Welcome to the Business Insight blog, your all access pass to the very best thought leadership, information and tools for creating smarter business strategies and practices. You'll discover a broad range of resources including real-life case studies, insightful analyses, blogs, articles and ideas from leading experts in diverse industries.
|The IBM Business Insight Channel||IBM for Midsize Businesses|
|Most recent||Most recommendations||Most comments||Most visits|
Got a sick feeling in your stomach? Could be Customer Churn.
Nigel Broomhall 270005DMNP firstname.lastname@example.org | | Tags:  zealand broomhall customer business analytics new business_intelligence_ana... nigel intelligence
3 Comments | 11,182 Visits
Would you like to be described as ‘hot’? There are a couple of scenarios where it is an incredible compliment for someone to refer to you in this way. And how would you feel if you discovered that New Zealand was the second hottest in the world? Wow! Now if the ranking was NZ men aged over 25 then I think there would be a bunch of us that would be pretty stoked. Imagine that – NZ is ranked second in the world! I know that there would be a T-shirt produced pretty quickly.
Now there are a couple of scenarios where being ‘hot’ is a little less than a compliment.
Sweating on a treadmill that’s going nowhere is probably one of them. But at least when you’re working out you’re actually going somewhere, be it faster, thinner, more healthy. If you had to pay for the gym and spend hours on a treadmill each day for almost zero gain that wouldn’t be much fun. And that’s exactly what a high churn retail market can become. Look at Melbourne over in Victoria, Australia. They have had customer churn above 25% for the last 3 years. The recent World Energy Market Rankings, produced by VaasaETT, categorised them as “super hot”. New Zealand now ranks on the same world scale as second – we are officially “hot”.
One of my favourite quotes is “Growth for the sake of growth is the ideology of the cancer cell” by Edward Abbey, for you see that sums up the current unsustainable trajectory of the planet. Now using that same theme it could be said that “Churn for the sake of churn is the ideology of gastroenteritis” and we all know what happens when you contract gastro.
Now the views on whether customer churn is a good thing depends of course on your perspective – if you’re a customer and people are asking for your business then that can great. And if you’re a regulator and your public (easily available) measure is customer churn – then it’s a great thing. But if you’re a retailer, staring down the barrel of 20%+ of your customer base turning over every year, then you probably don’t rave about how great customer churn is. And in Victoria the impact of this customer churn is retail margins of -3 to +9% with an average of 5%.
I spent some time a few years ago with Massey University, and one of the lecturers shared a PhD student’s thesis with me. The basic premise was that it is very difficult to shift your company’s share of average market churn (acquisition and defection) much beyond ±5%. I found this fascinating, however I both agree and disagree with this perspective. I agree on average it is difficult to move away from market churn statistics, particularly if you’re a medium/large player (when you move you move the market ergo moving away from average is illogical). What I disagree with is an average perspective.
Here is where it starts to get more difficult. You see to get off the endless treadmill of customer churn, you need to take a more scientific approach. Just as an elite athlete won’t get to the highest pinnacles of performance by doing an average workout, you need to take a much more granular view of your market. An elite athlete will break down all aspects of their training regime – food, rest, recovery, training types, and will fine tune this regime specific to their body and their metabolism. This is also the view that retailers need to take of the energy market. Pockets of value that are multipliers above the average exist throughout the energy market. The real skill is to be able to bring together several different data points (descriptive, behavioural, interaction and attitudinal) with a central customer perspective, and align this to the behaviour that generates value for your organisation (load profile, repayment abilities etc).
It can be done. But once you have your view of the valuable customer groups for your organisation, the hard work really begins. Because it is all well and good to develop a complicated customer analytics and segmentation engine, but actually generating value from this process is hard. Educating the company on your strategy and approach is also hard. Particularly if you are trying to move from a “firing a shotgun while running on a treadmill to stand still” strategy, to strategic targeting of high value customer groups of value, and either passive or active churn of lower value groups. And you can’t just step off the treadmill either.
In my view there are three key steps to developing a step change in value from your retail customer base to differentiate you from your competitors:
1. Value Identification. Who are your most profitable customers, what do they look like, what are they into, what do they spend money on?
2. Internal Education. Bring your people on the journey – from the front line staff selling into these customer groups through to the board. It’s pretty hard to get buy in and funding if people don’t get it.
When market churn hits 20%+ it becomes very difficult to be able to take the time to step back and try something different. The alternative is you follow Melbourne's lead and enter an endless treadmill of door knocking and value erosion until someone else works out where your valuable customers are and strips you of them, leaving you with the average and a sick feeling in your stomach.