Monday Mornings with Madison

The Power of Promises in Business – Part 2

The Cost of Broken Promises and Path to Keeping Them

Research by Accenture has confirmed what most smart business people have long believed to be true:  broken promises hurt business.  Day in and day out, many businesses make overt or implied promises to customers.  Often, those promises are intentionally, carelessly or inadvertently broken.  In any given year, nearly half of customers have a promise broken by a company with which they do business.  Of those, almost two thirds report companies breaking multiple promises.  Some industries are more habitual in breaking promises than others.  

What is the actual impact of broken promises on business?  Logic dictates that broken promises erode trust between the customer and the business.  But do broken promises actually cause customers to stop doing business with a company?  Is just one broken promise enough to cause a loyal customer to go elsewhere with his business or does it take multiple offenses?  Research indicates that this is an area that should be of prime concern to business owners, CEOs, CFOs, Controllers and anyone who is focused on a company’s bottom line.  There is a very strong, direct relationship between customer erosion and broken promises.

The Bad News

If nothing else, here is a number that every person in business or leadership should know:

90% of all customers who encounter a broken promise in dealing with a company ultimately either switch companies or seriously consider doing so.

Here is the breakdown.  Of the nearly half of customers who experience a broken promise in a given year, 38% do actually switch to doing business with another company soon after.  Another 10% will keep working with the promise-breaking company but move some of their spending to a competitor (presumably to test them out before making a full switch).  Another 42% begin to think about switching to another company.  Only 10% live with the broken promise and keep doing business with that company without it threatening their loyalty.  That means that nine out of every 10 customers who experienced a broken promise are in jeopardy of defecting to a competitor.

Just how much of a particular company’s business this jeopardizes depends on how many promises a given company’s employees are making-and-breaking and in what industry the business is.  Although the telecommunications industry is the greatest offender of broken promises (as we discussed last week), ironically it is not the industry that has the most defectors.  About 65% of all customers who experienced a broken promise in the automotive industry subsequently switched companies.  Here is the breakdown according to Accenture:

After a broken promise: By industry:
65% of customers defected Automotive
50% of customers defected Travel & Tourism
42% of customers defected Retail Consumer Goods
38% of customers defected Banking and Insurance
37% of customers defected Healthcare
36% of customers defected Government agencies
30% of customers defected Telecommunications
28% of customers defected Utilities – Gas and Electric

It is unfair that the industry which reportedly broke promises to its customers the most – telecommunications – had one of the lowest customer defection rates.  However, it probably makes sense since it is complicated to switch phone carriers and cell phone contracts often involve work and family plans.  That said, all industries experienced a significant volume of customer defection from within the ranks of customers that experienced at least one broken promise.  Since most companies aren’t even aware that employees are regularly making-and-breaking promises casually, the behavior goes unchecked and the company bleeds customers like a burst artery.  Moreover, if a company considers the amount of money spent in sales and marketing to acquire new customers to replace customers that it is losing through broken promises, this pipeline of lost customers represents a very significant hit to the bottom line.

The Really Bad News

Perhaps the biggest problem related to customer defection due to broken promises has to do with the timeframe in which customers switched to a competitor.  In most cases, the switch to a competitor did not happen overnight.  Very few customers who experienced a broken promise – only 2% to 28% — discontinued or cancelled service with that company immediately after a promise was broken.  The average was 10%.  However, up to two+ years after experiencing a broken promise, 20% to 50% of all customers had taken their business to another company. The greatest surge in defection happened from six months up to two years after the promise was broken.  Thus, the damage done by employees breaking promises today can impact customer loyalty for years to come.  Ironically, customers may be drawn away from one company to another by the promise of better outcomes even if in reality the next company’s ability to keep promises is just as poor.

For the bean counters and number crunchers, broken promises have another negative impact to the bottom line besides a direct loss of customers and an increase to the cost of sales and marketing efforts.  Broken promises also increase the cost to service the customer.  Service breakdowns invariably raise interaction volumes across all channels and prolong those interactions with the company.  Each interaction with the customer costs the company money.  Unresolved issues can escalate drawing more and more upper level staff into the mix, and invariably spills over into social media channels which then makes future sales and marketing efforts even harder and more expensive.  The hits to the bottom line are numerous and painful.

The Good News

Although these facts and figures related to broken promises seem dismal, there is some good news.

First, the relationship between promises and loyalty is good news for companies really focused on keeping the promises it makes to its customers,   Such companies not only keep its current client base, but can benefit from the bad habit of other companies to break promises enticing their customers to switch.  If nearly half of all customers are experiencing a broken promise within a year and up to half of those people are defecting to a competitor within about two years after that, companies that keep promises should find it easy attract those customers.  It would be like shooting fish in a barrel.

Also, some companies see broken promises as an opportunity to improve their own internal processes.  While some companies think that the way to solve the ‘broken promises problem’ is to avoid making any promises, other companies take the opposite approach.  They believe it is important to make promises to customers.  If promises are then broken, the first step is to know what promises were made and then to understand why were they broken.  Proactive companies see a broken promise as the canary in the coal mine: an indicator that there’s something wrong with a business process.

Indeed, in an article for American Express’ Open Forum blog, Daniel Markovitz cited a “large construction company that tracks all its broken promises, identifies the reasons for the missed commitments, and puts them up on the wall for all to see.” According to Markovitz, the company’s reason for posting the information wasn’t to assign blame or shame the staff person who broke the promise.  It was done to identify common issues and engage the team in productive problem solving in order to avoid repeating it.  Broken promises can be used as a learning opportunity instead of sweeping problems under the rug or compensating for them by making superhuman efforts to get the job done anyway.

How to Keep Promises

There are steps a company can take to ensure that the promises it makes to customers are kept.   A company that is focused on keeping promises will:

  1. Build a service-oriented environment where every employee understands what it means to focus on service.
  2. Streamline processes to eliminate recurring problems.
  3. Utilize technology to help maximize the understanding of each client’s needs.
  4. Teach employees to truly listen well.
  5. Implement customer satisfaction surveys to help get greater insight into what customers really think.
  6. Embrace any tools or technology that provides analytics of customer behavior, including online, on the phone and in person.

If the name of the game is to increase client satisfaction, add repeat business and maintain customer loyalty (and avoid losing existing customers to the competition), then the number one goal of all business strategies should be to avoid breaking promises at all cost.  It can be the one thing that sets a business apart from its competition and helps it differentiate itself from the rest.

Quote of the Week

“It is easy to make promises – it is hard work to keep them.”
Boris Johnson


© 2014, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

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