cisco recommends that its partners use an online tool that it created to plug in a particular customer's prior-year purchase levels to generate a number of potential revenue gains, depending on the customer's level of satisfaction. McNally acknowledges that not all of the factors used in the Cisco tool are "pure science"—only customers willing to take customer-satisfaction surveys can be factored in, for example—but the tool, nonetheless, serves as an invaluable aid in helping business partners better understand the dynamics of their customer bases. It can even help business partners determine which of their accounts might not be worth fighting for, so that they can better deploy their resources elsewhere.

One other word of advice experts have for those struggling to better understand the impact of client defections: It never hurts to ask those who have left why they did so. It may be humbling to do so, but it can help immensely in understanding the dynamics behind customer loss. Married with the monetary value of such losses, that information can prove vital to your long-term viability.