Want To Increase Customer Retention? Stop Acquiring The Wrong Customers.
Entrepreneurs are often too focused on growth, which can often lead to a customer retention problem. A closer look at my churn story while at T-Mobile and what I learned
Written by Jeremy Korst, President, GBK Collective
Early in my career at T-Mobile, I was an “intrapreneur” at the helm of the company’s quickly growing emerging devices business. As is the case for many business leaders and entrepreneurs, bringing in new customers was job #1 and prioritized ahead of customer retention or loyalty efforts – we figured we would get to that later. We were so focused on growing the business, we weren’t prepared for customer churn when it happened.
My team had just launched the company’s first 4G capable devices, including connected tablets and mobile hotspots. After months of planning and hard work to launch the business, it seemed like we had a real winner on our hands. Sales and marketing were effective, and customers were buying in droves. We hit double-digit growth month over month and the business was seemingly on fire.
Then came the hangover. After many consecutive months of growth, we suddenly realized we had a leaky bucket. Our churn rate, the number of customers who left us each month, was over 10 percent. We were still growing, but we had to do more each month just to keep our head above water. At that rate, we’d need to replace our entire customer base each year just to break even! To make matters worse, our business model showed that we needed to keep customers around much longer to make up for operating and customer acquisition costs.
“Our churn rate was over 10 percent; it became clear we’d need to replace our entire customer base each year just to break even!”
How could we fix this mess? Why were customers churning? As we dug deeper to address the problem and rethink our strategy, we realized we were selling to the wrong customers! Our acquisition efforts were the root of our retention issues. Rather than targeting people who intended to use our 4G mobile hotspots as a way to be connected on the go, the sales team was targeting consumers and small business owners who were using the mobile hotspots to replace their home or office broadband. Our product wasn’t built or priced to serve these customers.
In hindsight, everyone can see that this was a disaster waiting to happen – we were targeting the wrong customers and no practical investment in retention was going to keep many of them from eventually leaving us. It was my first big lesson in customer retention.
Churn puts businesses in a double bind: You need to bring in new customers, but it’s also expensive to acquire and onboard new customers. On average, it costs five-times more to acquire a new customer than it does to retain an existing one. Businesses also tend to overreact to churn, assigning the responsibility to some downstream customer success or retention-focused organization and throwing precious resources at “fixing it” as it’s happening, instead of figuring out the root cause of the problem.
While it sounds obvious, this is arguably one of the most important lessons for any entrepreneur or marketer to learn: Stop wasting time marketing to all potential customers and hyper-focus on acquiring and serving your target customers.
This also means you must make hard choices. Who are the customers who you can best provide a differentiated service to? Deciding who your target customers should be, and then building your brand, products, services – and entire company – around them is paramount. You cannot be all things to all customers. If you’re trying to serve everyone, you’re likely under-serving your most valuable customers and missing opportunities – impacting your ability to build customer loyalty and brand affinity over time.
“You must make hard choices. If you’re trying to serve everyone, you’re likely under-serving your most valuable customers.”
My advice for those amid churn: Start asking questions about who you are trying to serve —and perhaps equally important, who you are intentionally not targeting. Have you done upfront segmentation work? Do you have the right tools in place to target your best potential customers? Have you thought about what kind of customers you must avoid? Sketch a holistic view of who your most valuable customers are and how you can develop products and services to reach them.
This brings me to my next tip for avoiding churn: “Right fit” your customers and make sure your product, sales and marketing teams are aligned. At T-Mobile, our sales compensation at the time was weighted toward acquiring new customers – any customer – versus targeting customers who would be a good long-term fit for the service. And, as is common with most services, we had many levels of offers. One bad habit we observed was the tendency to sell the customer the lowest-priced offer just to “just get them in the door,” and then assuming the customer would upgrade to a more expensive offer later if they needed it. This led us to sell to many customers who were sure to be quickly disappointed by our service because it didn’t meet their needs.
To avoid poor fit, you must put yourself in your target customers shoes and really understand their unique needs. What features will they use? What pricing fits their budgets? And you must be sure that your sales team has incentives focused on making the business successful over years rather than weeks. Let salespeople know the profile of your target customers and incentivize them to acquire customers with the right offer up front. Worry more about finding long-term fit than short-term sales.
“You have to put yourself in your target customers shoes and really understand their unique needs. Incentivize your sales teams to acquire customers with the right offer up front.”
Lastly, I’d advise entrepreneurs to constantly seek out better data and insights to understand the customer journey – from the initial trial and purchase experience to how you deliver value across every touch point. Today’s customers want a brand to anticipate their needs, to surprise and delight them. Through trial and error, asking the right questions and listening to your target customers, you’re able to hone your brand and product strategy and marketing approach to maximize potential growth.
Key questions to ask: What are low-cost or low-risk ways you can get potential customers to trial our product before they buy? What updates do you need to make to your brand messaging and positioning to spark interest with the right customers? How do you design demand generation, sales and onboarding processes to ensure customers are matched with the right products and services not only initially, but in the long run?
Amid the churn at T-Mobile, we went through each of these steps. It was stressful for a while, but we identified the right customers and refocused our efforts. Our marketing materials, sales and support training, and compensation incentives shifted to ensure that we were serving our target customers. We experimented to get the right products in front of them. We turned the corner—gross sales were slower, but churn was dramatically reduced.
