The Danger of Defection A Comparative Study into Customer Defection Rates A Group 1 Software Report, July 2005 Management Summary Key Findings - Customer defection rates in key UK consumer industries have increased from 16.9% in 2003 to 19.1% in 2005 - This indicates that the UK consumer is becoming more mobile and that companies¡¦ retention strategies need to improve to deal with this phenomenon - Marketers¡¦ attentions are now focusing on existing customer development rather than new customer acquisition - Major changes have occurred in the traditional view of customer defection rates, most noticeably in the Banking industry where churn has now increased from sub-10% levels in 2003 to almost 20% in 2005 - Mobile Telecoms retains the highest average customer churn at some 33%, although some practitioners are now achieving churn under 25% per annum - Power Utilities have managed to contain churn rates under 14% per annum, as have Mortgage Finance providers - Retail Multiples, Internet services providers (ISPs) and Mobile Telecoms remain above the UK top 1000 company average, indicating a need to continue to focus on retention strategies in these sectors Introduction Over the last fifteen years, the cult of customer retention has gone from strength to strength. For many industries, winning new customers consumes far less intellectual effort than keeping the ones you already have, and developing their value to your organisation. Much modelling effort goes into predicting which customers are likely to defect, as well as building strategies to stop them doing so. Research from Pitney Bowes tells us that by the end of 2005 more effort will be going into marketing to existing customers than is devoted to winning new ones ¡V a watershed moment in marketing Since Reicheld¡¦s over-quoted (some say unscientific) assertion that a 5% increase in loyalty can lead to a 25-85% increase in profitability, the cult of customer retention has continued within the marketing community. Yet just because a company manages to keep customers, does not mean that it is also capable of developing the value of those customers. Yet the world is becoming generally more mobile and less loyal. Back in 2003 ¡V the last time that we commissioned research on the subject ¡V the all industries average customer defection rate was 16.9% per annum. Now our annual average has risen to 19.1%. No wonder marketers are becoming obsessed with retention strategies. Other pieces of received wisdom are also being toppled. Traditionally, pundits have regarded the range of key industries studied in this report as being highly polarised as far as customer ¡¥churn¡¦ is concerned. Banking was always labelled low churn, and Mobile Telecoms high churn. Our study shows that whilst Mobile Telecoms still heads the field, the supposedly massive rates of customer inertia in Banking is no longer a given. The importance of customer profiling In an atmosphere of high or habitual defection rates, the importance of customer profiling becomes paramount. In the first place, the community of habitual switchers must be identified so that retention effort is not expended on those who will defect anyway. These serial switchers have now been given names such as ¡§rate surfers¡¨, ¡§card collectors¡¨, and so on, depending on the particular industry. At the other end of the spectrum, high value (or high potential value), high inertia customers must be made to feel special and further products or services relevant to their needs offered to them under the aegis of a brand that they obviously value. It is the role of data-driven marketing techniques to identify all the shades of loyalty, value and inertia in between these more obvious behaviour polarities, and help develop strategies to keep and develop customer value. Implementing such strategies requires a truly integrated approach to the customer across all ¡¥touchpoints¡¦ with the company ¡V face-to-face, mail, phone, email, website, SMS, and even bills, statements and customer correspondence. Every communication that a customer has with the company needs be consistent, relevant and develop customer satisfaction and value at the same time. Otherwise a terse letter, or a rude assistant, or an inappropriate phonecall can undermine all the other investment and hard work that has been put into managing the customer relationship. It would appear that no recent research has been conducted that compares and contrasts the main industries represented by the country¡¦s largest firms. These publicly quoted companies are under particular pressure to measurably grow their customer bases, exposed as they are to market sentiment and shareholder scrutiny. Strategies to stem defection are therefore critical to growing the customer base for the lowest possible investment. In that sense Reicheld was right ¡V it is far less expensive to keep a good customer than to win a new one. Getting CRM out of the door This focus on marketing to existing customers is causing some concern in the marketing services industry, which is mainly focused on new customer acquisition. In particular, anecdotal evidence from the companies studied in this report indicates that they are actively exploring the information that they have on customers, and the points of communication that they already ¡¥own¡¦. Moreover, there is increasing anecdotal evidence that many companies have been struggling to translate the sophisticated segmentation that has been achieved internally into more efficient and effective customer communications. In short, they had trouble getting their tailored and personalised CRM communications out of the door. However, a CDMS survey conducted in Spring 2005 highlighted the steady progress organisations in different industry sectors are making. CRM is gradually breaking through its bottleneck and achieving ¡¥end-to-end¡¦ marketing.. Over half of top UK companies are now able to translate sophisticated database analysis into highly personalised and segmented campaigns, where creative, message, and enclosures are varied for different types of recipient. Other barriers to CRM falling In another study this year by TotalDM, a barometer of ¡¥CRM Commitment¡¦ was established, in the form of the proportion of the UK¡¦s top 500 companies with a Head of CRM. The average came in at approaching half (44%). We may conclude, therefore, that in many cases, measurable return on CRM investment has to be proved before a company will appoint a Head of CRM into a senior directorial role (regardless of whether this is an internal promotion or an external hire). In this sense, Heads of CRM penetration is acting as a real indicator of commitment. CRM initiatives have been taken, hard bottom-line results measured, and ongoing metrics put in place, before CRM management is afforded senior status. In parallel, we have seen significant advances in cheaply and quickly drawing customer information out of legacy systems (billing, finance, order management, EPOS, stock management, etc). Formerly, pulling such information was cumbersome and expensive. Special interfaces had to be programmed in to extract the data without causing the legacy line-of-business system to fall over (and result in, say, the tills failing, or bills not being sent on time). This was a particular problem for volatile industries (Telecoms, Retail, Travel & Leisure) where the customer data you needed to analyse and apply to campaigns today might not be the same as your requirements six months later. Firms simply couldn¡¦t afford the cost of writing new interfaces twice a year. That barrier no longer exists thanks to a relatively new software category called ¡¥extract, transform and load¡¦ (ETL). In layman¡¦s terms, this software allows non-technical people to build new data input filters on the fly, and inexpensively. Not only can customer data now be easily extracted from all around the enterprise, but existing customer communications can be harnessed for marketing purposes. What are called ¡¥print streams¡¦ for statements, bills, order confirmations, customer letters and so on, can now be manipulated to include marketing messages tailored to the individual recipient, taking advantage of all the sophisticated analysis and segmentation that takes place at the database level. This is another example of matching personalised marketing analysis with real-life physical delivery of those offers to the recipient through a medium that can reach the bulk of the customer base. The importance of this development is that its incremental cost for the marketer is minimal, yet research we commissioned at the end of 2004 shows it can produce response rates akin to stand-alone direct marketing campaigns, delivering tangibly contributing to return on investment. Another hurdle bites the dust. What about the major disincentive of the capital cost of a CRM investment? Again, things have moved on here. After experiencing a massive downturn in sales in 2002-2003, CRM software vendors pulled themselves together and started to explore alternative sales models. A range of options came to market, including the hosted (ASP) charged on a service rental basis, low-cost defeatured start-up packages, and even charging per transaction (like a database bureau traditionally does). The result is that the upfront cost of investing in CRM has fallen, making the whole scene more acceptable to careful CFOs at larger organisation, as well as stacking up financially for smaller organisations. Outsourcing of whole CRM business processes has also grown. The traditional outsourcing focus has been on the call centre. Recently, however, database bureau businesses have transformed themselves into outsourced analysis departments, campaign management back-offices, or database hosts. According to data management specialist CDMS, campaign management outsourcing is used by over one third of top UK corporations. In short then, costs have fallen, the need for capital commitment has crumbled, and liquidity has been assisted through the option of monthly service charge payments to an outsource provider. What levels of defection are occurring? So, to what level do different industries suffer from customer defection? To provide just such a ¡¥compare and contrast¡¦ picture, this study was commissioned by Group 1 Software (fieldwork by MarketingUK) amongst the country¡¦s top 1000 companies, aiming to be a first stage in filling this knowledge gap. The results of this study raise a number of warning flags and/or lessons for top British business sectors. Sector Churn rate 2005 (%) Power Utilities 13.0 Mortgage Finance 13.6 Banking 17.5 General Insurance 17.8 Average 19.1 Retail Multiples 19.8 ISPs 24.0 Telecoms - Mobile 33.4 - The Power Utilities regulator, Ofgem, appears anxious about the lack (as they see it) of customer churn in the industry, to the extent that a number of statements have been made where the authority explicitly states that it would like to see higher switching levels. At all events, the initial post-deregulation enthusiasm for product diversification under the ¡¥trusted¡¦ brand of a utility has only been successfully developed by a few players. Fingers have been burned in ill thought out diversification initiatives, and many boards are now insisting (rightly) that consumers demand a certain level of logic between core product and additional product or service offers. This has been the underlying success factor in the Centrica home-service-oriented strategy. The sector¡¦s relatively low defection rates would tend to imply that it can afford to retrench and take its future plans a little more calmly and slowly, given that the defection threat it faces is fairly contained. - Mortgage Finance providers also have a relatively low customer turnover, but has rather more acute problems. Remortgaging ¡V the mortgage industry¡¦s version of switching ¡V now makes up over half of all new business sold each year. This means that the back-book of existing profitable customers who have traditionally subsidised low entry rates for first time buyers has now been almost irrevocably undermined, threatening the very business model of the industry. Therefore, even these very low rates of churn need to be stemmed still further if mortgage finance providers (especially mutuals) are to survive as going concerns. Discounting and price-led strategies cannot remain the main tools for customer retention. Brand values and other forms of delivering value and privilege back to the customer must be the main marketing focus. - Banking, it seems, can no longer rely on customer inertia. Traditionally, churn levels have been in the sub-10% range, but have now rocketed to virtually the same level as the General Insurance industry. As the branch network comes back into favour as a worthwhile element of customer service, we can expect to see high value customer privileges and rewards being delivered through this channel. Banks¡¦ direct marketing departments have generally been a playground for the experimentalist up to now ¡V possibly because the threat of defection was so low. Now we can expect a sharper focus on intelligent marketing, with hard results, across the customer base. Recent figures from the Direct Mail Information Service have shown a reduction in financial services mailing volumes and an increase in their sophistication and targeting. And inevitable further scrutiny by special committees and by the regulator will only increase consumers banking mobility still further. - Although General Insurance averages at much the same level of churn as Banking, this figure hides a wide polarisation of individual company churn rates ¡V ranging as widely as 5% in some cases to 40% in others. The industry remains still largely intermediated ¡V through traditional brokers and IFAs, but also non-traditional resellers such as supermarkets, estate agents and product vendors. So the burden of stemming customer defection is in large part focused on support for the reseller channel. Many underwriters are still of the mindset that the reseller channel is paid to conduct marketing. This is short-sighted. The underwriter, once introduced, is wise to establish a presence with the insured that encourages him or her to renew with the same insurer. Introducers cannot be expected ¡V in a highly competitive market ¡V to automatically recommend the same underwriter year after year. They will increasingly act in the client¡¦s best interests for price, and so cover-related marketing messages remain the responsibility of the underwriter. - The Retail Multiple sector seems to have been quietly reaping the rewards of rich data from loyalty schemes being used to mount very effective responsive marketing initiatives ¡V resulting in the sector¡¦s below average customer churn percentage at 19.8% per annum. Considering that for grocery, electronics and department store multiples, who have the highest penetration in the UK¡¦s top 1000 companies, location remains a strong determinant of custom, and also considering that some 10% of the UK population move house each year, affecting their choice of such retailer, we should consider the underlying churn to be just a further 10%. Nevertheless, we also have to recognise the growing de-location factor of online presence and sales influence. Home shopping, insofar as it has been grasped by traditional retailers, is helping them to overcome the location factor, and therefore the influence of home delivery capabilities should help to further cement the inertia of buying habits. As the latter half of the first decade of the 21st century progresses, we expect the effect of remote shopping to continue to stem churn in this sector. - Finally, we come to the Telecoms sector, divided into two sections ¡V ISPs and Mobile Telecoms. Standard fixed line Telecoms has not been included because Oftel advised our researchers that there is no effective means of measuring customer churn. A whole raft of factors make this the case ¡V particularly the complication of virtual providers where revenues are split between line rental (usually BT) and call charges (possibly a variety of providers across different tariff areas ¡V local, national and international). Falling charges in the ISP sector, along with the multiple provision of various bundled and unbundled broadband services have created a complex usage pattern amongst consumers. The jury is currently out regarding whether packaged or individual services will win out, and no pundit is currently prepared to put their money on the line on this issue. Mobile Telecoms remains a very fluid area. Here, strong brands are evidently having an effect, with the issue of content provision likely to be a key factor in future churn (or indeed inertia) patterns. 3G provision has initially disappointed consumers, leading to massive churn. Nevertheless, the sector is so volatile that this situation may easily reverse after its initial customer relationship difficulties. Methodology Research Base UK top 1000 companies Research Period July 2005 Research method Telephone and Email Individual Qualitative Survey, Market Analysis Primary research, plus corroborative secondary analysis, was conducted amongst the UK¡¦s top 1000 companies and with key trade bodies and research organisations. This research covered the following areas:- 1. Annual customer defection rates 2. Responsive campaign standards, across direct mail, direct email, telemarketing and cross-selling/retention campaigns through existing customer communications (bills, statements, correspondence, etc) 3. Database marketing and analysis standards