Customer retention is not enough: Defecting customers are far less of a problem than customers who change their buying patterns. New ways of understanding these changes can unlock the power of loyalty.(Statistical Data Included)

Companies spend millions trying to understand and influence customers--to hold on to them and to encourage them to spend more. But to increase the customers' loyalty, companies must do more than track today's typical metrics: satisfaction and defection. For despite all the money invested to promote loyalty among high-value customers, it is increasingly elusive in almost every industry.

A better appreciation of the underlying forces that influence the loyalty of customers--particularly their attitudes and changing needs--can help companies develop targeted efforts to correct any downward migration in their spending habits long before it leads them to defect. Such an appreciation also helps companies improve their current efforts to encourage other customers to spend more. Our recent two-year study of the attitudes of 1,200 households about companies in 16 industries as diverse as airlines, banking, and consumer products shows that this opportunity is surprisingly large. Improving the management of migration as a whole by focusing not only on defections but also on smaller changes in customer spending can have as much as ten times more value than preventing defections alone. Companies taking the approach we recommend have cut downward migration and defection by as much as 30 percent.

Differentiating and measuring degrees of loyalty is an evolving craft. Companies first tried to measure and manage their customers' satisfaction in the early 1970s, on the theory that increasing it would help them prosper. In the 1980s, they began to measure their customers' rates of defection and to investigate its root causes. By measuring the value of the customers themselves, some companies also identified high-value ones and became better at preventing them from defecting. These ideas are still important, but they are not enough. Managing migration--from the satisfied customers who spend more to the downward migrators who spend less--is a crucial next step.

This step is so important because large amounts of value are at stake. Many more customers change their spending behavior than defect, so the former typically account for larger changes in value (Exhibit 1). At one retail bank, for example, 5 percent of checking-account customers defected annually, taking with them 10 percent of the bank's checking accounts and 3 percent of its total balances. But every year, the 35 percent of customers who reduced their balances significantly cost the bank 24 percent of its total balances, while the 35 percent who increased their balances raised its total balances by 25 percent. This effect showed up in all 16 industries we studied and was dominant in two-thirds of them.

In industries like retailing and credit cards, whose customers generally deal with more than one company, managing migration is vital. But doing so also matters in industries like insurance and telecom services, where a customer might seem to have a single primary provider. One local phone company, for example, found that more than 90 percent of its loyalty opportunities came from reaching out to customers dropping features such as second lines and call waiting.

Managing migration not only gives companies an early chance to stem the downward course before their customers bolt entirely but also helps them influence upward migration earlier. Since the opportunities in either direction are equally good, and many of the tactics companies can use to influence their customers' spending are the same regardless of which effect they focus on, a company taking aim at either upward or downward migration can double the bang for its buck.

Understanding …