What is Churn Management?
Churn management is the art of identifying the valuable customers, who are likely to churn from (leave) a company, and initiating proactive measures to retain them.
In simple terms, churn management is about:
- Identifying who is going to leave or ‘churn’; and
- Offering incentives to keep the customer from churning.
However, some commentators suggest that businesses should judge customers by the opportunity to make money, rather than by the risk of losing money (discussed below).
Churn Management Metrics
Churn management involves the tracking of two important customer metrics:
- Churn Score: The calculation of customer behaviour; and
- Customer Value: This is calculated on the basis of customer’s desires and satisfaction.
What is a Churn Rate?
Churn rate (also termed the attrition rate), when applied to a customer base, refers to the proportion of contractual customers or subscribers who leave a supplier during a given time period.
What Issues Does a Churn Rate Identify?
Churn rate is a possible indicator one or more issues within a business, including:
- Customer dissatisfaction.
- Cheaper and/or better offers from competitors.
- More successful sales and/or marketing by the competition.
- Improper sales and/or advertising by the business.
- Reasons having to do with the customer life cycle.
- In a fitness business:
- Instructional issues;
- Lesson programming issues (i.e. timetable);
- Lesson content issues;
- Environmental (e.g. no indoor facilities in cold weather); and/or
- Seasonal (e.g. beach bodies!).
Why is Churn an Issue?
Churn is an issue because it has a direct impact on the profitability of the business.
According to a Chief Marketer Officer (CMO) Council study, ‘Business Gain From How You Retain’, conducted in late 2007 and early 2008 of more than 450 marketers, churn significantly impacts a business in a number of ways. Key findings from the study included:
- Reduced business performance through revenue loss.
- Reduced profitability.
- Greater marketing and re-acquisition costs.
- Over 50% of the global marketers studied reported that they had fair, little, or no knowledge of the customer demographic, behavioural, psychographic and transactional data. Just 6% said they had excellent knowledge of the customer.
- Only 50% of companies reported having a strategy for further penetrating or monetising key account relationships.
- Some 45% of companies rated the effectiveness of customer relationship management (CRM) systems as deficient or needing more work. Just 15% rated themselves extremely good or effective at integrating disparate customer data sources and repositories.
- More than 35% of respondents reported that the marketing department had primary responsibility for the customer analytics function but were not leveraging its value.
- Over 31% of those surveyed did no data mining at all, and 63% were only doing moderate levels of data mining for business intelligence and insight.
- The top six strategic applications of customer information by marketers were:
- Up-selling and cross-selling;
- Segmenting and targeting;
- Driving retention, loyalty and promotional programmes;
- Identifying new opportunities and unmet needs;
- Improving customer service; and
- Shaping personalised and customised communications.
What is a Churn Ratio?
Number of leavers / number of joiners = churn ratio
Anything over 1.0 = net leavers (i.e. loss of customers and revenue), anything under 1.0 = net gain.
For example, a ratio of 2.0 means there were twice as many leavers as joiners for the given period.
It is possible to overstate the churn rate, as when a consumer drops the service but then restarts it within the same year.
What is the Difference between Gross Churn and Net Churn?
A clear distinction needs to be made between:
- Gross churn: The total number of absolute disconnections; and
- Net churn: The overall loss of subscribers or members.
The difference between the two measures is the number of new subscribers or members that have joined during the same period.
Businesses may find that if they offer a loss-leader ‘introductory special’, it can lead to a higher churn rate and subscriber abuse, as some subscribers will sign on, let the service lapse, then sign on again to take continuous advantage of current specials. However, most businesses have limitations or conditions in offers to negate this practice.
What are the Different Types of Churn?
There are a number of categories of churn which present different levels of risk to the business, with examples including (Mahindra Comviva, 2018):
- Account Churn: Where the customer is completely lost and is no longer using or paying for the service.
- Product Churn: Where the customer has lowered their subscription profile but remains a paying user.
- Decreased Spend: Where the customer has reduced their spending without changing their subscription profile, like sending less emails through a transactional email service.
These categories can also be used to represent the lifecycle of a churning customer, depending on the business’s product and payment system.
General consensus, and research, suggests that decreased spend and/or decreased activity can be seen as an early indicator of a customer nearing a churning point.
What are the Churn Modelling Approaches in Use?
There are a variety of prediction methods used to identify customers who are likely to churn including (Lemmens & Gupta, 2013):
- With cross-sectional data available:
- Logistic regression.
- Discriminant analysis.
- Finite mixture.
- Hierarchical Bayes.
- Decision trees or classification and regression trees (CART).
- Neural nets.
- Bagging and stochastic gradient boosting.
- With longitudinal data available:
- Hazard models.
- Hidden Markov models.
What is the Link between Churn & New Products/Services?
If we look at the fitness industry, different players in the market (both major and minor) continue to offer new deals, products and services to customers to pry them away from their competitors.
Within the fitness industry we see customers being tied into contracts with the high-end ‘experience’ health clubs and then often churning at the end of these contracts. In contrast, low cost operators have removed tie-ins with the promise of entry convenience in the form of 24-hours gyms.
How to keep customers onboard for a further contracted period has become a huge motivator for increasing revenue (and therefore profit), as research has demonstrated that retaining existing customers is far cheaper than acquiring new ones (up to five times cheaper).
Churn Rates and the Bottom Line
“The bottom line: increasing customer retention rates by 5% increases profits by 25% to 95%.” (Reichheld & Schefter, 2000).
A report published by KPMG in 2014 highlighted that customer retention was the main driver of a company’s revenue (52%), with customer acquisition second (45%).
marketmetrics.com claims that the probability of selling to an existing customer is 60-70%, and only 5-20% to a new prospect.
Therefore, it makes sense to focus on churn, since keeping existing customers is profitable!
How Can You Minimise the Churn Rate?
The churn rate can be minimised in a variety of ways, including:
- Analyse why churn occurs:
- For example, through exit surveys, or preferably, a phone call.
- Engage with customers:
- For example, face-to-face, social media, websites, channel partners, call centres, etc.
- Educate the customer:
- For example, through blogs, webinars, video tutorials, product demos, etc.
- Identify who is at risk of leaving :
- Spotting those who are getting closer to the ‘at-risk’ group is easy.
- For example, in a fitness business, who has not turned up for a few sessions?
- A two-step strategy that involves:
- Ranking customers based on their estimated propensity to churn; and
- Then offering retention incentives to a subset of customers at the top of the churn ranking.
- Define who are your most valuable customers:
- Segmenting customers into groups of:
- Readiness to leave;, and
- Their likelihood to positively respond to your offer to stay.
- In this way the business can better predict customer churn.
- Segmenting customers into groups of:
- Offer incentives:
- Offer incentives, such as discounts and special offers, to those customers who are identified as likely to leave.
- However, ensure that the offered incentives are beneficial to the business – the costs of the retention campaign should not outweigh the profits to be gained from the customers retained.
- Target the right audience:
- The business’s retention strategy may be rendered useless if the ‘wrong’ audience is targeted.
- For example, if the business’s first interaction with the customer is about ‘free’ and ‘cheap’, then there is a risk that the business will attract consumers who are not looking for the value that the business offers – This type of customers is the most likely to leave.
- It is advisable to target those consumers who appreciate the long term value of products and services, and investing in good quality as an advantage.
- Provide a higher standard of service:
- Incompetent and rude staff and slow service are two big reasons for customers to leave (Oracle, 2011).
- Sometimes even an average customer experience, also known as ‘meh’ experience, can be a trigger for churn.
- Pay attention to complaints:
- Complaints can be likened to an iceberg – you will only see part of the problem – with approximately 4% of those could make a complaint making one.
- The vast majority of unhappy customers will not complain, with some simply leaving and never coming back.
- Research suggests that dissatisfied customers whose complaints are attended to are:
- More likely to remain loyal; and
- Even likely to become advocates.
- Offering longer-term contracts:
- This is where the fitness industry is in dichotomy.
- Some commentators suggest that, instead of the month-to-month contracts, businesses should try offering a longer subscription model. It is argued that the customer will have enough time to implement the product/experience the service and see the benefits of using it. And, once they see the benefits, they are more likely to commit to the product/service – so the theory goes.
- However, current growth in the fitness industry is driven by low cost operators who offer month-to-month contracts.
- Get your best people to deal with cancellations:
- Changing the mind of a customer who wants to leave may be difficult, but it is not impossible.
- However, the person dealing with the customers will have to call on their best sales skills to achieve good results in keeping them.
- Research by Achieve Global (2013) suggested that the majority of respondents thought that being heard and respected was more important than having their issue resolved.
- Being a good listener is important in ameliorating the effects of a customer’s leave decision.
- Express your competitive advantage(s):
- Do your customers know:
- How are you different to your competitors?
- How you stand out?
- What they will lose if they decide to leave?
- Does the business analyse what it is that it does:
- Differently; and/or
- More innovatively than its competitors.
- Do customers now about the above? If not, why not?
- Do your customers know:
- Creating barriers which discourage customers to change suppliers:
- This can be achieved through:
- Contractual binding periods;
- Use of proprietary technology; and
- Unique business models, etc.
- This can be achieved through:
- Loyalty programmes:
- Churn can be reduced through retention activities and incentives such as loyalty programmes.
What are the Best Practice Principles of Churn Management?
Jain and Surana (2018), in an article for McKinsey, suggest that a comprehensive, analytics-driven approach can reduce churn by as much as 15%, identifying the following four best practices to facilitate this:
- Understand your Customer and Their Journey:
- What core problem are you solving for them?
- Why does your product or service solve that problem best?
- How do they typically use your service?
- What are their existing pain points?
- The decision journey:
- Acquisition and onboarding;
- Upgrades cycles; and
- Eventual disconnect.
- The business should have (internal and external) data sets that include:
- Customer profiles;
- Product, offer, usage, and rebate history;
- Data from call centres, web logs, network experience;
- competitive pricing and promotions;
- Media spend;
- Retail footprint;
- Any other pertinent factors.
- Utilise the Best Analytical Methods you can:
- Amassing a large collection of data is, by itself, not very useful. The data is only as useful as the interpretation of that data.
- For example, the business could use an analytical technique called “feature discovery” to identify variables that contribute to customer churn, as well as their relative importance.
- Accurate interpretation of data can lead to changes in strategy or procedure, and therefore reductions in churn.
- Segment and Micro-segment your Customers:
- Think about why the business analyses the data it collects. What is the ethos behind it?
- Personalisation of products and services should be an important feature of the ethos of data analysis and subsequently churn management.
- Micro-segmentation can aid in focusing and targeting the customer base at a specific level, which can then be matched to a broad, but well-defined library of offers.
- These offers (with appropriate mechanisms for rapid launch) can then be measured against related campaigns to ascertain their effectiveness.
- This tailored approach can personalise the customer journey while keeping costs lower.
- Agile Process Management Techniques Bring this to Life:
- Process is important, and the ethos of the test-and-learn process manifests in two ways:
- Continually develop new offers or benefits for customers and deploy them to test their effectiveness; bringing an agile approach to product development.
- Have teams work with agile process driven methodologies to increase their speed and responsiveness while being able to document their actions in order to drive improvement.
- Making effective use of business process management techniques will enable the business to implement processes which can be optimised (and eventually automated) to varying degrees to improve the business’s operations and workflow.
- It may be prudent to employ agile working methods that divide these tasks into short phases with frequent reassessments and adjustments to ensure the best results.
- Process is important, and the ethos of the test-and-learn process manifests in two ways:
When implementing these best practice principles it is recommended that businesses set a mandate for the role of analytics through:
- Documenting standard operating procedures (SOPs) for analytics to be incorporated and used across teams. If the business builds analytics into its processes then, provided those are followed, the business will be mandating an appreciation of analytics across the organisation.
- Having a team who create and improve analytical approaches for other teams across the organisation to employ. This allows for other teams to focus on their tasks and on generating value for the business.
- Utilising teams with an array of skill-sets to increase knowledge spillover within the business. This should allow teams to be more agile and reduce bottlenecks caused by information being transferred from department to department.
Churn Score versus Opportunity Score
Some commentators suggest that businesses should judge customers by the opportunity to make money, rather than by the risk of losing money. This is where the opportunity score comes in.
In the traditional model of churn management a business would develop a score representing the churn of defection propensity of a customer. Lemmens and Gupta (2013) argue that businesses should move to a score that represents the targeting opportunity score of a customer. Lemmens and Gupta (2013) state that their model can boost profits by 115%.
The traditional method looks to offer incentives to the customer, whilst the new methods looks to maximise profits and reduce churn.
However, we have to remember that not all customers are equally important to the business.
“In particular, the benefits (costs) associated with an (in)correct evaluation of a customer’s churn propensity substantially varies across a firm’s customer base and depends on the potential profit leveraged by the decision of targeting or not a given customer.” (Lemmens & Gupta, 2013, p.4).
When running a retention campaign, a business needs to consider the net profitability of that campaign. For example, if the business offers an incentive to customers most likely to churn, they may not leave the company, but will it be profitable for the business? If it costs more to run the campaign than revenue generated then it has not been effective.
Through data collection and analysis, a business must try to work out the difference between:
- A customer who will leave regardless of the retention incentive used.
- A customer who will not leave due to a targeted retention incentive.
- A customer who has no intention of leaving, regardless of whether a retention incentive is used.
This means that targeting a future churner is financially more profitable than targeting a customer who has no intention to leave. However, we have to remember that not all customers spend the same amount of money with the business and, as a consequence, losing a high-value customer is financially more damaging to the business than losing a low-value customer. We must also note that not all targeted customers will successfully be retained, even after being correctly identified by the business as future churners and targeted with a retention incentive. Businesses should avoid trying to retain any and all customers.
Further, it is important to remember that a retention incentive should be offered in a timely manner. If a customer on a 12-month contract has not made the most of the products/services after 10 months, they are unlikely to invest/reinvest with only 2-months left on the contract.
What is Profit of Targeted Retention Actions?
Lemmens and Gupta (2013, p.5) suggest that at the:
- Customer level, the profit of targeting a given customer depends on four elements:
- The customer’s future churn behaviour in absence of a retention action;
- The value of the customer to the business;
- The probability that the customer, if targeted, will respond positively to the retention action and therefore not defect; and
- The cost of the retention action.
- Company level, the profit of the overall retention campaign also depends on the target size of the retention campaign.
What is the Customer Management Framework?
Churn management is one of eight elements within the customer management framework:
- Price elasticity analysis.
- Sales channel optimisation.
- New product/service development.
- Customer lifecycle management.
- Brand management.
- Churn management.
- Market forecasting.
- Needs assessment.
Simply put, churn management should not be viewed in isolation. It should be an integral part of the business process management techniques utilised by the business.
The churn management approaches, principles and issues outlined above seek to build an organisation which understands the customer as well as possible in order to be able to locate the key factors or identifiers for when a customer might churn.
With the collection and analysis of this data it will be significantly easier to ‘catch’ that customer in advance and attempt to take the necessary steps to retain them.
With this in mind, is your business doing an adequate or inadequate job of integrating and applying customer data to reduce customer defections and increase loyalty?
If you answered inadequate, unfortunately, this may result in lost opportunities and revenues from up-selling and cross-selling new products – as well as incurring higher costs to replace lost customers. Most importantly, the inability to leverage data to reduce customer turnover hinders a business’s long-term competitiveness and profitability.
Clarity of message can help customers understand and clearly see why it is better to stay you, than leave and use a product or service from a competitor.
Churn management is not magic, it just requires a little collection of data, analysis, segmentation, good customer service, and then offering the right incentive (if an incentive is required).
Achieve Global. (2013) Why Your Customers Stay or Stray: Insight From Global Customer Experience Research. Available from World Wide Web: http://www.customerservicegroup.com/pdf/CX_Report-Stay_or_Stray.pdf. [Accessed: 18 September, 2018].
Lemmens, A. & Gupta, S. (2013) Managing Churn to Maximise Profits. Available from World Wide Web: https://www.hbs.edu/faculty/Publication%20Files/14-020_3553a2f4-8c7b-44e6-9711-f75dd56f624e.pdf. [Accessed: 18 September, 2018].
Mahindra Comviva. (2018) What is Churn Management? Available from World Wide Web: http://blog.mahindracomviva.com/what-is-churn-management/. [Accessed: 18 September, 2018].
Jain, P. & Surana, K. (2018) Reducing Churn in Telecom through Advanced Analytics. Available from World Wide Web: https://www.mckinsey.com/industries/telecommunications/our-insights/reducing-churn-in-telecom-through-advanced-analytics. [Accessed: 18 September, 2108].
KPMG. (2014) 2014 Retail Industry Outlook Survey. Omnichannel Retailing: From Expectation to Execution. Available from World Wide Web: http://www.kpmginfo.com/industryoutlooksurveys/2014/pdfs/289583_Retail_Industry_Reportv11WEB.pdf. [Accessed: 18 September, 2018].
Oracle. (2011) 2011 Customer Experience Impact Report: Getting to the Heart of the Consumer and Brand Relationship. Available from World Wide Web: http://www.oracle.com/us/products/applications/cust-exp-impact-report-epss-1560493.pdf. [Accessed: 18 September, 2018].
Reichheld, F.F. & Schefter, P. (2000) The Economics of E-Loyalty. Available from World Wide Web: https://hbswk.hbs.edu/archive/the-economics-of-e-loyalty. [Accessed: 18 September, 2018].