In doing so, it was evident that the firms with lower administrative and marketing expense ratios had significantly higher profits. The lower expense ratios had little to do with any great operating or purchasing efficiencies and much more to do with customer loyalty . This was discovered when one of the team's researchers, in her endeavor to understand what made one company more profitable than another, decided to interview ex-customers regarding what led them to switch from one broker to another. Toward this end, she began collecting names of lost customers from each of the firms and uncovered a very interesting finding. In fact, it was the retention metric that was almost single handedly responsible for differences in profitability since those firms with higher retention rates also had lower expense ratios.
Customer attrition has a multiplicative adverse effect on a firm's cost of doing business.
This is the direct result of the compounding effect associated with having to replace newly acquired customers each year. Another extraordinary expense associated with newly acquired customers is the service cost required to educate these customers regarding how to consume the service or make use of the product. Other costs of attrition are equally significant but are more difficult to quantify. Several customer service experts have quantified another less tangible effect associated with losing a customer. These sources have suggested that every satisfied customer will tell four of his or her friends or associates about the company, whereas 11 friends and associates are regaled with negative experiences when the customer is dissatisfied.