Customer defections – the root cause of all your problems

In my earlier post a few days back, I had introduced the first formula of Customer Math, That is, 1=25%. This formula suggested that on an average comapnies lose 25% of its customer every year. Lets continue learning customer mathematics.

Let us now see how losing customers is the cause every company’s woes? Let us assume that a company has 100 customers in a given year who purchase in equal amounts from it. If the company wants a 10 percent growth in sales, it will need to have 110 customers next year. However, the company will lose 25 of its customers (on an average companies lose 25 percent of their customers), which will leave it with only 75 customers. The company would require a total of 110 customers to achieve its target. It is obvious that to meet its target increase of 10 percent, it will have to increase the number of customers from 75 to 110 – a nearly 47 percent jump.

This brings to the next Customer Math formula 10%=47% which states that in order to increase sales by 10 percent over that of the previous year, a company has to actually increase sales by 47 percent. This is because, on an average, a company loses 25 percent of its customers annually.

For instance, I lost a customer who was giving me a business of Rs 2 million. To arrive at last year’s numbers, I had to first find new customers who would give me business worth Rs 2 million. I had to then find additional customers who would give me new business so that I could achieve the increase in sales that I was looking for.

Some of you may argue that this estimate of companies losing 25 percent of their customers is rather high, while others may opine that it is quite low. You can replace the 25 percent with your number and you will arrive at the same conclusion as I have. That is, you actually have to increase sales by a much larger percentage than what you had planned for, because of sales lost due to defecting customers.

This is one of the most important lessons I learnt in life even though very late in life. If you are not meeting your targets, I can guarantee that you are losing customers. If you are not making enough money, you are losing customer. Plug this leak and you will prosper. Don’t believe me, then stay tuned here and you will find out more.

avinash narula

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Comments

Good information in this post, keep up the great work. Cheers.

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