A customer defection occurs whenever a customer switches to a competitor. Customer defection is the rate at which customers stop the usage of products of a company. Businesses with high defection rates would be losing their existing customers. Customer defections can tell a firm a lot about its products and services from an external perspective, which the firm would otherwise not have known. The concern for reducing and eliminating customer attrition emerged from studies that indicated the following:
- Customers are profitable over time. The longer they stay with an organization, the more profitable they are likely to be.
- Across industries, profits can increase by 35-85 per cent by increasing customer retention by only 5 per cent.
- About 70 per cent of customers switch to competitive offerings due to the perceived indifference of the current provider.
Customer defection is often hard to define. Product-oriented companies with no focus on its customers and no market orientation will be more likely to have high customer defection. Not many of those firms will take the time to find out why they have lost customers.
1. Types of Defectors
Customers who defect may be broadly classified as:
Price defectors: These customers shift to a competitor who is offering a cheaper price. In most cases, these customers are compulsive “bargain hunters” and one may be better off by not having them. But in some cases, customers do not see value in patronizing their existing service provider as a competitor is offering similar or better service at cheaper rates.
Product defectors: Product defectors are former customers who are not satisfied with the existing products offered by the firm. This may be due to a bad experience with the product performance or availability of better products from competitors.
Service defectors: Service defectors are former customers who are dissatisfied with the service. The impact of service dissatisfaction is normally very high. At the same time, customers give enough opportunity for organizations to retain them. Customers not only expect and demand more, they are also more articulate in saying so.
Market defectors: In almost every market in every developed country of the world, competition has increased dramatically in the last 10 years. Globalization and advanced manufacturing technology have resulted in businesses becoming faster and improving product quality. Market defectors have stopped patronizing their former service providers as they have moved away.
Technology defectors: These customers would have shifted to another, normally superior technology. Examples include customers shifting from a typewriter to a word processor, from a digital diary to a PDA (personal digital assistant), a line printer to an inkjet printer and from fax to e-mail, etc.
Organizational defectors: If the customer wishes, buying the simplest product or service can be a very complex decision-making process. Individual users who belong to a group (organization, club, association, etc.) may shift to an alternate supplier because the group has switched although some of the individuals may be satisfied with the existing service provider. An example is the case of shared Internet services in an organization and the organization deciding to shift from VSNL to Spectranet.
Physical defectors: Physical factors such as a more convenient location are ranked quite low as are competitor action and invention. Marketing and competitor activity and relationship with a competitor are about 15 per cent.
The most important and common reason for customer switching is the indifference and lack of attention of the business and the lack of any reason to stay from the customer’s point of view. It is important to understand why customers defect and what can be done to reduce defections. Studies have shown that about 70 per cent of the time, customer’s defect due to the perceived indifference of the company personnel. Perceived indifference includes lack of proper response to any query for service, inefficient complaint handling, lack of courtesy, etc. In service businesses, where customers keep coming back and ensure a continuous stream of revenue such as in hospitality, retailing, telecom, credit cards, banking, etc. customer defection has serious implications on profitability. Unfortunately, this gets hidden because customer defection is not measured by most organizations.
2. Zero Defections
Just as the quality movement in the 1980s in manufacturing focused on “zero defects,” the quality revolution in services is leading the way towards zero defections. Managing for zero defections requires a mechanism to find customers who have ended their relationship with the company or are about to end it. Companies must gain intelligence in the following areas in order to manage and retain customers in the long-term:
- Companies have to know which customers are profitable.
- They must research and understand what their customer defection rate is and the specific reasons for defection. Defection analysis is a guide that helps the company to decide which service quality investments will be profitable and also to manage continuous improvement.
- They must also know the value of their customers in the long run.
Source: Poornima M. Charantimath (2017), Total Quality Management, Pearson; 3rd edition.
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