Customer retention is essential to business survival. It measures the underlying health of a firm. In April, Netflix announced it had lost some 200,000 subscribers in the first quarter, suggesting that consumers were abandoning the streaming company. The stock price was penalized because of the headline interpretation of subscriber churn. In fact, the number could have been interpreted as a rounding error.
Customer retention and customer disengagement are two sides of the same coin. For business leaders, loyalty-in-action can be affirming, while lost sales may be a signal of deeper marketing problems. There are many web-based resources on how to calculate these data points. Either metric will guide investors on the price they are willing to pay for a share in a public or private company.
Churn is topical in 2022, especially in direct-to-consumer businesses, because of the impact of the pandemic on shopping habits. Do customer disengagement rates reflect lack of confidence in the company? Or are they part of the normal process of lifestyle stabilization as buyers re-establish more standard, non-lockdown routines? How do e-commerce companies retain customers when those buyers, at least in part, are returning to stores in search of product alternatives and cost savings?
The e-commerce darling Chewy, a pet-supply retailer, is wrestling with this issue firsthand. Its share price has underperformed much of this year as analysts grapple to understand weak sales numbers. Do those figures simply reflect lower pet adoption rates? Were customers merely lured by outsized price discounting? Has the company grown prematurely, given the inflated activity it saw in 2020-2021? Maybe customers have decided that Fido or Fluffy no longer need the pricey Provence-inspired gourmet food with the amuse-bouche complement.
In most companies, churn is the responsibility of the marketing department. And the pathology of building customer loyalty is often routine. We note that the average tenure of a chief marketing officer is now 40 months, the lowest level in a decade, according to the executive-search firm Spencer Stuart.
Consider these two everyday approaches:
Digital Marketing. Sending out promotional emails to sustain a customer relationship may seem ideal. The cost is low. But open rates are stubbornly small. If a customer unsubscribes because of the perception of spam, the buyer may be lost forever. To illustrate the point, we know a certain pizza chain which once bombarded us daily by email with promotional offers. We like pizza for a casual lunch at our firm; we do not eat it every day. We now give our periodic business to another chain.
Loyalty Programs. Retaining customers by offering incentives to regular shoppers seems logical. The proliferation of these programs, however, means that they are ordinary. In some cases, they may run headlong into ever-expansive concerns over privacy matters and the interplay with cybersecurity issues. A 2019 article in The New York Times, “Why Rewards for Loyal Spenders Are ‘a Honey Pot for Hackers’” is a classic among many such commentaries.
Price discounting is also a common tactic, but it can be a dangerous retention strategy. The approach crosses the line between customer acquisition and customer retention. They are different. In context here, we argue that aggressive sales may generate negative brand perceptions, undermining customer equity.
For investors looking at churn issues, there is opportunity in trying to figure out the correct standard for a given enterprise. That metric varies across companies and industries. However calculated, there is no magic number. Pointing to a competitor and comparing churn rates to determine whether a company has optimal or substandard engagement is a valuation hazard. Better to look inside the company to see how it manages its customer relationships over time.
We spotlight the magazine business, an industry with a downward churn spiral. Expired subscriptions are opportunities for readers to look elsewhere. And they have, en masse, to digital alternatives. This point is among the reasons why Condé Naste, publisher of Vogue, Wired, and The New Yorker, among other iconic titles, just declared that it is “no longer a magazine company.” Like most analysts, we are challenged to value a company that is spontaneously something different. ■
Our Vantage Point: Consumer trends and economic uncertainty create an unstable valuation backdrop for many firms. That reality will exacerbate stock-market volatility for public companies. It could lead to failed funding rounds for private companies.
Learn more at the Harvard Business Review
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Image: Chewy, like many e-commerce companies, is wrestling with customer-retention issues. Credit: Amaviael at Can Stock Photo.
This MBA-level textbook, now in its third edition, was published in 2018, 
