Marketers challenge: to reduce churn

Posted by: S.Suganya | Digital Marketing

Customer churn is calculated by the number of customers who leave your company during a given time period. When thinking of churn impact, the statistics by forrester research comes to mind: it costs 5 times more to acquire new customers than it does to keep the existing ones. To make the matters even more serious, the harvard business school report claims that on average, a 5% increase in customer retention rates results in 25% – 95% increase of profits. The same truths are revealed in a by kpmg, who found customer retention is the main driver of a company’s revenue. According to gartner, a staggering 80% of a company’s future revenue will come from just 20% of its existing customers. Meanwhile, marketing metrics claims that the probability of selling to an existing customer is 60-70%, and only 5-20% to a new prospect.

customer defection or churn is a widespread phenomenon that threatens firms across a variety of industries with dramatic financial consequences. A recent report estimated 20% annual churn rates for credit cards in the us, and 20%- 38% annual churn rate for mobile phone carriers in europe (bobbier 2013).to tackle this problem, companies are developing sophisticated churn management strategies. These strategies typically 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 . A report by the consulting company mckinsey estimated that reducing churn could increase earnings of a typical us wireless carrier by as much as 9.9% (braff, passmore, and simpson 2003).marketers assume that this strategy will maximize firm's profits by targeting customers who are most likely to churn. The challenge is the correct classification of churners and non-churners. The profit from targeting a customer depends on various factors such as a customer's propensity to churn, the spend or value and the probability of responding to retention offers, and finally the cost of these offers. Overall profit of the firm also depends on the number of customers the firm decides to target for its retention campaign.

Marketers challenge today

Not surprisingly top executives both in the us and uk indicate customer retention as their number one marketing priority and report higher retention budgets (forbes 2011). Companies spend huge amount to acquire customers. After this task marketers protect those investments by attempting to keep them happy, engaged, and increase their loyalty status. Companies often fail to take into account the complete value of the customers they are trying to retain. They focus only on a customer's likelihood to churn, but not on the overall profitability of that customer.. The major challenge today is identifying who should be targeted and work out the net profitability of the retention campaign.

Churn management strategies

Companies are beginning to use sophisticated churn management or retention campaigns. Such retention programs consist of targeting the customers identified as potential churners with special retention incentives (bolton, kannan, and bramlett 2000; ganesh, arnold, and reyn- olds 2000; shaffer and zhang 2002). These incentives take multiple forms, such as special offers, discounts, personalized (e-) mailing etc., with the common objective of increasing the targeted customers’ behavioral loyalty.

Identifying potential defectors to target is not an easy task. Traditionally companies have ranked customers based on the estimated likelihood that they will flee and then offering incentives to a core group of customers at the top of the churn ranking but this has shown flaws. If the marketers are offering an incentive to customers who are more likely to churn, they may not leave the company, but it will not be profitable and this is similar to adding water to a leaking bucket. The best strategy is to gain maximum profit from retaining customers, companies should consider not only the churn probability of customers, but also how much they spend, the likelihood that they will respond to a retention offer, and the cost of the offer itself.

The major task for the firm in today’s scenario is have a balance between increasing the target size to reduce the potential loss of money from defection and reducing the target size to trim the cost of the incentives themselves since the marketers don’t want to lose customers and of course targeting too many of them could become too expensive to be worthwhile. Neslin et al. (2006), identified that the profit of a retention action is heterogeneous across the customer base.

Every marketer should know that at the customer level, the profit of targeting a given individual depends on four elements: (i) the customer’s future churn behavior in absence of a retention action, (ii) the value of the customer to the firm, (iii) the probability that the customer, if targeted, will respond positively to the retention action and therefore not defect, and (iv) the cost of the retention action. At the company level, the profit of the overall retention campaign also depends on the target size of the retention campaign.

How to reduce customer churn

Analyze why churn occurs:

communicating with the customers does miracles in analyzing churn. It is essential to use all channels for that: phone, e-mail, website, and even social media. The valuable feedback on how well the marketers serve their customers either through a phone call, an e-mail or a survey and as simple as that.

Engage with customers:

The second thing that helps prevent churn is to engage customers with the product. Engagement can be achieved through providing ample and clear content about the key functional benefits of the product and offering regular news updates, such as announcements of deals, special offers or sales that are coming up.

Educating the customers:

Offer free trainings, webinars, video tutorials, and product demos – whatever it takes to make customers feel comfortable and informed. This means offering the training and demonstrating the full potential of the products and services, and ensure that customers are on board.

Knowing who is at risk:

Spotting those who are getting closer to the ‘at-risk’ group is easy. Find out which customers were not contacted for a while.

Special attention to the most valuable customers:

Valuable customers have to be taken extra care of because they bring in the biggest revenue. Another advisable tip is to offer incentives, such as discounts and special offers, to those customers who were identified as likely to defect. It’s better to target those who appreciate the long term value of products and see investing in good quality as an advantage

Immediate attention to complaints:

Research studies show that 96% of unhappy customers don’t complain, and 91% of those will simply leave and never come back. Dissatisfied customers whose complaints are attended to are more likely to remain loyal, and even become advocates, than other average customers.

Best people to deal with cancellations:

The your best, most vocal and convincing sales reps are to be identified and they should be given the task to talk to those who have decided to leave so as to prevent customer churn. The marketers can make use of their charisma and experience in dealing with difficult situations and dissatisfied customers.

Communicate the competitive advantage:

Competitive advantages are the glues that makes the customers stick with the products. Hence it is very essential for the company to do better or to re think what makes the products unique.

Conclusion

In today’s scenario it is essential to be proactive in order to prevent customer churn by creating the conditions in which customers would clearly see and make use of the benefits of the products that are being offered.. Keep in mind that 80% of a company’s future revenue comes from just 20% of its existing customers it is high time for the marketers to prevent churn. According to forum corporation research, “almost 70% of the identifiable reasons why customers left typical companies had nothing to do with the product. The prevailing reason for switching was poor quality of service.”

Finally keeping the customers is not magic. Communication with customers and involve them with the products, improving customer service levels and make sure that they see what the customers are gaining if they stay with the company , rather than moving away.

References

• Bobbier, tony (2013), “keeping the customer satisfied: the dynamics of customer de- fection, and the changing role of the loss adjuster,” cila report, Read More, accessed july 2013.
• Braff, adam, william j. Passmore, and michael simpson (2003), “going the distance with telecom customers,” mckinsey quarterly, november, 1-16.
• Bolton, ruth n., p.k. kannan and matthew d. Bramlett (2000), “implications of loyalty program membership and service experiences for customer retention and value,” journal of the academy of marketing science, 28, 95-108.
• Forbes (2011), “bringing 20/20 foresight to marketing: cmos seek a clearer picture of the customer,” forbes insights, 1-13.
• Ganesh, jaishankar, mark j. Arnold, and kristy e. Reynolds (2000), “understanding the customer base of service providers: an examination of the differences between switchers and stayers,” journal of marketing, 65, 65-87.
• Neslin, scott a., sunil gupta, wagner kamakura, junxiang lu, and charlotte h. Mason (2006), “defection detection: measuring and understanding the predictive accuracy of cus- tomer churn models,” journal of marketing research, 43 (2), 204-211.
• Shaffer, greg and john z. Zhang (2002), “competitive one-to-one promotions,” man agement science, 48, 1143-1160.
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