Winning Back "Lost" Customers

If you’re like the average company, up to 40% of your customers walk out the door and never come back. What's worse, the "average" business is totally oblivious to their actual churn rate—so they do nothing to correct the problem. Even companies that do track customer defection rates usually assume a lost customer is gone forever—a lost cause.

Happily, nothing could be further from the truth.

With churn increasing and customer loyalty fading, winning back and keeping lost customers has never been more important. Lost customers mean lost revenues. Negative word-of-mouth. Sagging employee morale. Worst of all, it can put your sales and business development team on a treadmill of constantly finding and wooing new customers just to replace the defectors—a costly and exhausting predicament.

But here's good news. An effective customer winback program can transform these problems into increased customer loyalty, while actually decreasing your customer acquisition costs. Here's how.

Knowledge is Key

Overall, you have a much better chance of winning back a former customer than signing up a new one, according to a study by Marketing Metrics. On average, you have:

• 60–70% chance of successfully selling again to a current customer
   
• 20–40% chance of winning back an ex-customer
   
• Only a 5–20% chance of turning a prospect into a customer

Your chances of winning back a former customer are statistically two to four times higher than landing a new one.

Even harmless-sounding or “average” defection rates can be misleading, by the way. One college boasts an annual 80% student retention rate. That sounds healthy, even robust. But look closer. By the time a freshman class of 1,000 students enters its senior year, that 80% retention rate means the class has shrunk to just 512 students!

Now suppose those 500 lost “customers” had been retained. Imagine the savings in unspent customer acquisition dollars alone.

Knowledge is key to successfully winning back your lost customers. Today’s computer information technology allows unprecedented access and analysis of a wealth of detailed customer data. But you need to know which information to capture and what to do with it.

Grade and Segment Your Lost Customers

Customers defect for different reasons, and some customers, frankly, aren’t worth winning back. Careful evaluation and segmentation lets you select the most important customers to target, then develop individualized strategies to win back each segment.

Not all defecting customers represent legitimate winback prospects. Some proved too costly to serve and are better left alone. But others represent important recovery opportunities.

To separate the wheat from the chaff, you must grade and segment them. The best lost-customer segmentation plan we found when researching our book Customer Winback is a two-step process developed jointly by Bernd Stauss, chairman of the Services Management Department at Catholic University of Eichstaett (Germany) and Christian Friege, former marketing director for Doubleday Direct, Inc.

Step 1: Segment customers by Second Lifetime Value. Most marketing professionals are familiar with the Lifetime Value (LTV) of a customer. But Stauss and Friege suggest that the LTV of lost customers is not as important as the value of the relationship once the customer has been regained.

Stauss and Friege call this new metric the Second Lifetime Value (SLTV). They suggest a customer’s second life cycle can actually be more valuable than the first, and offer four important reasons why:

1. The defected customer is already familiar with your products and/or services.
    
2. You have more data about their buying preferences than any first time customer's. That lets you offer a more targeted service.
    
3. The personal attention and recognition you show a customer in your winback program can spur better sales than the typically anonymous treatment s/he probably received when they were a first-time customer.
    
4. Cross-selling and up-selling may catapult the customer into higher buying levels more quickly in the second lifetime, due to their familiarity with your products or services.

All of these variables represent important considerations when you estimate the SLTV of each lost customer. Once you've assigned SLTV estimates to each, segment these customers in tiers. Stauss and Friege recommend dividing lost customers into four SLTV segments:

1. The top 10 percent
    
2. The next best 20 percent
    
3. The next 30 percent
    
4. The bottom 40 percent

A Case Study

What if you have the names of lost customers, but very little other data from which to predict SLTV? Here's how one of our clients solved that problem.

An optical retailer with three stores in the Northeast contacted The Griffin Group with a familiar problem. Their database contained the names—and not much else—of 15,000 former customers. They wanted help winning them back.

To determine their SLTV, we recommended surveying a sample of these lapsed customers by phone, starting with customers who had made the most recent purchases. We discovered that, generally speaking, the lapsed customers with the highest SLTV were those who:

1. Were still wearing prescription eyewear
    
2. Used multiple types of prescription eyewear (reading glasses, prescription sunglasses, etc.)
    
3. Had multiple family members with eyewear needs
    
4. Expected to make a prescription eyewear purchase within the next six months

These insights enabled the optical retailer to effectively segment its lost customers and launch a successful winback program.

Step 2: Segment customers by reasons for defection. Estimating SLTV is an important first step. The second is to classify customers according to the reason they defected in the first place.

Stauss and Friege identified five distinct defector categories:

1. Intentionally pushed-away customers. These customers were unprofitable to begin with, so little or nothing was done to win them back.
    
2. Unintentionally pushed-away customers. These are customers you wanted to retain, but they left because your company's performance didn't meet their expectations in some way.
    
3. Pulled-away customers. These are customers who were lured away by competitors offering a better value (not just a lower price).
    
4. Bought-away customers. This group was lured away by competitors with low-ball, introductory pricing offers.
    
5. Moved-away customers. These customers drifted away because their needs changed due to age, life cycle changes or geographical changes.

In addition to Stauss and Friege’s five categories, I've uncovered another defector category to consider:

6. Variety Seekers. These are customers who won't remain loyal to one product, because they want the experience of using many different ones. For example, a high-performance car enthusiast who trades his BMW for a Mercedes, then a Porche and finally a Bentley is a variety seeker. He loves each of these autos, but is unlikely to remain loyal to only one brand. Investing money in winning back this customer would be a mistake. His hunger for variety will likely blunt any automaker’s winback initiative.

So Who Do You Woo?

Sometimes, uncovering the real reason you lost a customer is easy. At other times it demands Columbo-style detective work. Capture all the clues you can in advance, in the customer's data file. Of course, particularly in retail settings, customers often do not announce their intentions; instead, they simply walk away.

In these cases, you must become a sleuth. Carefully review their purchase behaviors. Keep your eyes peeled for things like lagging visits, low purchase rates compared to previous periods, a frustrating encounter with a staff member, etc. Contact the customer and address any issues at the earliest possible stage.