Why Your Best Customers Might be First to Flee

Last Updated Feb 23, 2011 8:49 AM EST

If your business depends on providing a high level of service, take note. When a competitor comes to town offering superior service, the customers you think are most loyal might be the first to throw you overboard.

A new Harvard Business School research paper shows that it is the "high-quality incumbent's most valuable customers, those with the longest tenure, most products, and highest balances, who are the most vulnerable to superior service alternatives." The study, How Do Incumbents Fare in the Face of Increased Service Competition?, was done on the retail banking industry by Ryan W. Buell, Dennis Campbell, and Frances X. Frei.

The research also demonstrates that high-service firms must be vigilant about maintaining that quality. If they don't, a customer exodus may start quickly. Entry or expansion of competitors offering superior service increase defection by an average of 9.6% in a single year over baseline defection rates, according to the researchers. Equally significant, such an event has long-term ramifications for the incumbent in terms of degrading account quality.

The bottom line: By committing to sustain a high level of service relative to local competitors, a company can attract and retain higher value customers over time. But be vigilant -- customers lured by service are extremely attuned to what you provide them, and happy to go down the street at any sign of deteriorating attention.

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(Photo by Foto urgent, CC 2.0)
  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.