Using Applied Science to Prevent Loss of Customers and Profits

Each customer is an investment and represents hours of marketing efforts and expenditures. Each customer lost represents an investment that is no longer reaping dividends. Having customers, not merely acquiring customers, is crucial for business success.

In an article in the Journal of Marketing Research titled “Defensive Marketing Strategy by Customer Complaint Management: A Theoretical Analysis” by Claes Fornell and Birger Wernerfelt, numerous successful marketing strategies are identified. According to the authors, one crucial feature of marketing strategy is the company’s ability to identify and influence the flows of customers in and out of its franchise and into and out of the market. Fornell and Wernerfelt identify these flows as consisting of:

1. additional customer entry to the market,
2. brand shifting or change of patronage,
3. customer market exit, and
4. changes in purchase frequency.

Companies strive to control these four customer flows because they are the ultimate determinants of growth, stagnation, or decline. The marketing literature tends to emphasize offensive rather than defensive measures such as strategies designed to obtain additional customers, encourage brand switching, and increasing purchase frequency. This approach can become a problem.

Q: Why can focusing on offensive strategies be problematic? A: Because this approach can decrease your profits. Offensive objectives can become increasingly difficult to meet in the face of increasing competition and/or maturing industries or shrinking markets. The cost of generating a new customer can substantially exceed the cost of retaining a present customer. Because low growth and highly competitive markets are increasingly common characteristics of many industries, defensive marketing strategy is becoming more important. Instead of attempting to obtain new customers or encourage brand switching, defensive marketing is concerned with reducing customer exit and brand switching. That is, the objective of defensive marketing strategy is to minimize customer turnover (or, equivalently, to maximize customer retention) by protecting products and markets from competitive inroads.

Q: How can you put these ideas into practice to develop your own defensive strategies? A: Take advantage of techniques developed by applied science. You may wonder how science can be used to improve your marketing strategy. The answer is simple. Science is all about obtaining knowledge, not just any kind of knowledge, but knowledge of objective facts in a specific discipline. Applied science pursues knowledge that can be applied in practical ways to solve problems.

In a research article published in Industrial Marketing Management, John E. Swan and Thomas L. Powers use applied scientific techniques to develop a theoretical framework for identifying styles of customer dissatisfaction behavior. Their research led them to conclude that information about dissatisfied customers can be successfully utilized to form a foundation for concrete programs designed to reduce dissatisfaction behavior that will result in a loss of customers and reputation.

Susan Keaveney also took an applied approach in a study called “Customer Switching Behavior in Service Industries: An Exploratory Study” published in the Journal of Marketing. Keaveney reports the results of a critical incident study conducted among more than 500 service customers. Her research identified more than 800 critical behaviors of service firms that caused customers to switch services.

Q: How can you take a list of 800 critical behaviors and apply them to your company to decrease customer loss? A: You can’t. While this research has helped marketers to better understand switching behavior, there are a couple of reasons why this knowledge cannot easily be applied to help other businesses improve their defensive strategies. First, this amount of information is unmanageable. A more manageable amount of information is needed to be able to apply the data. Secondly, this information comes from someone else’s customers, not yours. To be most effective in eliminating loss, you need applied research on your customers.

Dennis H. Gensch describes an interesting approach to offensive marketing in an article published in Management Science. Gensch’s approach involves segmenting customers on the basis of probabilities of switching and loyalty as a first step in determining the allocation of resources to offensive versus defensive marketing.

Q: But how do you go about identifying such customers in order to segment your customer base? How do you acquire a manageable amount of information that can be applied to decrease the loss of your customers? A: Implement the Customer Loss Analysis (CLA) Organizational psychologists at the National Business Research Institute (NBRI), a research firm specializing in applied customer and employee research, recently developed a new defensive approach that can facilitate the segmentation of your customer base in order to predict and prevent customer loss. Using highly sophisticated statistical procedures, this technique compares data from customers who have left with data from current customers. In this process, data is collected from customers over a time period of at least several months. This data is used to create psychological profiles on current customers and customers who are no longer doing business with the company. A technique known as the Root Cause Analysis is utilized to identify the drivers that influenced the customers’ decision to stop doing business with the company. Using this advanced statistical technique, the profile of customers who have been lost can be used to predict the percentage of current customers who will choose to leave in the future.

Identifying how many customers will choose to leave is only the beginning. Next, the Root Cause Analysis is applied to uncover the drivers that most often lead to customer loss. A psychological path analysis identifies a small, manageable number of items that have the greatest effect on customer perceptions of the largest number of other items. The results of this analysis facilitate preventive measures. Knowledge of the drivers influencing your customers provides you with “marching orders” and empowers you to take actions to change the perceptions of current customers regarding these drivers in a positive way. As Swan and Powers found in the study mentioned earlier, improving customer perceptions decreases the likelihood that customers will choose to leave, thus minimizing lost revenue. Taking such action also improves the reputation of your company which can enhance both defensive and offensive marketing efforts.

Businesses from every sector have utilized NBRI’s standardized and customized surveys and used the results to forecast the behavior of their customers and implement changes to decrease loss. Call NBRI at 800-756-6168 to learn more about how you can take advantage of our predictive tools as part of your defensive strategy to avoid the loss of customers and profits.

Ken West
Chief Operating Officer
National Business Research Institute