2007: The Year Customer Churn Reshapes Industries

The coming year is going to reorder entire industries due to customer churn. With this reordering will be an entirely new set of selling dynamics, as existing ones prove marginally successful into 2007.

The old “bundle three” rule for higher customer retention will prove no longer as effective as it once was. Pricing and promotional strategies will no longer be as strong as they once were in keeping customers from churning either.

While the severity of churn will vary by industry, the fact that many companies going into 2007 have no idea what their true churn rate is, and how to fight it, is already turning into an area of opportunity for software vendors.

Keeping Up

The growth of business intelligence and analytics in financial services and telecommunications through 2006 is partially driven by the need to slow churn down — and this will accelerate into 2007.

Churn’s pain is going to be SaaS’s gain, as there isn’t going to be enough time to deploy traditional enterprise applications as service industries deal with a set of competitive dynamics they haven’t seen before.

Services industries already contend with churn as part of their business models, yet telecommunications is going to see the fundamental aspects of churn strategies change as Voice over Internet Protocol (VoIP) becomes one of the top projects on which companies choose to spend in 2007.

This is going to, in turn, be exacerbated by the growth in VoIP by Yahoo, eBay/Skype, AOL, MSN and others. This is just one of several industries that will be reordered by churn. Energy and utilities will find churn changing their industries, as well.

Changing Your Customers

The challenge for many companies with CRM systems already in place is how to respond to churn when it happens, without resorting to plummeting pricing or product bundles that appear very attractive to customers yet don’t make long-term financial sense.

Many CRM systems aren’t agile enough to create strategies on the fly for responding to customer defection; they are built with the implicit assumption customers will always be there.

There are literally dozens of metrics to measure the upward progression of prospects to customers through pipeline analysis and customer lifetime value once they start buying, yet many old-school CRM systems do not take into account customer churn.

This inflexibility of legacy CRM systems fails to support business strategies aimed at fighting to retain customers first. The revolution that will happen in 2007 as it relates to CRM is the further integration of analytics, sales force analytics and customer data management, all applicable to selling, service and marketing strategy development.

This translates into a much more agile CRM platform than ever before.

The Prediction Dartboard

No end-of-the-year column is complete without a series of predictions. Instead of going for simple, obvious ones, I taped a bunch of predictions to my dartboard in the garage and let the darts fly. Here is what I hit:

  • The impact of customer churn across many industries (both services and manufacturing) will lead to increased adoption of analytics integrated with CRM systems in companies that have held out to this point. CRM will experience rejuvenation in these companies directly as a result of analytics, and dashboards will be what sales operations, channel management and even business development will use to share their objectives company-wide.
  • Google’s extensive work on recommendation algorithms makes it out of their labs and to the enterprise. It’s interesting to check in and read what Google Labs is up to, specifically the papers that members of the staff are writing. In addition to natural language processing, which is the subject the majority of papers from Google Labs staff members published in 2006, the emergence of recommendation algorithms and systems became a popular topic.

    The implications for e-commerce vendors to validate, classify, analyze and act on recommendations has much potential, and it would be reasonable to expect Google to eventually turn their work in this area into a service.

  • Unmet needs in small and medium-sized businesses will lead to the greatest innovations in software. The elusive SMB market will lead to the greatest innovations in software development in 2007. The battle at the high end of the market over platforms including NetWeaver and Fusion is irrelevant to these companies, who will benefit the most from new applications from — AppStore Checkout is a case in point.

    Look for SugarCRM, Microsoft, SAP, Google, Yahoo and others to follow this direction by cranking up their SMB initiatives further. SAP’s recent focus here is a good example; it sees the opportunity for rapid growth in this space.

  • SOA strategies continue to show financially significant contributions in the enterprise due to streamlining customer-facing strategies, making life difficult for best-of-breed software vendors in the process. SOAs are already showing financial performance gains in pilot programs in the limited sample of companies I speak to running internal programs.

    The reluctance of just trusting one vendor, however, with an entire SOA strategy, is pretty strong; there is more of a tendency to complete pilot programs internally combining business process re-engineering and Web services; and on that second point is where the IT departments I’ve spoken with want to be able to still exercise control.

    The knowledge of how to create Web services is too attractive a retention strategy for top internal programming talent to outsource. While the press is buzzing with build versus buy, it goes deeper than that — it’s about an entirely new and very marketable skill set that can be used for retaining top talent. This is going to make best-of-breed vendor’s sales cycles all the tougher in an SOA-dominated account.

  • Many marketing departments in struggling companies will give themselves an extreme makeover and recast themselves with dashboards and a heavy focus on metrics. This is already happening in several high growth companies’ departments out of necessity for tracking the many programs in progress.

    Yet 2007, with the increasingly strong focus on results around customer retention strategies will pervade those slow-growth and even declining companies as marketing looks to quantify its contribution and sustain and grow its budgets. This includes posting customer satisfaction scores on dashboards for everyone to review anytime they want.

Making sense of 2007 starts with the recognition that the battle to hold onto existing customers will be more intense than ever, and that battling churn in entirely new ways will reshape entire industries. What’s being redefined is how companies stay connected with customers, and at its essence, staying relevant to those served.

Thank you for reading this column and may you and your family have a happy and healthy New Year.

Louis Columbus, a CRM Buyer columnist, is a former senior analyst with AMR Research. He has worked with enterprise clients on defining solutions to their channel management, order management and service lifecycle management strategies. Mr. Columbus also teaches graduate-level international business and marketing courses at Webster-Loyola Marymount University and University of California, Irvine. He is the author of fifteen books on technology and two books on analyst relations. His book, Getting Results from your Analyst Relations Strategies, can be downloaded for free.

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