Over 10,000 fans showed up for the grand opening of Planet Hollywood’s New York restaurant. Stars like Demi Moore, Bruce Willis, Arnold Schwarzenegger, and Whoopi Goldberg had invested in the company, and they showed up regularly to promote the handful of initial restaurants in Chicago, Los Angeles, Washington, D.C., and London. Fans flocked into long lines waiting for the chance to be inside when a star walked by or sat down at a nearby table for dinner. The restaurant’s customers not only got a meal (one practical job done for them), but also the bragging rights that come from the thrill of star watching (a social job done for them). After the company went public, the fan’s fever pitch made the company worth over $2.5 billion.
Four years later, the company had gone bankrupt twice and its stock traded at less than $1 per share. What happened? In short, the customers defected—they stopped going like the initial droves did. Why? Well, the stars got tired of promoting the restaurants and stopped showing up. Doing the red carpet thing was OK for a while. But eating at the restaurants and dealing with the fans on a regular basis was work, not a night out for a meal. When word got out that star sightings rarely happened, the thrill of the star hunt diminished and customers lost interest. The high-priced, mediocre food made the decision not to give Planet Hollywood a try even easier. In other words, Planet Hollywood stopped doing the jobs that the customers wanted done.
Knowing why your customers buy is extremely important. Knowing why they reduce or stop buying is equally important. Customer defections mean either that you’ve solved their problem for a period of time, maybe forever, or that the problem still exists but the customer has found someone else who can solve it better than you do.
To know the cause of the their defection, understand the lifecycle of the problem and the lifecycle of your solution. For example, if you break your wrist, you hope that after it’s healed, you never have to see an orthopedic surgeon again in your life. Similarly, after students get a law degree or a Ph.D., they probably don’t plan to get another though all of them will need continuing education which these institutions could offer). These are one time “problems” with, hopefully, one-time solutions.
On the other hand, car manufacturers need a steady supply of parts, hotels want their rooms filled by guests, parents buy bag after bag of diapers for their babies, and people need groceries—all on a re-occurring basis. Unlike the one-time needs described above, most businesses do an ongoing “job” for their customers, whether keeping them supplied with products they need or providing services they use. Most businesses are built upon and depend on this repeat business.
Customer defections signal an alarm. It means that customers are “firing” you in favor of a competitor (or they decide to do the “job” themselves). (As we will learn in Part Six of this book, this is the same process that your company will use toward you as an employee. If you are not producing enough value for the money paid, then you will be cut loose.)
While thinking of defections, consider an important variation on the theme—those who do not stop buying altogether. They just cut back and are “partial defectors.” You want to keep track of these partials: their percentage of your total customer base, their drop in number of purchases, and the trend in dollar amount of purchases.
A good example of partial defection is grocery shopping. Many people shop at two stores because neither store carries everything they want to buy. Or the preferred store makes it too difficult to shop there.
As we saw in Part One when we discussed the definition of the critical path, most grocery stores put milk and bread shelves in the back of the store for the stores’ convenience and to spur impulse buying. This critical path design decision drove most busy customers who only want a few basic items (like milk and bread) into the arms of the $200 billion convenience-store industry, which better understood the hurried customer’s critical path. The large grocery chains created their own competitors and drove their customers to become partial defectors.
So, what is your customer retention rate and your customer defection rate?
To begin, understand how customers perceive your performance. Too many organizations simply never ask their customers for a performance rating. Your cash register will tell you if they are buying from you, but not if they are happy with you. As we saw with the demise of the taxi business, your customers may deeply wish that a new competitor would arrive so that they could defect, or defect happily once a more convenient option arrives on the scene.
Some businesses do try to gather customer satisfaction ratings. For them, the problem isn’t lack of data but how to interpret that data. If they get ratings of 4 on a 5-point scale, they think that they are doing a good job. A study by Xerox, however, found that a 4 simply means that the customer believes they got what they paid for. The customer feels OK about the transaction, but not much else. No data on good will or future intention to purchase was obtained. In contrast, customers who give you a rating of 5 out of 5 are 6 times more likely to re-purchase in the next 18 months than those who give you a 4 rating.
Satisfied customers, then, are not the same as loyal customers. They are open to replacing you, especially if a new technology or new competitors come along. Highly satisfied customers are more likely to stick with you in the face of these changes.
These findings led to the notion of the “Net Promoter” score. Although different people have different definitions of net promoters, we can define them as customers who most often include three behaviors:
They are very satisfied with you as a supplier, i.e., a 5 rating out of 5.
They indicate that they are very likely to do business with you again in the near future; and
They are very likely to recommend you to family, friends, or colleagues.
Highly satisfied customers aid your organization through their ongoing business. But they also aid you through their positive word-of-mouth recommendations that bring in additional customers that you can then wow.
Critical Path Action Items
What percent of your customers are very highly satisfied net promoters?
What percent of your customers have defected completely?
What percent of your customers are partial defectors? How much of their business did you lose to your competitors?
How many of your competitors have defected from them to you? What percent of those customer’s business did you get?