A study by the Institute of Customer Service (ICS) today reveals that UK firms fear losing 10% of their customer base over the next three years, at a cost of almost two and quarter billion pounds.
As cash-strapped customers spend less and shop around more amid continuing economic turmoil, business leaders warn of an impending war for customers and identify customer retention and acquisition as critical to success.
The study is based on research among senior decision-makers at 250 of the UK’s largest consumer firms, as well as 1,000 consumers.
According to the study, the difficult economic climate leaves businesses with little room for growth, exacerbating the fierce battle for customers.
The majority of consumers are spending less (65%) and taking more time to shop around (86%) and research the best deals (76%). Almost half (47%) describe themselves as more likely to switch companies in the future.
At the same time, two fifths of business leaders (41%) suggest that the scope for organic growth is limited in the current climate. The same applies to growth by acquisition, according to 54% of senior decision-makers
As a result, 41% of leaders expect the war for customers to intensify this year.
More still (44%) describe customer retention as critical to their ability to achieve growth, while 58% describe customer retention as critical to the sustainability of the business itself. More than a third (35%) identify customer churn as the greatest threat to their business.
Jo Causon comments: “As consumers spend less and shop around more, senior leaders need to consider how their business strategies and operating models reflect the needs of their customers.
“Firms that differentiate on the quality of their customer experience will be best placed to achieve their growth ambitions.”
Business leaders expect competition for customers to erode almost 12% of their current custom over the next 12 months alone, and some 10% on average over the next three years.
Executives predict that this level of customer churn will hit turnover by almost 11% over the next three years – threatening some £2.23 billion of revenues.
This is before the cost of replacing lost customers – estimated at more than £6,500 per customer by senior managers – is taken into consideration. Leaders admit it takes a staggering 58 days on average to replace a lost customer.
In light of an impending war for customers, two thirds of business leaders (65%) agree that customer service will be a critical market differentiator.
Leaders identify customer service as the most important factor – alongside price – in driving the customer loyalty that will be critical to success. Almost three quarters (71%) single out service as a key loyalty driver, ranking it above product and service quality, brand reputation and effective sales and marketing.
Their customers agree: the large majority (83%) identify the quality of service they receive as an important driver of loyalty.
In this context, two thirds (64%) of firms are planning significant investment in customer service this year to ensure customer retention.
Despite plans to invest, firms are facing significant service challenges as they battle to retain customers, ICS found.
Almost half of business leaders admit cutting back on service operations during recession (47%). Cuts have damaged the quality of customer service in close to half of organisations (48%), with only a quarter (27%) preserving service levels through the recession.
A third (31%) believe the quality of their customer service has been impaired by a short-term focus on prioritising sales over service.
Worryingly, less than half (45%) of executives feel that their board understands the importance of customer service, while the same number believe their board affords it inadequate priority.
Jo Causon comments: “A quarter of the organisations we spoke to understood that cutting back on customer service is not an option. These are the firms that will succeed in such a fiercely competitive environment.”
“Service drives bottom line performance, and will be the critical differentiator in a business environment marked by intense competition for customers.”