A new study in the Journal of Marketing explores how a failure-tolerant corporate culture leads to reattracting displaced customers and increased firm profits
As firms seek to boost revenues and margins, they are increasingly targeting customer defectors. Experts report that the costs of reaching out to lost customers are generally far lower than the costs of contacting new customers. In addition, the chance of winning back a lost customer is up to eight times greater than that of acquiring a new customer. In recognition of these advantages, McDonald’s announced plans to invest from $150,000 to $700,000 per location in the U.S. to win back displaced customers.
However, experts also report that customers can defect strategically because they anticipate improved offers such as lower prices from competitors. In such a scenario, a firm’s win-back activities could unnecessarily lower firm revenues. In addition, resources are misallocated if win-back offers to defected customers provoke negative attitudes in loyal customers (e.g., feelings of unfairness if loyal customers pay higher prices than defected customers).
Using a cross-industry data set, our research team reports that reacquisition increases firm profits. The positive outcomes of customer reacquisition, such as increased revenues, more than offset the costs of customer reacquisition management such as price concessions.
We also demonstrate that managers need to understand the important role that a company’s culture plays in effective customer win-back. While reattracting lost customers can lead to increased profits, win-back processes are often unpleasant for employees—who likely perceive customer defection as an undesirable occurrence. Usually, employees do not freely and deliberately discuss their mistakes. They may fear blame from colleagues or punishment by superiors. Thus, company cultures that reward success and punish failures can instill reluctance in employees to address customer defections.
We demonstrate that successful customer reacquisition management requires a failure-tolerant organizational culture that encourages a constructive treatment of failures. In failure-tolerant cultures, employees feel free to voice ideas and discuss customer defections openly. Thereby, employees assume responsibility for the reacquisition process. Such feelings of responsibility spur employees to work harder, be more creative and act unconventionally when reacquiring customers. As a result, employees address more defections and increase win-back success.
However, failure tolerance can also have a boomerang effect: Strong levels of failure tolerance reduce win-back success. Highly failure-tolerant cultures can induce laxness in employees. Once employees have internalized a tolerance for failure, they may make decisions with less due diligence and effort and can even hide behind a failure-tolerant culture, provoking more and increasingly severe failures in customer relationships. More and increasingly severe failures can create irrecoverable damage to win-back success. Even motivated and creative employees are unlikely to win back customers who experienced multiple and severe failures.
We also find that win-back guidelines increase win-back success. In such guidelines, companies establish and enforce strict formal rules and procedures that employees must follow when reacquiring customers. Such guidelines help employees detect customer defection, formulate expected actions and outline monitoring activities to ensure learning for future reacquisition attempts. We observe that such guidelines increase reacquisition attempts and win-back success.
Importantly, formal reacquisition guidelines do not conflict with motivational effects that failure tolerance raises in employees. Instead, we demonstrate that guidelines help unfold the full potential of failure-tolerant cultures. Employees who assume responsibility for customer win-back find those guidelines informative. In other words, such guidelines help them structure the otherwise unstructured context of customer reacquisition management. We also observe that guidelines ensure that the boomerang effect of failure tolerance sets in only for excessively failure-tolerant companies.
Our findings have managerial implications. First, even if customer acquisition and retention management are well-established in company practice, we call on managers to stimulate reacquisition activities. Addressing failures, shortcomings and defections is likely less appealing than acquiring new customers, so win-back endeavors must be encouraged. Second, to benefit from reacquisition activities, we suggest that managers organize for customer reacquisition management. Managers need to establish cultures that are open to failure, but must also be aware that failure tolerance can result in “too-much-of-a-good-thing” environments: High levels of failure tolerance reduce reacquisition performance. Thus, managers also need to recognize that failure tolerance is not a substitute for management. Third, we observe that few companies currently have comprehensive reacquisition guidelines in place. Because those guidelines steer employees toward successful win-back and amplify the performance effects of failure-tolerant cultures, we call on managers to establish reacquisition guidelines.