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Understanding the reasons behind attrition and how to earn customer loyalty

With the advent of do-it-yourself (DIY) systems and higher customer expectations, understanding and managing attrition is more important than ever before.

But a number of companies still don’t have a good understanding of their attrition, the reasons behind it, and how to earn customer loyalty.

Look in a mirror

In fact, John Brady, president of TRG Associates, based in Old Saybrook, Conn., shares that, in his experience, the entrepreneur who started the alarm company almost always says his attrition is low.

“What we almost invariably find is it’s a lot higher than he understands, because he’s so busy growing the business for new customers and new sales, and most guys don’t have reporting systems that give them monthly information and monthly attrition tracking,” he says.

Given this, companies should “look in a mirror,” to find out what’s causing attrition. Attrition should be measured based on two metrics: gross attrition and net attrition, Brady says.

Bob Harris, president of The Attrition Busters in West Hill, Calif., agrees. “The formula for gross attrition is how many accounts you start with at the beginning of the month and how many have cancelled by the end of the month,” Harris explains. “Net attrition has to do with how many accounts did you lose at the beginning of the month minus how many accounts did you add during the same period of time?”

However, there is another important factor companies should be aware of, he says.

“There’s an account creation multiple, which means that it costs money to generate a new account, whereas it doesn’t cost money to keep one that you already have,” he explains.

“So a lot of mistakes are being made between gross and net attrition. People think if they … lose 10 accounts and they add 10 accounts, that they’re in the same place they started in. But they’ve lost.”

For example, Harris says that in Quebec, his data shows that it’s approximately a 36 times account creation multiple, meaning it’s 36 multiplied by every dollar to generate a new account.

“So if the account creation multiple is 36 times and you get a new $25 a month customer, that’s $300 a year. But what’s 25 times 36? It’s a lot more than a year, even two years’ revenue.”

Brady adds that attrition should be measured based on recurring monthly revenue (RMR), rather than the number of customers. “You measure based on RMR and you measure on a monthly basis, and then each month, you annualize to see what your gross attrition rate is, and then you track your reasons,” he explains.

Understanding the roadmap

Tracking the reasons behind attrition is the first step to better understanding attrition.

Alarm dealers need to know more than “‘Hey, I have seven per cent attrition.’ You’ve got to know the reasons for the losses,” Brady says. “Because if you don’t know the reasons for the losses, it’s really hard to manage what you’re doing wrong.”

Many companies say they track the reasons, but often they offer customers the option of choosing ‘other’ in a survey.

“What do you do with ‘other’? How do I manage ‘other’?” asks Brady.

While it is difficult getting unhappy customers to share why they are cancelling their contracts, he says the management team “really have to be come in-tune with unhappy customers.” He recommends they ask customers why they are leaving so they can learn from their mistakes.

“The reasons give you the roadmap to managing to lower your attrition,” he adds.

And there are a range of reasons, including loss to competition and poor service on calls.

To address the problem of poor service, Brady suggests companies look at their “go backs.”

“Look at all the times that a service tech went to see Mrs. Smith and she probably took off [time] from work…and you don’t show up on time or you don’t show up at all, or you show up and you do a little work, but you don’t have all the right parts, so you have to come back.” Mrs. Smith won’t be happy.

“So we track go backs, because go backs are endemic; they create unhappy customers,” he explains.

Poor service can also be measured by looking at the turnaround time — the time between when a customer calls with a problem and when the company fixes it.

If the quickest a company can fix a client’s system is a few days, then they are in trouble, he adds.

Additionally, moves is a big driver of attrition, since customers may move out of a company’s geographic market. But they can also be an opportunity.

“A good management team will tell you not only how many move-outs they had, but how many re-signs they got,” Brady explains. “Think of the re-sign as two different things. I can either re- sign the same customer in the new home, or I can get a two-for-one. I can sign the existing customer in the new home and I can sign the new home- owner in the old home.”

“It’s [all about] the management team and what they do about re-signs, follow up,” he continues. “Because think about it — who’s really your customer? Long term, the home is your customer.”

Finally, the most important factor driving attrition is “the perception of value that people receive or don’t receive. It’s the experience-based perception of value they get based on the money they invest,” Harris says.

The best way to engage customers and stop attrition is to “shore up the front-end of an all-out team approach to engage our customers and make the customer really believe that they’re not paying us enough for the services that we’re providing them. And when you do that effectively, it makes it really, really hard for them to dump you.”

“We’re falling short”

But as customer expectations have become higher over the years, “How we communicate, what we communicate, specifically, and what do we do in terms of education… has changed dramatically, and frankly we fell short, or we’re falling short still on doing that,” Harris says.

In his experience, countless alarm companies have lost a customer to a competitor for a service they already provide, simply because they didn’t communicate properly.

Reaching out to customers outside of renewing contracts, collecting payments, or service calls is a simple way to earn customer loyalty, Brady adds.

He suggests that companies pick a few customers a week to call and check up on. When he tells entrepreneurs to do this, “they all look at me like I’ve got four heads,” he says.

But “there’s just a lot of different places where a customer can discern poor service…and if you’re really looking carefully, you can tell that they might be getting unhappy.”

Harris also believes lack of communication plays a role in losing customers to DIY.

“One of the primary ways to really persuade people from DIY is the monitoring component. You’re on an airplane, you’re in a meeting, there’s a fire at your house — there’s no possible way that you can respond as quickly as a professionally monitored service can,” he explains.

Additionally, he says, a professionally monitored service would only cost clients approximately one dollar a day.

But the industry is not explaining this to customers.

“Our industry as a whole has become so lethargic in the way we communicate and how we add value to the professional services we do,” he shares.

“What we’ve done is we’ve done the opposite, we’ve gone cheap, especially in Canada! … [Instead of focusing] on value and service and relationships, we’re competing on product and price, and it’s totally backwards.”

Dealing with problem customers

These communication problems are exacerbated further by higher customer expectations.

“I believe [higher expectations are] due to having a smart phone, instant access to the internet, and consumers, including us, are used to getting whatever we want now. And so that’s been the number one challenge of adapting our business to today’s consumer and their high expectations,” says Virgil Reed, president of Reed Security & Dealer Program, based in Saskatoon, Sask.

With such high expectations, some customers can become a drain on a company, especially if they require several service calls.

When it comes to dealing with these customers, Reed says if they become belligerent, it may be time to let them go.

“There are times where the expectations are so high that you do have to actually agree to [say] ‘We can’t make you happy, we’re happy to cancel your contract and you can shop around else- where,’” he explains.

Sometimes customers do cancel their contracts, and other times this changes the tone of the conversation, and they can work together to come up with a solution, he adds.

“I would say the challenge has never been higher, and our strategy to combat that has been to go above and beyond with service, including adding more to our support desk, more staffing, more hours, more resources, and trying to create a better experience for that client base.”

Harris adds that when it comes to problem customers, “you need to turn that customer into a pro table customer, otherwise it’s a huge drain on your financial position.”

To identify these customers before they become problematic, Brady suggests that companies watch for signs of unhappiness, such as a sudden stop in payments or lack of system activity.

Many alarm dealers don’t pay attention to accounts with no activity and don’t want to reach out to those customers if they are still paying, he shares.

But the problem with that is “there’s a good chance that someone like Vivint …they’re going to come knocking on doors.”

Greater awareness

However, not all alarm dealers are falling short managing attrition and communicating with customers.

“I think the management teams in general have gotten far more aware of the importance of understanding the metric and understanding the dynamics of it,” says Brady.

Additionally, more companies are taking attrition seriously.

“We’ve got a lot of smaller clients and they do a monthly report, they use our template …and they track the reasons and they really do something about it,” he says.

In fact, Reed Security does just that.

“We look at gross attrition, we track our data, we do monthly reports on what our attrition is and we pay attention to it quite heavily,” Reed shares.

“Proactively educating our customers is our best strategy,” he adds.

The company writes educational articles on their blog and shares them via social media, particularly Facebook, and through their email database, he explains.

Reed Security especially focuses on communicating and educating customers during the “summer door-knocking programs.”

“As soon as May hits, I’m always going to send a proactive email to our client database and we will educate [them]…Some years it’s been ‘Beware of door-to-door sales people,’ and then we’ll share articles that we find online,” Reed says.

This year, he took a slightly different approach, writing an article from the perspective of a fictitious door-to-door salesperson who was sharing his secrets and tactics.

“Boy, did we get a lot of attention on that one, as far as our customers sharing various stories, on social media in particular,” he says. “It’s the best awareness that we’ve ever come up with. To this point, I don’t think we’ve had a single cancellation relating to door-to-door this season.”

On top of education, Reed agrees with Brady and Harris.

“You have to make sure that those customers feel like they’re valued, and you have to actually stay in communication with them,” he says. “You can’t just sit back and relax and be on cruise control — you have to take an active approach with your customer experience and that’s really what we’ve done.”

This article originally appeared in the June/July 2018 issue of SP&T News.