Cost of customer churn too hard to ignore

February 13, 2018

Regardless of what you call it – defection, attrition, turnover, changing providers, you name it – customer churn is a painful reality doing business. Even the largest and most successful companies are not immune.

In Australia, our businesses on average lose between 6-8 percent of their customers each year, with our utilities and telecommunications sectors taking biggest beating with losses of between 20-25 percent.

To add further insult to injury, our energy retail market boasts one of the highest rates of market churn in the world, worst affected being Victoria which at last count was seeing one in four customers head for the door each year!

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.

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 per cent of policy holders switching providers each year, which says health insurance industry consultant, Avnesh Ratnanesan, 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!

The general consensus is that acquiring more customers and generating new business will in time balance out these unavoidable losses.

Regrettably, 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 & Utilities, Wipro, in India – who has worked extensively in the utilities sector around the world, including Australia, 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 perilous threat of acquisition should a company be perceived to be haemorrhaging customers!

Tide is turning for customer retention

However, the good news is that despite the prevailing acceptance that customer attrition is part and parcel of doing business; the global tide is now turning.

More and more businesses are now no longer prepared to cop a financial belting and increasingly turning their attention to customer retention.

They 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.
Are you one of these more forward-thinking, progressive businesses? Do you believe churn is not something we should passively accept but rather something we should actively look at reducing?

Complete our Customer Retention Health Assessment and find out how your business ranks on the customer retention front.