Being able to correctly identify customers who are likely to leave your business is one of the key metrics of any business.
Managing churn is extremely important for so many businesses. There is of course the very obvious fact that the cost of retaining an existing customer is far less than acquiring a new one. The ratio will vary from business to business, for most businesses it will cost 5 to 10 times more to acquire a new customer than to retain an existing customer (although we have come across figures as high as 30 times).
However, the impact of churn is even more fundamental than hinted at by those figures. Its impact on the bottom line can be bigger than market share, unit costs, scale and many other metrics, as profitability is directly related to customer tenure. And, due to its compound nature as churn rises the affect it has on a business can be absolutely debilitating.
So, why do so many companies omit one of the key predictors of churn?
Having worked with telecommunications and utility companies throughout the world I continue to be surprised that competitor pricing is not included as an input in to churn prediction. Is it that these companies think that their pricing is so confusing that customers can’t understand their pricing, so that they don’t deem it important at all? I doubt it.
I certainly agree that the telecommunications industry (aka as a confusopoly) was heading that way, but in recent years services like Skype and Viber have forced them to simplify their pricing. Pricing in utilities is starting to become more complex but is certainly still accessible to the layman albeit with a bit of patience. And, with the growing availability of extremely accurate and personalised comparison services pricing will at last become more transparent for the general public.
Variables ranging from the number of suspensions, proportion of certain call types, overdue payment counts, current bill amount, tenure, number of calls to customer service etc. are commonly used in the development of “state of the art” churn prediction models. However, over the last 20 years, I have yet to come across a company that was already using competitor pricing effectively as an input to their churn model.
I find this stunning when you consider that whilst service is important, price is equally if not more important. How long will you continue to stay with a company as the pricing gap between what you are paying and what you can pay with a competitor widens. You may not consider moving if you are paying an extra 5% more than what you could pay with a competitor but if that gap rises to 20% are you still willing to pay such a premium?
With such an obvious and statistically significant variable available to improve the power of our churn prediction capability I hope to see many more telcos and utilities including this fundamental driver in their churn prediction models. If you don’t, don’t be surprised when your competitors start to leave you behind.