The Cost of Poor Service

David Carroll is a musician, who travelled United Airlines, and on one occasion put his precious guitar into the baggage marked as fragile! That’s where the story began. Sitting on the plane, waiting to get off, he saw the baggage handler throw it without care onto the truck. He tried to complain to the company representatives immediately but was dismissed. When he collected his guitar, it was damaged.  He went to the customer help desk, where no one seemed to care, and he was told to write in. He wrote in on numerous occasions, and got little or no reply. He called up and still no one took ownership, responsibility or tried to fix his customer experience.

Eventually he decided to write a song about it, and he posted it on YouTube. The result? Millions of people worldwide viewed that clip and United Airlines’ share price dropped! The Times reported that $18 million of shareholder value was lost!

One happy customer is a powerful thing as he or she will tell some people. One unhappy customer is a very damaging thing as they will tell more people! We call this the power of one.

What is the lost opportunity cost associated with customer churn?

I believe all businesses should use great care and concern when determining how their customers and clients are treated. The time, energy, and cost associated with acquiring a customer are substantial, the benefits of retaining customers are considerable, and the costs associated with customer churn are significant. I’m always amazed at how much money will be spent to acquire a new customer, but how little care is given to insuring customer satisfaction after the sale.  There is great truth in the old axiom that states: “if you’re not serving your customer well, someone else will.”

If you believe customer service is someone else’s problem, you have a much bigger problem than you realise. Most businesses these days will have a grasp on the concept of lifecycle value, I’m not sure they really understand the true cost of losing a customer. Let’s just assume that the lifetime value of a customer for company X is £2,000. If company X loses just one customer, the total lifecycle loss could run well into the tens of thousands, if not the hundreds of thousands. If you don’t believe me consider the following points:

1. The Initial Churn: First you have the £2,000 lifetime value loss attributed to churning the account itself.
2. Sunk Acquisition Costs: Don’t forget to add in the cost of acquiring the account to begin with. You spent money to acquire the account so you need to factor that into the total equation. I’ll let you pick the percentage you want to use and add that into the total number.
3. Replacement Costs: Remember the cost of acquisition number you just calculated above? Well, you need to add it back in again, because now you have to go out and replace the customer you just lost. By the way, you should probably multiply the cost of acquisition number by 5 since it costs about 500% more to acquire a new customer than retain an existing one.
4. Lost Ancillary Revenue: On average, a single account is good for a 30-40% cross-sell/up-sell revenue increase over time as new products, services, joint ventures etc. are brought online and offered to existing accounts. This means you can conservatively expect to lose another £600 of upside in our £2,000 example.
5. Lost Referral Revenues: Depending on your business, and whether or not you have a solid customer acquisition process in place, a single account should be good for a minimum of 2-3 referrals (direct or indirect) on an annual basis. Over a 10 year period of time, assuming only 2 annual referrals, without any cross-sell or up-sell value being added-in, you just lost another £200,000.
6. Loss of 2nd and 3rd generation referrals: But wait; it just gets worse. Those lost referrals mentioned above would have also given you 2-3 referrals each year, and if you carry this formula out over 20 years the loss of a single account could easily cost your organisation more than a million pounds in lost revenue.
7. Negative Brand Impact: If it isn’t bad enough already, a lost account can easily have a negative impact on future sales due to spreading the news of their bad experience with your company.  The average dissatisfied customer will persuade 10-20 other people from doing business with your firm. If the upset customer takes their dissatisfaction online and amplifies it via social media you could see a much bigger problem. This will not only impact your revenue, but can also taint your brand equity. Just think back to Dave Carroll!!!! If you like that story, why not visit ihateryanair.org for another example of this.

Sean@Bluesky

www.blue-sky.co.uk

Tags: advertising, baggage handler, Blue Sky, Bluesky, Brand, business, Customer experience, Customer Service, David Carroll, Guitar, ihateryanair.org, Sean Spurgin, Service, shareholder value, technology, transportation, United Airlines, YouTube