Increase Profits by Reducing Turnover and Churnover

November 20, 2018

Increase Profits by Reducing Turnover and Churnover

In the course of working with both B2B clients (e.g., medical device companies, chemical companies) as well as B2C (e.g., retailers, restaurants, hotels), I’ve found that the actions taken by employees are critical in creating a level of customer loyalty that ultimately results in increased sales and profits.

In the B2B space, for example, I’ve typically found that things such as the sales rep’s knowledge of the customer’s business and their responsiveness to customer problems are critical in creating ongoing loyalty. Among B2C companies, employees who can help the customer find the right product and register operators who provide speedy service at the point of checkout help build strong relationships with the customers they serve.

While companies clearly acknowledge the role of employees in creating strong relationships with customers, we consistently find that few truly “practice what they preach.” Nowhere is this clearer than in the case of turnover (the employee leaves the company) and churnover (the employee remains at the company, but gets transferred to a different sales territory or store).

Human resource executives will acknowledge that turnover is costly, but they often underestimate its costs to the corporation. Their accounting systems can readily tell them the cost of recruiting and training a new employee. Unfortunately, these same systems have no way of providing a reliable assessment of the negative impact of turnover (or churnover) on the relationships that the company has with its customers. For example, a number of years ago we surveyed customers who had closed their accounts at a local retail stock brokerage to understand their reasons for leaving. Nearly 80 percent of them cited the same reason, “My account manager left the brokerage.”

Reducing employee turnover (and churnover) produces a number of benefits that result in better service delivery to customers and greater satisfaction and loyalty:

  1. Employees become better at their jobs over time (i.e., a “learning by doing” effect).
  2. Employees develop a better understanding of the needs of their customers the longer they interact with them.
  3. Teamwork increases the longer employees work together as a group.
  4. Long-term employees have a greater knowledge of the resources available at their companies and how to apply them to meet the needs of their customers.
  5. Customers are more willing to ask questions and seek the advice and assistance of employees they know and trust.

For one “big box” retailer we found that having no more than three people in line at the point of checkout was a major driver of customer satisfaction. For each of their 1,500 stores, we obtained annual associate turnover. We then ranked the stores from highest to lowest based on their turnover and grouped these stores into four quartiles. Thus, Q1 had the 25 percent of stores with the lowest level of turnover and Q4 represented the 25 percent of stores with the highest level of turnover. Among Q1 stores, we found that 70 percent of customers surveyed reported lines of three or less at the register. That number dropped to 55 percent among customers who shopped in the Q4 stores.

For a West Coast consumer electronics retailer, we were given two pieces of data for each of the stores in their system:

  1. The length of time the store manager had been a manager at any store in the company.
  2. The length of time the store manager had been the manager of the store where they were currently located.

Interestingly, we could find no statically significant relationship between store financial performance and how long the manager had been a manager. On the other hand, we found a very strong statistical relationship between sales and profits and how long the manager had been the manager of their current store.

The lessons for human resource executives should be clear:

  1. Employee turnover imposes costs that go well beyond what current accounting systems can measure. Turnover negatively affects service delivery to customers, resulting in a poorer customer experience and leading to reduced levels of sales and profits.
  2. Even if you reduce turnover, moving people around from store to store or from one sales territory to another (churnover) has a similar negative impact on the relationships you have with your customers. This will also lead to reduced levels of sales and profits.
The Authors: 

John Larson is the senior partner at John Larson & Company and co-author of Capturing Loyalty.