The Idea in Brief

How much does it really cost your company to lose a customer? The facts may shock you. Long-term customers are a vital source of profitability. They purchase more each year, and often pay more for products and services because they trust you. Also, as you get to know them, you serve them more efficiently—and cheaply. And finally, they provide free advertising through word of mouth.

Still, most businesses lose 15–20% of their customers annually. This article shows you how working toward zero defections—keeping every customer you can profitably serve—helps you get the most from their loyalty.

As credit card giant MBNA America discovered, trimming defection rates even slightly pays big. Through a 10% defection reduction, MBNA doubled its average customer life—and more than doubled its average customer value. Its industry ranking soared from 38 to 4, and its profits ballooned sixteenfold.

The Idea in Practice

Managing Customer Defections

You can’t eliminate all customer defections, but you can manage them—by spotting customers who leave and then analyzing and acting on the information they provide.

  • Watch your customers. Gather information about your customers to identify the buyer behaviors that drive your success and increase customer loyalty.

Example: 

Staples, the office-products discounter, offers buyers a membership card at checkout. The card entitles people to promotions and discounts—in return for name, job title, address, etc. All purchases are logged against the card number. This lets Staples see buying habits—including when customers stray.

  • Find out why defectors are leaving. Then use the information to improve your business.

Example: 

When Staples customers stop visiting the store or buying certain products, the company notices immediately (through the membership card described above). It then calls defectors to get feedback, and selectively discounts or targets its catalogs accordingly.

Crafting a Zero-Defections Culture

Defection rates are measurable—and thus manageable. But striving for zero defections requires support throughout your firm. Here’s how to strengthen that support:

  • Focus your entire organization on customer defections. In addition to including it in your mission statement, make sure everyone lives it—daily. MBNA prints the words “Brought to you by the customer” on every paycheck envelope, and has a customer advocate who participates in all major decisions.
  • Teach all employees the lifetime value of a customer. Domino’s Pizza employees know that regular customers are worth $5,000+ over the life of a 10-year franchise contract.
  • Teach employees defections-analysis methods. For example, show them how to gather information, with whom to share it, and what actions to take in response.
  • Tie incentives to defection rates. Great-West Life Assurance pays a 50% premium to brokers who hit retention targets.

The real quality revolution is just now coming to services. In recent years, despite their good intentions, few service company executives have been able to follow through on their commitment to satisfy customers. But service companies are beginning to understand what their manufacturing counterparts learned in the 1980s—that quality doesn’t improve unless you measure it. When manufacturers began to unravel the costs and implications of scrap heaps, rework, and jammed machinery, they realized that “quality” was not just an invigorating slogan but the most profitable way to run a business. They made “zero defects” their guiding light, and the quality movement took off.

A version of this article appeared in the September–October 1990 issue of Harvard Business Review.