Do Customers Bounce Back?

As you prepare for the intensive spring selling season, it’s a good idea to assess the early warning signs of customer loyalty you may have received from customers last year. After working with retailers and their sales data for many years, I have learned the previous year’s sales are a leading indicator of what a customers is likely to do the following year. In other words, 2009 sales with individual customers will predict their behavior this year.

One of our clients recently mentioned 2009 was a very good year for them. Sales were up and they acquired quite a few new customers. I guess some of their competitors didn’t have quite as good a year! Because this client has worked with us for many years, they know many new customers are actually vulnerable the following year. New customers tend to buy in one or two categories and often continue to do business with their former retailer as they evaluate their experiences with the new retailer. Like any relationship in trouble, the dissatisfied party doesn’t leave all at once. They tend to leave slowly. Our client will be monitoring these new customers this year to ensure he strengthens the relationship by deepening his category penetration and overall share of business.

Which brings back to our main topic: Do customers bounce back? Even though you might have increased your business last year, you likely did not achieve 100% loyalty with all customers. Consider this: Most ag retailers lose roughly 10% to 15% of their customers each year. Even more customers defect in one or two categories with their former retailer. This slow death of a customer is very insidious. Most retailers don’t notice the process of a customer leaving because they don’t have a proper customer radar in place.

So the question is what happens to these customers the year after they don’t buy their chemical, fertilizer, or seed from you? If most customers return the following year, then customer attrition in any particular year is not a big deal. But if customers tend to stay away the following year after not buying at least one category from a retailer, then it’s a very big deal indeed.

Looking At The Numbers

The chart shows the purchase behavior of approximately 20,000 growers from our database who dropped at least one category with their retailer in a recent year. What we wanted to know is this: “What happened the next year? Did these customers bounce back?”

The chart shows the last year of a three-year evaluation of customer loyalty. In year one, we measured the number of categories our clients sold to their customers. In year two, we identified customers who defected in one, two, or three categories with their retailer. Finally we measured what these same customers did in year three. This is the data shown on the graph. Of the customers who dropped one category, only 23.5% “bounced back” to their starting position (i.e., the retailer regained their business after the customer dropped a category the previous year).

Unfortunately, a full 76.5% of customers who dropped only a single category continued to decline as we tracked their sales between year one and year three. In these cases, the retailer did not recover the business. It was lost to a competitor for the foreseeable future. Remember: New customers leave their current retailer and try a new retailer in stages.

When customers dropped two (i.e., chemical and seed) or even three categories, the prognosis for the following year is much worse. For customers who dropped two categories, only 19.5% returned to their previous level the next year. More than 80% either stayed at the new low level or kept declining (i.e., they dropped additional categories the following year). As the graph shows, it just gets worse if a customer essentially defects (i.e., they drop three categories).

In my recent columns, I have been discussing how customer experiences impact a retailer’s market share. When a customer is lost (even in a single category), there is a tendency to look for “sound bite” type explanations, but these are often too simple to provide a satisfactory explanation. Pricing is one of the customer experiences that many retailers spend a lot of time thinking about. In work done by AgKnowlogy to quantify customer loyalty, pricing is rarely near the top of customer experiences that drive repeat business. Pricing needs to be competitive, of course, but it is not the driver many believe it is.

Quantifying how your customers perceive your performance on a range of experiences will give you insight into what drives loyalty for your business. This insight is critical because the cost of losing a customer, even in a single category, for the upcoming spring season is much larger than you might think.

I suggest you review last year’s sales to identify any customers that might have taken business to a competitor. Customers typically don’t bounce back on their own, so you need to work with these potentially lost customers to resolve differences and win back their business.

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