Where do statistics come from - and why? This came to mind when, after last month's article, a reader called to ask where I had gathered my statistics on why a company loses customers*. The question made me think about where such statistics originate and how relevant they are and I was reminded of the saying - there are three kinds: lies, damned lies and figures produced to back up a thesis. Statistics can be used to provide an indication of the various issues, however in this fast changing world, it would seem dangerous to rely on general statistics and more efficacious to find out specific relevant results.

Experience has told us that our clients work closely with their customers to keep abreast of changing needs. The principle must be: Put yourself in your customers' shoes or they will walk away. When we consider customer loyalty, recent research would indicate that failing to remain in line with changing needs is one cause of customer desertion, showing apparent disloyalty; in reality the issue is often that the customer feels their supplier has lost interest.

The symptom is that the customer is satisfied but not involved and is really on the look out for something new and exciting that might just help them keep ahead of their competitors, therefore when that something appears, they are off. If the measure used by the supplier is simply customer satisfaction, it is quite likely that unless the customer makes an effort to explain their concerns, the supplier will remain unaware of a problem brewing. How do companies keep close to their customers? How do they measure and maintain loyalty and reduce the number of customers they lose (churn)? In fact, what is the statistic on the average number of customers lost each year?

One company I know measures its satisfaction index to two decimal places because with literally millions of customers it is essential to measure to this level of detail. The actual number of customers they lose each year is around 8.5%, which may not sound a lot until one realises this means that in six years half of the customers will have left. The company knows the cost of acquisition of new customers, and the much lower cost of keeping existing customers. Head of the eponymous software giant, Tom Siebel famously quoted the difference as 16 times, five years ago. Current research indicates it is more like 11 times, but these figures only matter when you know the cost of acquiring customers for your own business.

It is not about a single measure, and the company with 8.5% churn has satisfaction levels that are consistently above 97.5%: in effect they are losing three times as many customers as their satisfaction index might suggest. By that measure, if the average satisfaction index is around 80% (which, by most statistics, would be considered good) a company would lose all its customers over a five year period. 'This can't be true', I hear you cry, as one points to the number of apparently really loyal customers that have been with the company for years. Some may stay loyal while other customers are only there for a year or two, and then gone, and this is how the 100% churn occurs over five years.

The statistics actually point to an average of approximately 60% churn over five years, and despite all the focus on customer service the number is rising, as customers become ever more demanding and it becomes easier to switch supplier. Think how easy the banks and mortgage companies competitors have made it to switch.

Many businesses struggle to produce a mechanism to evaluate the level of customer satisfaction, and don't seem to realise that customer satisfaction is a lag measure, referring to the past, and is not an indicator of the customers' future intentions. Additionally the business' level of customer satisfaction provides no information about how competitive the business is, or what it must do to sustain a customer's business. Customer satisfaction is an inert, almost sterile entity, as it gives no visibility of changing customer needs or competitive position. A customer can often be very satisfied with a supplier, only to buy from a competitor because of a closer match to their needs, or a special offer, which has been designed to better target their needs.

The normal reactions to customer churn imply two responses: So what? Can't be helped! You can't satisfy all of the people all of the time, which is probably one of the most established statistics. Or they were going to leave anyway and are probably no major loss. Both points are potentially valid but only if you really have control of which customers go and which stay. Leading edge companies in many cases are very aware of their customers' value to them and influence the retention of customers by managing which customers stay and go through the investment they make in the customers. In such cases you can measure a company by the customers it keeps.

To be in a position to judge your customers you have to be able to measure their value to you, instead of only worrying about your value to them. If you have the right customers they will all be valuable to you and they will value you. This is what really defines a partnership - where both of the participants are looking out for each other as well as themselves. The position of being a victim to your customers' whims is very dangerous. Let us examine how to measure your customers' value and how to bring those apparently satisfied customers into the loyalty bracket. One thing is certain - a loyal customer is valuable and will be a promoter for your business far beyond what is normally believed (if the statistics are to be believed). The downside could be that a snubbed customer will act as a detractor and can cause many problems.

There is an often-quoted physiological experiment carried out in the early fifties by a Professor Hawthorn and the result has become known as the "Hawthorn Effect". The experiment was aimed at assessing the productivity improvement that could be gained by better lighting for a manufacturing operation. In reality what was proved was that if you pay attention to something it will improve - The Hawthorn Effect.

Also highlighted was that when the focus of attention moved away, the performance fell to below what it was before the experiment started. This has been seen to be very true with offering customer loyalty cards of which only a very few have worked for very long. To satisfy customers and deliver to service level agreements usually based around respond and restore times, many companies focus on their first time fix, with averages between 80% and 90%. As customer demands increase, customers tolerate failure less and less and expect promises to be kept. Failing to fix first time puts the business into an awkward position; resolution must be either a successful fix and create a promoter or the reverse - fail and create a detractor. The customer may regard a first time fix as simply fulfilling the contract and paradoxically it is in recovering from the failed first time fix that the business can begin the process of creating loyalty.

However, like the Hawthorn Effect, this will be relatively short lived, and so a loyal customer is only created and sustained by creating a true customer relationship. A relationship is two ways whereby both partners gain benefit, possibly at different times, but both must see an advantage to maintaining the relationship. Research evidence would indicate that if both partners profit from the relationship then it will survive, with both the customer and the supplier becoming advocates of each other, recognising the long-term advantage they each bring to the relationship. The temporary effect is evident when an engineer goes the extra mile, but unless effective processes are in place to consistently deliver good service, the effect will quickly wear off and the engineer as well as the customer will become disillusioned and both might leave.

To retain customers and gain the best customers in the first place, a business has to deal effectively with the exceptions where they have failed the customer the first time. Then put in place processes that reduce the failures, take away the constraints on the process and allow the engineer to do their job and retain their role of trusted advisor, working for a trustworthy company focused on keeping high quality customers (referrers, re-buyers and promoters) and accurately delivering to all their needs.