Preventing Customer Loss During a Crisis

Consider giving your customers free services or discounts to retain them.

Losing a major customer can be devastating at the best of times. During a global pandemic, as entities of all sizes struggle to survive, it can spell financial ruin — particularly for service companies that bill on a recurring basis.

Despite the potential impact that losing a major client could have on a company’s bottom line, customer retention is not something that CFOs always prioritise. Often it is left to the marketing or sales departments responsible for initially landing the client, according to Adam Ramshaw, the founder of Genroe, a Sydney-based B2B business and growth consulting firm.

“Many CFOs are very acquisition focused,” he said. “There’s an assumption that some customer churn is a given, when in fact reducing it can really improve a company’s bottom line.”

The pandemic has already had a devastating economic impact, but with concerns over subsequent waves growing, worse could be yet to come. However, CFOs can adopt strategies to reduce customer churn rates during a crisis — and possibly even grow them into higher-value clients in the future.

“The immediate goal is to keep your customers engaged,” Ramshaw said. “Then, after the immediate crisis passes, you’ll have that loyalty and can continue business.”

Here are some of the strategies that finance teams can adopt to improve customer retention during the global pandemic.

Make customer retention an executive issue

Traditionally, sales and marketing or customer-relations teams spearhead customer-related issues. But when it comes to customer retention rates, there are good reasons to make sure that finance is also a part of the conversation, according to Adam Dorrell, the Amsterdam-based CEO and founder of CustomerGauge, a software-as-a-service company that focuses on customer retention strategies.

“When you crunch the numbers, it’s clear that there are hidden profits in reducing account churn,” he said. “CFOs will find that investing in customer retention will allow them to grow faster than actually selling more, as it costs much less to keep your existing clients than it does to attract new ones.”

As a first step, Dorrell recommends that CFOs work closely with management accountants to create key performance indicators (KPIs) for customer engagement. This might include data on how often a customer has been contacted by email or phone in the past few months, as well as their email response rates.

Companies can also use survey software to collect customer feedback in order to calculate their Net Promoter Score (NPS) — a key metric for measuring their customer experience.

Calculating the NPS begins with having customers answer the question “How likely are you to recommend us to a friend or colleague?” on a survey, on a scale of 0 to 10. The percentage of customers considered “promoters” (those who scored 9 or 10) minus the percentage of customers considered “detractors” (those who scored from 0 to 6) determines the company’s NPS. An analysis by Bain & Co found that companies that achieve long-term profitable growth usually have up to double the NPS scores of the average company.

Such tools can be used to flag potential problems before a customer decides to walk. And though most of these methods are hardly new, companies rarely link them to financial metrics under the CFO, according to Dorrell.

“In our experience, when CFOs begin monitoring customer engagement, their customer retention rates go up,” Dorrell said. “And that translates directly to increased revenue.”

Strive to keep your customers engaged throughout the crisis

It is almost a given that clients are more cash-strapped now than in ordinary times and are likely to be looking for ways to cut costs. If you do not want your business to be the victim of one of those cost-cutting measures, the best approach is to proactively reach out to clients and offer to help, according to Ramshaw.

“The problem is, once you’ve lost a customer, it’s almost impossible to get them back,” he said. “So the goal is to keep them engaged and loyal through good times and bad times.”

In the short term, that starts with reaching out to customers to understand what challenges they may be facing, and seeing how you can make things easier during the crisis.

“A CFO who prioritises customer engagement should have a metric that tells them how often that customer has been visited, called, or responded to an email in the last three months,” Dorrell said. “In general, this is important to maintaining a good customer relationship, but it’s even more important now.”

If possible, Dorrell recommended, CFOs should consider voiding invoices for a quarter. If that is not possible, it is a good idea to offer to defer payments, or give them heavy discounts for lower-level services. While this may result in short-term business losses, it also maintains the relationship and, more critically, keeps the customer from leaving.

“The crisis has really elevated the role of the CFO and made it clear how critical it is to have a good one,” said Lou Shipley, a lecturer at Harvard Business School and a former CEO who sits on the board of five software companies. “Now that we’re in the second half of the year, we are seeing that the companies with leadership that prioritised retaining customers are generally coming back stronger than those that didn’t.”

Focus on the metrics: How much is retention worth to your company?

After checking in with customers in the short term, CFOs should also consider adopting longer-term retention strategies. The first step is to get management accountants to calculate how much customer retention is actually worth. While this may seem straightforward, it can actually be quite tricky, according to Ramshaw.

“You need to look at the customer before they leave and assess the loss to the company and what that loss is worth over the lifetime of the customer,” he said. “And then assessing whether it is worth spending an hour, ten hours, or $1 million on keeping them from leaving.”

Doing so requires combining a few financial concepts. First, management accountants should calculate the net present value (NPV) of each customer to the company and use that to work out the customer lifetime value (CLV) — what the customer is likely to be worth to the company over the entire span of that relationship. (See the sidebar, “How to Calculate NPV and CLV”.)

Then, they can combine that concept with the company’s average customer attrition rate to assess how much the company is losing when a big client leaves.

“You can use that figure as a basis to calculate how much money it’s worth investing in keeping them from leaving,” Ramshaw said. “You need to know how many hours of phone calls, emails, or discounts it’s worth investing in a customer to make sure that they stay with you.”

When trying out new customer retention strategies, Ramshaw recommends using a small group of customers as a control group to systematically test which techniques are the most effective. This is necessary to prove that interventions are actually working to reduce customer churn and thus worth the investment.

“We’ve found that combining simple ideas like NPV, customer attrition, and testing individual strategies by creating control groups can be very powerful,” he said.

Create a customer success department

Increasingly, companies are creating “customer success” departments devoted to increasing customer engagement.

“Once a client is unhappy, changing that mentality becomes very difficult,” said Stephen Gregorio, CPA, the executive vice-president and CFO of value stream management platform software company Digital.ai. “Customer success is about being proactive and keeping in touch with clients, to make sure they are happy and satisfied.”

Executed effectively, customer success departments can improve a company’s gross margin by both increasing customer retention and growing customer spending — unlocking more value over the lifetime of the customer’s relationship with the company.

Because sales departments already have many of these skills (understanding the customer and product), they are often the people to lead the recruitment and training of customer success teams, which differ from customer service departments in a number of important ways.

While customer service departments tend to be reactive — the first point of contact is often when a customer has an issue they need help navigating — customer success departments are proactive. Dedicated customer success representatives hold customers’ hands through the onboarding process, during which they seek to understand the customer’s needs and short- and long-term goals, and work with the customer to make sure they understand how they can use the purchased product to meet those needs and goals.

While customer success departments may have originated among software companies, the concept can also be adapted to other industries, according to Gregorio.

“Customer success teams focus on staying in touch with the customer to make sure they have the support the need,” Gregorio said. “By creating this sort of department, you’re unlikely to be taken by surprise by a customer leaving.”

This can help CFOs with more accurate forecasting, as it gives them a better estimate of which customers are likely to renew, he said.

To maximise customer retention, Gregorio has helped to drive the creation of an executive sponsor programme, in which company executives — including the CFO and CEO — personally reach out to high-value clients, to ensure that they get personal attention, and that any potential issues are promptly addressed.

“Driving retention is really critical to making our numbers, and it’s something the CFO really has to stay on top of,” he said. “If you are private or a public annuity company, the annual gross renewal rate is a key metric.”

Because of the unique challenges that companies are facing during the pandemic, customer success departments are particularly important now. Engaged customers who receive more personal attention are less likely to leave.

“As we come out of this crisis, more CFOs are going to be thinking about how to grow their customer base, rather than going crazy to acquire customers from scratch,” Dorrell said. “From that perspective, putting resources into retaining customers is key to success.”

How to calculate NPV and CLV

The net present value (NPV) is a tool used to analyse the profitability of a project or investment, and can be calculated by using the following formula:

NPV = (FV) ÷ (1+discount rate)n

Where:

FV = Projected cash flow for each year

n = the number of periods out the cash flow is from the present

Calculating the customer lifetime value (CLV) is more complicated. First, it requires finding out the lifetime value (LV), which can be calculated by the following formula:

LV = (Average value of sale) × (Number of transactions) × (Retention time period)

The CLV = (LV) × (profit margin).

— Malia Politzer is a freelance writer based in Spain. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.