Chapter 32
Churn Rate

Part of marketing’s challenge is knowing how many customers they lose versus how many are retained since not all customers are loyal, profitable, or desirable.

Churn measures customer attrition expressed as percentage of customers a business loses over a specific period of time. Churn is calculated as follows:

Where

Cbt = customers at beginning of time period t

Cet = customers at end of time period t

Cat = customers at beginning of time period t

Churn affects companies everywhere, and rates vary, often dramatically, by sector. Mobile phone carriers in Europe have churn rates between 20%–38%. Wireless carriers in the United States could improve earnings by 9.9% if they reduced churn.ii A study in Asia showed that six countries in the region anticipated mobile phone churn rates of 24%, representing 169 million consumers who were forecasted to change carriers within eighteen months.iii

It is important that marketers learn why customers left so they can reduce churn in the future through revised marketing communication programs, improved product offerings, better pricing, and more effective customer targeting. Most businesses regularly face customer churn challenges, trying to develop strategies and programs that will minimize it. It is necessary to address churn since losing a customer is often expensive in time (amount of time invested to attract and retain a customer), resources (manpower deployed to service customers), and money (actual outlay of cash spent on customer development programs). Churn rates also impact customer lifetime value analysis (see Metric 35) since a higher churn rate indicates customers are not staying long with the company. This leads to higher costs since more money has to be invested to educate and attract new customers.

Churn is somewhat similar to retention (Metric 31), but there are subtle differences. Churn is calculated with former/lost customers only, while retention can be determined with former or existing customers. Churn research focuses on why they left, whereas retention focuses on how to maintain and increase loyalty. Furthermore, churn is subject to interpretation, blurring the differences even more with retention. Returning to the telecommunications example, different providers may use slightly different methodologies in calculating churn. When a customer moves from one geography to another, and consequently changes telephone numbers, yet remains with the same provider, the provider might count this move as churn. This phenomenon occurs regularly in the United States. Alternatively, when a customer’s service contract expires and that same customer selects a different plan with the same provider, this may also be counted as churn. In these two instances, the customer has remained with the provider, but individual circumstances have created the need to change their previous plan.

Marketers must be clear on their definition of churn, since it affects the kind of marketing programs designed to attract and retain customers in the future. A conservative definition of churn suggests that it pertains only to customers the company has lost to a competitor as opposed to another division or product within the same firm. This definition would lead the curious marketer to explore why the customer switched to a competitor, whether it is isolated or an indication of a larger, unsettling trend and, consequently, how to improve the situation for remaining and new customers. However, large companies (such as telecommunications) often “lose” customers to another division. Corporate marketers, with broad strategic responsibilities for marketing across the entire company, may view this as retention, since the customer remains with the company overall. But divisional and/or product line marketers may count this as churn and, therefore, concern themselves with how to reduce it in the future.

It stands to reason that whether a customer is lost to a direct competitor or to another division within the same firm, marketers can use this as an opportunity to improve their offerings and their running of the business.

Churn numbers typically come from one of two sources: reactive, or postcustomer departure, reports; and proactive, or precustomer departure, reports. Reactive reports are generated by any of several key areas in a company, depending on its size, complexity, and customer account practices. Sales, customer support, customer service, telemarketing, and even customer account managers in accounting may track this information. As it implies, reactive reports capture customer departures after a customer has contacted the company and indicated they are leaving. It is a more straightforward metric, although it can also be frustrating since it is usually much harder to convince an already lost customer to return. Proactive efforts attempt to predict which customers are likely to leave, allowing marketers the opportunity to target them with new programs and incentives designed to retain them and, thereby, reduce churn.

iBrian Rogers, How to Calculate Customer Churn and Revenue Churn. Evergage. Retrieved May 9, 2017 from http://www.evergage.com/blog/how-calculate-customer-churn-and-revenue-churn/;Churn Rate, Churn Rate 101. Retrieved May 9, 2017 from http://www.churn-rate.com/

iiAurelie Lemmens, Tilburg School of Economic and Management; Gupta Sunil, Harvard Business School. Managing Churn to Maximize Profits, September 2013. Retrieved May 9, 2017 from http://www.hbs.edu/faculty/Publication%20Files/14-020_3553a2f4-8c7b-44e6-9711-f75dd56f624e.pdf

iiiDentsu Media, To Stay or Go? Understanding Customer Churn Among Mobile Carriers in Asia, 2014. Retrieved May 9, 2017 from http://www.dentsumedia-network.com/dmwp/wp-content/uploads/2015/02/Dentsu_media_MoCTS2014.pdf