The Hidden Losses of Unremarkable Performance: When “Good Enough” is no longer enough.

As the saying goes, "Close don't count in baseball. Close only counts in horseshoes and hand grenades."

In today's competitive business landscape, customer retention is widely recognized as a critical strategy for achieving long-term success. Bain & Company and the Harvard Business Review (HBR) famously demonstrated that a 5% increase in customer retention can boost profits by 25–95%, and according to Mento Group retaining existing customers costs 5–25x less than acquiring new ones. These findings have made retention a cornerstone of growth strategies.

However, there is another layer of hidden losses associated with delivering anything less than exceptional customer experiences. These losses manifest in reduced profit margins due to tough customer negotiations, decreased purchasing of additional products, shorter customer lifespans, fewer recommendations, and diminished purchase volumes. This article explores these often-overlooked consequences of unremarkable performance and highlights the importance of elevating customer experience to mitigate these losses. It is important to note that the impact of substandard performance s far greater and for example the cost of a customer compliant or bad customer service can multiply the hidden losses.

Benefits of Customer Retention

Much as been written bout the importance of customer retention, however, often companies fall not the short-term sales incentives technique or the on “new and improved” products as a growth strategy neglecting the reliable, yet long term growth strategy.  Therefore, before delving into the hidden losses, it is essential to understand the well-documented benefits of customer retention:

1. Cost Efficiency: Acquiring a new customer is significantly more expensive than retaining an existing one, with estimates suggesting it can be five to seven times more costly. This disparity makes retention a more efficient use of resources.

2. Profitability and Revenue Growth: Increasing customer retention rates by just 5% can lead to a 25% to 95% increase in profits, according to studies by Harvard Business Review and Bain & Company. This substantial profit boost arises from the higher spending habits of loyal customers and the reduced need for costly acquisition efforts.

3. Customer Lifetime Value (CLV): Retained customers have a higher CLV due to their increased purchase frequency and loyalty. A 5% increase in retention can result in a 25% increase in CLV.

4. Predictable Revenue Streams: Loyal customers provide a stable source of revenue, allowing businesses to plan more effectively and invest with greater confidence.

5. Brand Advocacy: Satisfied customers are more likely to recommend a brand to others, generating valuable word-of-mouth referrals that are both cost-effective and highly influential in attracting new business.

These benefits combined demonstrate that the long journey to profitability and business growth is in fact the shortest path. Minimizing customer churn and maximizing their purchasing is at the heart of the customer retention strategy case.

Image: Lior Arussy

Hidden Losses of Unremarkable Performance

While the benefits of customer retention are well-documented, there are additional, often overlooked losses associated with failing to deliver exceptional customer experiences. If the aforementioned benefits did not make a string enough of a case for customer loyalty, we ought to confront the less measured, yet highly consequential costs and losses associated with not delivering exceptional experience or accepting customer service failure. In my experience the hidden costs ad losses are often not tracked because the customer is measured as a purchaser of a product or service not as a total value entity.  As such we will look at a car buyer as a $50,000 opportunity not as a $1 million opportunity which is the total spent over the customer’s lifetime. With a baby products company i worked with, the average customer was assessed as a $200 value which was the cost of the car seat or stroller that they have purchased. When assessing the 3 years life of a parent relationship, we discovered that its value to the company was $3000. By not measuring the lifetime value, we left $2800 on the table. The product view of the customer as a product purchaser, fail to capture the true value of the customer. Some of the hidden losses associated with unremarkable customer experience or bad customer service further deepen the financial consequences of selecting a “good enough” customer strategy:

1. Loss in Profit Margins Due to Tough Customer Negotiations

Price is king when the experience is poor. When customers are not fully satisfied with their experience, they may become more aggressive in negotiations, seeking discounts or concessions to compensate for perceived shortcomings. This can erode profit margins significantly, as businesses may feel pressured to offer price reductions to maintain customer relationships. In a business-to-business environment, this issue is even more painful. Clients will demand and receive deeper discounts in exchange for poor and unremarkable experience. The perception that switching to competition is rather easy due to lack of a differentiating experiences causes providers to relent to deeper discounts.

2. Loss in Purchasing Additional Products

Customers who do not experience exceptional service are less likely to purchase additional products or services from a brand. New products, cross sell and upsell opportunities are ignored regularly by unimpressed customers. This missed opportunity can lead to substantial revenue losses over time. Research shows that personalized and relevant product recommendations can drive sales, but mediocre experiences often result in missed opportunities for these additional purchases4.

3. Losses in Customer Lifespan

Unremarkable customer experiences and bad customer service may accelerate the shorter customer lifespans, as unimpressed and dissatisfied customers are more likely to churn. This not only results in lost revenue from repeat purchases but also increases the costs associated with acquiring new customers to replace those lost. Studies indicate that nearly 60% of customers will stop doing business with a brand after a poor experience.

Working with an insurance company, i witnessed how losing customers became an accepted practice every year with no real strategy to retain them. They simply accepted millions of customers departure without asking the question what, besides lower price, may keep them doing business with us for a longer period. The price points that company. $2.1 Billion a year in lost revenues.

4. Loss in Recommendations to Others

Referrals are the ultimate vote of confidence. I do not speak about NPS and the intention to recommend. Real referrals to real customers who will purchase form you without any CAC. Yes, it exists with remarkable experience delivered by remarkable companies. Exceptional customer experiences are crucial for generating positive word-of-mouth referrals. However, if customers are not satisfied, they are less likely to recommend a brand to others. In fact, research shows that dissatisfied customers often share their negative experiences with friends and family, further damaging the brand's reputation.

5. Reduction in Purchase Volume

Finally, customers who do not experience exceptional service may reduce their purchase volume over time. They will spread their purchases across multiple vendors to reduce risk of reliance on one provider. Since that provider is not remarkable, there is no real reason to consolidate business with one provider. This decrease in spending can have a significant impact on a company's revenue, especially if it occurs across a large customer base. Studies highlight that customers are willing to pay more for better experiences, but “good enough” service leads to reduced loyalty and spending.

Quantifying the Hidden Losses

To illustrate the potential magnitude of these hidden losses, consider a hypothetical scenario:

• Scenario: A company with an annual revenue of $10 million experiences a 10% reduction in customer satisfaction due to mediocre service.

• Consequences: Profit Margin Reduction: Tougher negotiations lead to a 2% reduction in profit margins, equating to $200,000 in lost profits. Missed Upselling Opportunities: A 5% decrease in additional product purchases results in $500,000 in lost revenue. Shorter Customer Lifespan: A 10% increase in churn leads to $1 million in lost revenue from repeat purchases and an additional $200,000 in acquisition costs. Fewer Recommendations: A 15% decrease in referrals results in $750,000 in lost revenue from new customers. Reduced Purchase Volume: A 5% decrease in purchase volume leads to $500,000 in lost revenue.

Total Hidden Losses: $2.65 million – a 26.5% of hidden losses of revenues that should be captured based on the existing client base.  These are hidden losses based on CAC invested already to acquire those customers!

This scenario demonstrates how failing to deliver exceptional customer experiences can lead to substantial financial losses beyond the well-documented benefits of retention.

The Silos That Hide The losses

If the financial case so clear, why is it that most companies not doing enough to retain their customers? There are multitude of reasons for the failure.

1. Short term strategies – with impatient shareholders, companies are focusing on short term trickery to gain growth at the expense of investing in existing customers.

2. Inertia strategy – without admitting publicly, many organizations, will count on customers enduring unremarkable experiences instead of making the effort to switch.

3. Lack of customer lifetime ownership – customers are “owned” by various parts of the organization with each group seeing only their part e.g. awareness, sales, service etc. without a central customer lifetime and potential management.

4. Lack of exceptional customer experience definition – many employees believe that they deliver an exceptional experience not knowing what the definition of such performance is. Most companies never defined and exceptional customer experience performance let alone applied the definition to real customer interactions.

5. Incomplete customer data – lack of full customer potential value prevent companies from collecting the right data and making a data driven decision on customer lifetime value.

6. Product centricity – organizations are centralized around research and development and the product they create, and the customer is an afterthought in the process.

7. Measuring the wrong impact – customer measurements of customer satisfaction are not string enough to justify changes and new investment.

8. Lack of tools and training– employees who are seeking to deliver exceptional experience are often lacking the tools and training to achieve this level of performance.

9. Lack of employees’ empowerment – people deliver exceptional experiences. Crescentic organizations do not provide sufficient empowerment and trust to enable them to deliver exceptional experiences.
   

Conclusion

While the importance of customer retention is well-established, the hidden losses associated with mediocre performance are equally significant. Delivering exceptional customer experiences is not just a strategy for retaining customers but also a critical factor in maintaining profit margins, encouraging additional purchases, extending customer lifespans, generating positive referrals, and sustaining purchase volumes. By recognizing and addressing these hidden losses, businesses can unlock additional revenue streams and achieve sustained growth in a competitive market.

In today's customer-centric economy, investing in exceptional customer experiences is no longer a choice but a necessity for long-term success. Organizations ought to be honest with themselves about their commitment to their customers and identify about the losses associated with not adapting a customer retention as a growth strategy as well as recognizing the obstacles to delivering on such a strategy. As businesses strive to differentiate themselves and build lasting relationships with their customers, understanding the full scope of potential losses from mediocre performance will be crucial in guiding strategic decisions and resource allocations.