With the exception of one or two products (such as funeral plans) you want your customers to buy from you more than once, and so there is considerable value in repeat sales, which come from customer loyalty.
Now think of your phone, broadband or TV provider – the chances are that you really hate them. Phoning them is a nightmare of frustration, and getting a fault fixed is enough to make a grown man cry, and certainly enough to make you want to try a new supplier. Meanwhile, cable and TV companies lament that customer loyalty is falling, and so they spend a fortune on advertising for new subscribers to replace the ones they are losing. See the problem?
Or consider the bloodbath that is the UK general insurance industry. Levels of advertising spend are very high, about £160m for the top five brands in 2010, with large discounts offered for new customers.
So while the brands concentrate on stealing each other’s customers, the introduction of price comparison engines and the commoditised nature of general insurance mean that it is extremely easy to switch providers, meaning that the ability of a new customer to subsequently defect is also high.
The results, according to a market assessment published by consultants Accenture in June 2010, are that 'customer retention remains at the top of the insurance industry’s agenda and [is] key to high performance in this sector’. Furthermore, ‘insurers lose around 20 percent of their customers each year, resulting in £3.3 billion (approximately $6.48 billion) of premium churn in the private motor and home insurance markets’ and that ‘insurers are effectively running to stand still as a result of attrition’. Hughes (2008) identified that average customer churn is closer to 30%, and exceeds 50% for some companies, with truly loyal customers accounting for just 5-6% of the customer base. Hughes identified that ‘most loyal customers are those who come as a result of personal recommendations. Conversely, the most disloyal customers are those who come as a result of price comparison websites’.
It doesn’t take a rocket scientist to see there is a systemic problem here. The effect of huge initial discounts is that customer loyalty is punished with a price hike in second and subsequent years as insurers try to recoup the profit they didn’t make in the first year. Switching is easy and customers are therefore disloyal, meaning that insurers have to chase new customers… and the industry is stuck in a death spiral with no hope and no new ideas.
Rebuilding loyalty
Well, here’s an idea. Insurers (and phone companies, cable providers etc) should take a look at the page on meme growth in complex systems.
We saw there that the level of market penetration in a saturated market depends entirely on the ratio of adoption to defection. If the propensity to stay loyal changes by just one or two per cent, then market penetration will stabilise at a new level which can be quite different from the initial one.
If you can increase happiness among existing customers, you will not only reduce defection rates, you might even gain more new customers through endorsements than you could through advertising, and at a much lower cost. The chances are that your market share will stabilise at a much higher point than it is now. So why not think about rewarding customers with discounts (not price hikes) if they don’t claim? And stop cutting costs on customer service. Oh, and perhaps you might think about building a brand based on quality rather than on initial discounts. Just an idea, guys…
The message for UK financial services, and indeed any saturated industry, is that perhaps you should try something radical. Here it is:
STOP ADVERTISING!
If you already have a decent market share, the way to increase it is to prevent defection of your existing customers and allow them to recruit for you. The ways to do that are to bundle an immune system into your brand using the techniques on this site, but above all to increase the quality of the customer experience – if you treat your customers consistently well, they will stay.