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Customer attrition, also known as customer churn, customer turnover, or customer defection, is the loss of clients or customers.
Bank A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...
s, telephone service companies,
Internet service provider An Internet service provider (ISP) is an organization that provides services for accessing, using, or participating in the Internet. ISPs can be organized in various forms, such as commercial, community-owned, non-profit, or otherwise priva ...
s,
pay TV Pay television, also known as subscription television, premium television or, when referring to an individual service, a premium channel, refers to subscription-based television services, usually provided by multichannel television providers, b ...
companies,
insurance Insurance is a means of protection from financial loss in which, in exchange for a fee, a party agrees to compensate another party in the event of a certain loss, damage, or injury. It is a form of risk management, primarily used to hedge ...
firms, and alarm monitoring services, often use customer attrition analysis and customer attrition rates as one of their key business metrics (along with
cash flow A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...
,
EBITDA A company's earnings before interest, taxes, depreciation, and amortization (commonly abbreviated EBITDA, pronounced , , or ) is a measure of a company's profitability of the operating business only, thus before any effects of indebtedness, stat ...
, etc.) because the cost of retaining an existing customer is far less than acquiring a new one. Companies from these sectors often have
customer service Customer service is the assistance and advice provided by a company to those people who buy or use its products or services. Each industry requires different levels of customer service, but in the end, the idea of a well-performed service is that ...
branches which attempt to win back defecting clients, because recovered long-term customers can be worth much more to a company than newly recruited clients. Companies usually make a distinction between voluntary churn and involuntary churn. Voluntary churn occurs due to a decision by the customer to switch to another company or service provider, involuntary churn occurs due to circumstances such as a customer's relocation to a long-term care facility, death, or the relocation to a distant location. In most applications, involuntary reasons for churn are excluded from the analytical models. Analysts tend to concentrate on voluntary churn, because it typically occurs due to factors of the company-customer relationship which companies control, such as how billing interactions are handled or how after-sales help is provided. When companies are measuring their customer turnover, they typically make the distinction between gross attrition and net attrition. Gross attrition is the loss of existing customers and their associated recurring revenue for contracted goods or services during a particular period. Net attrition is gross attrition plus the addition or recruitment of similar customers at the original location. Financial institutions often track and measure attrition using a weighted calculation, called Monthly Recurring Revenue (or MRR). In the 2000s, there are also a number of
business intelligence Business intelligence (BI) comprises the strategies and technologies used by enterprises for the data analysis and management of business information. Common functions of business intelligence technologies include reporting, online analytical ...
software programs which can mine databases of customer information and analyze the factors that are associated with customer attrition, such as dissatisfaction with service or technical support, billing disputes, or a disagreement over company policies. More sophisticated
predictive analytics Predictive analytics encompasses a variety of statistical techniques from data mining, predictive modeling, and machine learning that analyze current and historical facts to make predictions about future or otherwise unknown events. In busine ...
software use churn prediction models that predict customer churn by assessing their propensity of risk to churn. Since these models generate a small prioritized list of potential defectors, they are effective at focusing
customer retention Customer retention refers to the ability of a company or product to retain its customers over some specified period. High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defe ...
marketing programs on the subset of the customer base who are most vulnerable to churn.


Retail services applications

Financial services Financial services are the economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, accountancy companies, ...
such as banking and insurance use applications of
predictive analytics Predictive analytics encompasses a variety of statistical techniques from data mining, predictive modeling, and machine learning that analyze current and historical facts to make predictions about future or otherwise unknown events. In busine ...
for churn modeling, because customer retention is an essential part of most financial services'
business model A business model describes how an organization creates, delivers, and captures value,''Business Model Generation'', Alexander Osterwalder, Yves Pigneur, Alan Smith, and 470 practitioners from 45 countries, self-published, 2010 in economic, soci ...
s. Other sectors have also discovered the power of predictive analytics, including
retail Retail is the sale of goods and Service (economics), services to consumers, in contrast to wholesaling, which is sale to business or institutional customers. A retailer purchases goods in large quantities from manufacturing, manufacturers, dire ...
ing,
telecommunications Telecommunication is the transmission of information by various types of technologies over wire, radio, optical, or other electromagnetic systems. It has its origin in the desire of humans for communication over a distance greater than that ...
and pay-TV operators. One of the main objectives of modeling customer churn is to determine the causal factors, so that the company can try to prevent the attrition from happening in the future. Some companies want to prevent their ''good'' customers from deteriorating (e.g., by falling behind in their payments) and becoming less profitable customers, so they introduced the notion of partial customer churn. Customer attrition merits special attention by mobile telecom service providers worldwide. This is due to the low barriers to switching to a competing service provider especially with the advent of Mobile Number Portability (MNP) in several countries. This allows customers to switch to another provider while preserving their phone numbers. While mature markets with high teledensity (phone market penetration) have
churn rate Churn rate (sometimes called attrition rate), in its broadest sense, is a measure of the number of individuals or items moving out of a collective group over a specific period. It is one of two primary factors that determine the steady-state level ...
s ranging from 1% to 2% per month, high growth developing markets such as India and China are experiencing churn rates between 3% to 4% per month. By deploying new technologies such churn prediction models coupled with effective retention programs, customer attrition could be better managed to stem the significant revenue loss from defecting customers. Customer attrition is a major concern for US and Canadian banks, because they have much higher churn rates than banks in Western Europe. US and Canadian banks with the lowest churn rates have achieved customer turnover rates as low as 12% per year, by using tactics such as free checking accounts,
online banking Online banking, also known as internet banking, web banking or home banking, is an electronic payment system that enables customers of a bank or other financial institution to conduct a range of financial transactions through the financial ins ...
and bill payment, and improved customer service. However, once banks can improve their churn rates by improving customer service, they can reach a point beyond which further customer service will not improve retention; other tactics or approaches need to be explored. Churn or Customer attrition is often used as an indicator of customer satisfaction. However the churn rate can be kept artificially low by making it difficult for the customers to resiliate their services. This can include ignoring resiliations requests, implementing lengthy and complicated resiliation procedures to follow through by an average consumer and various other barriers to resiliation. Thus, churn can improve while customer satisfaction deteriorates. This practice is short sighted and will backfire. However, it was shown to be common in telephone companies and among internet providers.


Research

Scholars have studied customer attrition at European financial services companies, and investigated the predictors of churn and how the use of
customer relationship management Customer relationship management (CRM) is a process in which a business or other organization administers its interactions with customers, typically using data analysis to study large amounts of information. CRM systems compile data from a r ...
(CRM) approaches can impact churn rates. Several studies combine several different types of predictors to develop a churn model. This model can take demographic characteristics, environmental changes, and other factors into account. Research on customer attrition data modeling may provide businesses with several tools for enhancing customer retention. Using data mining and software, one may apply statistical methods to develop nonlinear attrition causation models. One researcher notes that "...retaining existing customers is more profitable than acquiring new customers due primarily to savings on acquisition costs, the higher volume of service consumption, and customer referrals." The argument is that to build an "...effective customer retention program," managers have to come to an understanding of "...why customers leave" and "...identify the customers with high risk of leaving" by accurately predicting customer attrition.


Prediction

In the
business Business is the practice of making one's living or making money by producing or buying and selling products (such as goods and services). It is also "any activity or enterprise entered into for profit." Having a business name does not separ ...
context, "churn" refers both to customers' migration and to their loss of value. So, "churn rate" refers, on the one hand, to the percentage of customers who end their relation with the organization, or, on the other hand, to the customers who still receive their services, but not as much or not as often as they used to. Current organizations face therefore a huge challenge: to be able to anticipate to customers’ abandon in order to retain them on time, reducing this way costs and risks and gaining efficiency and competitivity. There are in the market advanced analytics tools and applications, especially designed to analyze in depth the enormous amount of data inside the organizations, and to make predictions based on the information obtained from analyzing and exploring those data. They aim to put at the service of
marketing Marketing is the process of exploring, creating, and delivering value to meet the needs of a target market in terms of goods and services; potentially including selection of a target audience; selection of certain attributes or themes to emph ...
departments and agencies –and of all business users- the necessary weapons to: * Detect soon which customers are about to abandon and to know them in depth, answering to questions such as: Who are they? or How do they behave? * Know the real value of the potential loss of those customers, with the aim of establishing priorities and distributing business efforts and resources efficiently, optimizing resources and maximizing the value of the current customers’ portfolio. * Put into practice personalized retention plans in order to reduce or avoid their migration, increasing the capability to react and anticipating to possible non-predicted fugues.


Reduction

There are organizations that have developed international standards regarding recognition and sharing of global best practice in
customer service Customer service is the assistance and advice provided by a company to those people who buy or use its products or services. Each industry requires different levels of customer service, but in the end, the idea of a well-performed service is that ...
in order to reduce customer attrition.
The International Customer Service Institute The International Customer Service Institute (TICSI) is an international partnership organisation to enable the recognition and sharing of global best practice in customer service. It was founded in 2005 operating out of London and Dubai and has ...
has developed The International Customer Service Standard to strategically align organizations so they focus on delivering excellence in customer service, whilst at the same time providing recognition of success through a 3rd Party registration scheme.


Management

Not all customer attrition is bad. For many firms, it is useful and desirable that unprofitable customers should churn away. This is known as customer divestment of unprofitable customers.Ka‐shing Woo, Henry K.Y. Fock, (2004) Retaining and divesting customers: an exploratory study of right customers, “at‐risk” right customers, and wrong customers. ''Journal of Services Marketing, 18'', 187-197. However, simply because a customer is unprofitable does not mean that the customer should be divested, because there are strategic reasons for retaining unprofitable customers.


See also

*
Churn rate Churn rate (sometimes called attrition rate), in its broadest sense, is a measure of the number of individuals or items moving out of a collective group over a specific period. It is one of two primary factors that determine the steady-state level ...
*
Customer retention Customer retention refers to the ability of a company or product to retain its customers over some specified period. High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defe ...
* Revenue stream * Product/market fit


References


Further reading

* Buckinx Wouter, Dirk Van den Poel (2005),
Customer Base Analysis: Partial Defection of Behaviorally-Loyal Clients in a Non-Contractual FMCG Retail Setting
, ''European Journal of Operational Research'', 164 (1), 252–268. * Burez Jonathan, Dirk Van den Poel (2006),

" ''Expert Systems with Applications'', 32 (2), 277–288. * Prinzie Anita, Dirk Van den Poel (2005), �

��, ''Decision Support Systems'', 42 (2), 508–526. * Pohl Stefan (2007), Zeitraumbezogene Stornomodellierung in der Kraftfahrtversicherung, Zeitschrift für Versicherungswesen (ZfV)'', 59 (11), 361–368. Business intelligence Business terms