How Do Companies Keep Customers?

How do some companies manage to retain their customers, regardless of how bad they are?

In September 2016, Wells Fargo paid a $185 million to Los Angeles city and federal regulators after admitting to the creation of fake customers accounts. The company hoped that this would put the issue behind them. After all, big banks pay big fines for messing up all the time.

However, that wasn’t the case.

What followed was the uncovering of one of the biggest corporate scandals in living memory. Management had claimed at the time that it was a few bad employees who had tried to cheat the system to get results. But as we learned, the company’s ‘Eight is Great’ mantra —which meant that every customer should be sold at least 8 Wells Fargo products—had rotted the very culture of the company.

Under intense pressure from management to perform, Wells Fargo employees had set up millions of accounts for customers without their knowledge or consent. Those employees who refused to do so or spoke up against the system were quickly fired.

Not only had these bogus accounts racked up millions of dollars in fines, but they had also affected customer credit ratings. This meant that they could have been charged many more millions of dollars in higher interest rates. The true cost of the scandal is likely never to be fully calculated. Understandably, there was public uproar.

CEO John Stumpf was summoned to a hearing in front of the Senate Banking Committee at which Senator Elizabeth Warren called him “gutless’” and said, “you should resign. You should be criminally investigated by the Justice Department and the Securities and Exchange Commission.”

Stumpf did eventually step down, but at this stage, the bank’s reputation was in tatters. Surely, given this evidence of wanton malpractice, customers left Wells Fargo in droves?

Wells Fargo CEO John Stumpf testifies before the Senate.


In the immediate aftermath of the scandal, consultancy firm cg42 surveyed existing Wells Fargo customers. They reported that the bank would likely lose 14% of their customers, with a further 30% stating that they would be shopping around for alternatives. Overall, cg42 estimated that the company would lose about $99 billion in deposits and $4 billion in revenue in subsequent 18 months.

It should have been a death blow for the company—the kind of thing that sends a stock plummeting. But in reality, nothing much happened.

From peak to trough, Wells Fargo stock dropped about 12%. The following month, it had recovered. By February of 2017, it was at all-time highs. Warren Buffett, the bank’s biggest investor, didn’t sell any shares.

In the first quarter of the year, rather than lose deposits, the company actually gained an additional $80 billion. A year on, revenues are up, net income is up, shares are up. Wells Fargo might not have participated in the recent financial stock rally that others have, but considering the extent of the scandal, it hasn’t done too bad. Everything seems to be fine.

So what happened?

What protected Wells Fargo was something Wall Street knows well: People don’t switch banks.

Despite all the public anger, most of the bank’s customers didn’t leave. They might have thought about it and even told people they would. But when it came down to it, there was just too much hassle involved.

A Consumer Reports survey conducted in 2012 found that:

19% of people want to switch their bank account, but less than half of those actually do it. Click To Tweet

It makes perfect sense when you think about. Changing a bank account means moving funds around, getting new credit cards, getting new PIN numbers, updating direct debits. It’s an organizational mess that most people would simply rather avoid, particularly when just one mistake could mean missing an important payment that could cause further pain down the line.

That ability to keep customers (even in the most severe circumstances) is an incredibly powerful asset for a business.

Back in 2007/2008, rating agencies not only failed in their primary function but became a major part of the systematic failure that caused the financial crisis. Yet Moody’s stock is today hovering around all-time highs. Comcast regularly takes the title of “America’s Most Hated Company”, but in the last five years, the stock has more than doubled.

The story of Equifax is yet to be written, but considering how important the service they provide is, I doubt that the not-so-small matter of 145.5 million hacked accounts will be the end of them.

A behind-the-scenes look at the Equifax PR department.


The fundamental ability to retain customers (also known as stickiness) is something we should always be on the lookout for as investors. Not only does it provide a great source of recurring revenue for businesses, but it allows them to survive some serious setbacks. Of course, if we can find this ‘stickiness’ in a great business rather than the bad eggs listed above, all the better.

Switching costs are a particularly compelling form of leverage for a business to build a truly sustainable competitive advantage. These costs can be created in more ways than you think too.

Think about coffee chains, for example. There’s no financial penalty for choosing to go to Dunkin’ Donuts over Starbucks. But if you’re already part of the Starbucks loyalty programme, making a permanent switch to Dunkin’ means you’ll lose your points.

Intuit (the makers of TurboTax) have an amazing business model. There are plenty of companies out there flogging tax software, but Intuit got there first. If you’re a small business owner, you may be tempted by a cheaper competitor. But moving all your old accounts to another platform is going to hugely disruptive to your business. So most people don’t bother, which means that Intuit can keep increasing prices.

Companies like Shopify manage to do this very well too. If someone’s entire e-commerce business is built on Shopify’s platform, it’s going to take a lot of time and money for them to change to another provider.

Even companies like Facebook do it, but in a different way. There’s no financial cost to switching to another social network, but we’d lose all those connections we’ve made over the years. We’d even have to re-upload all our photos!

It might seem small and insignificant, but it’s something that most people just won’t bother with.

Far too often when we think about investing, we focus on how companies are going to expand—how they’re going to attract new business. Just as important as this is finding companies that have an intrinsic ability to hold onto current customers, though.

Those businesses can then reinvest in themselves, expand to new markets, and develop new products… all the while relatively assured of this recurring revenue stream.

Find some sticky companies, and you'll likely have some great long-term winners. Click To Tweet


Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions in Facebook, Shopify, and Starbucks. 

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