Source: Reichheld, F. F. and Sasser, E. W. (1990), ‘Zero defections: quality comes to services’, Harvard Business Review, September, 105–11.
Abstract: Companies that want to improve their service quality should take a cue from manufacturing and focus on their own kind of scrap heap: customers who won't come back. Because that scrap heap can be every bit as costly as broken parts and misfit components, service company managers should strive to reduce it. They should aim for "zero defections"--keeping every customer they can profitably serve. As companies reduce customer defection rates, amazing things happen to their financials. Although the magnitude of the change varies by company and industry, the pattern holds: profits rise sharply. Reducing the defection rate just 5% generates 85% more profits in one bank's branch system, 50% more in an insurance brokerage, and 30% more in an auto-service chain. And when MBNA America, a Delaware-based credit card company, cut its 10% defection rate in half, profits rose a whopping 125%. But defection rates are not just a measure of service quality; they are also a guide for achieving it. By listening to the reasons why customers defect, managers learn exactly where the company is falling short and where to direct their resources. Staples, the stationery supplies retailer, uses feedback from customers to pinpoint products that are priced too high. That way, the company avoids expensive broad-brush promotions that pitch everything to everyone. Like any important change, managing for zero defections requires training and reinforcement. Great-West Life Assurance Company pays a 50% premium to group health-insurance brokers that hit customer-retention targets, and MBNA America gives bonuses to departments that hit theirs.
Often quoted by other authors and researchers, this article reported that a small increase in the number of retained customers can have a disproportionately large increase in profitability, which finding has helped to propel a wealth of research and interest in relationship marketing. By definition, loyal customers are less likely to switch, and therefore incur lower sales and service costs. They also help, through word of mouth, to recruit new customers, so the net result is that they all contribute to higher profits. Although the specific loyalty gains might have changed since the time the research was conducted, the analysis is an important reminder of
how crucial customer loyalty is for the profitability of any business.