Customer attrition
Encyclopedia
Customer attrition, also known as customer churn, customer turnover, or customer defection, is a business
term used to describe loss of clients or customers.
Bank
s, telephone service companies, Internet service providers, pay TV
companies, insurance
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
, EBITDA
, 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
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 Recurring Monthly Revenue (or RMR). In the 2000s, there are also a number of business intelligence
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
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
marketing programs on the subset of the customer base who are most vulnerable to churn.
such as banking and insurance use applications of predictive analytics
for churn modeling, because customer retention is an essential part of most financial services' business model
s. Other sectors have also discovered the power of predictive analytics, including retail
ing, telecommunications 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
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
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.
(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.
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 perceive 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. Their aim, to put at the service of marketing
departments and agencies –and of all business users- the necessary weapons to:
in order to reduce customer attrition . The International Customer Service Institute
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.
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
term used to describe loss of clients or customers.
Bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
s, telephone service companies, Internet service providers, pay TV
Pay TV
Pay television, premium television, or premium channels refers to subscription-based television services, usually provided by both analog and digital cable and satellite, but also increasingly via digital terrestrial and internet television...
companies, insurance
Insurance
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the...
firms, and alarm monitoring services, often use customer attrition analysis and customer attrition rates as one of their key business metrics
Metric (mathematics)
In mathematics, a metric or distance function is a function which defines a distance between elements of a set. A set with a metric is called a metric space. A metric induces a topology on a set but not all topologies can be generated by a metric...
(along with cash flow
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time. Measurement of cash flow can be used for calculating other parameters that give information on a company's value and situation.Cash flow...
, EBITDA
EBITDA
EBITDA is an acronym for earnings before interest, taxes, depreciation, and amortization. It is a non-GAAP metric that is measured exactly as stated. All interest, tax, depreciation and amortization entries in the income statement are reversed out from the bottom-line net income...
, 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
Customer service is the provision of service to customers before, during and after a purchase.According to Turban et al. , “Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer...
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 Recurring Monthly Revenue (or RMR). In the 2000s, there are also a number of business intelligence
Business intelligence
Business intelligence mainly refers to computer-based techniques used in identifying, extracting, and analyzing business data, such as sales revenue by products and/or departments, or by associated costs and incomes....
software programs which can mine databases
Data mining
Data mining , a relatively young and interdisciplinary field of computer science is the process of discovering new patterns from large data sets involving methods at the intersection of artificial intelligence, machine learning, statistics and database systems...
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
Predictive analytics encompasses a variety of statistical techniques from modeling, machine learning, data mining and game theory that analyze current and historical facts to make predictions about future events....
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
Customer Retention is the activity that a selling organization undertakes in order to reduce customer defections. Successful customer retention starts with the first contact an organisation has with a customer and continues throughout the entire lifetime of a relationship...
marketing programs on the subset of the customer base who are most vulnerable to churn.
Industry applications
Financial servicesFinancial services
Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies,...
such as banking and insurance use applications of predictive analytics
Predictive analytics
Predictive analytics encompasses a variety of statistical techniques from modeling, machine learning, data mining and game theory that analyze current and historical facts to make predictions about future events....
for churn modeling, because customer retention is an essential part of most financial services' business model
Business model
A business model describes the rationale of how an organization creates, delivers, and captures value...
s. Other sectors have also discovered the power of predictive analytics, including retail
Retail
Retail consists of the sale of physical goods or merchandise from a fixed location, such as a department store, boutique or kiosk, or by mail, in small or individual lots for direct consumption by the purchaser. Retailing may include subordinated services, such as delivery. Purchasers may be...
ing, telecommunications 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
Churn rate , in its broadest sense, is a measure of the number of individuals or items moving into or out of a collective over a specific period of time...
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
Online banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
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.
Research on customer attrition
Scholars have studied customer attrition at European financial services companies, and investigated the predictors of churn and how the use of customer relationship managementCustomer relationship management
Customer relationship management is a widely implemented strategy for managing a company’s interactions with customers, clients and sales prospects. It involves using technology to organize, automate, and synchronize business processes—principally sales activities, but also those for marketing,...
(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
Demography
Demography is the statistical study of human population. It can be a very general science that can be applied to any kind of dynamic human population, that is, one that changes over time or space...
, 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.
Predicting customer attrition
In the businessBusiness
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
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 perceive 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. Their aim, to put at the service of marketing
Marketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
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.
Tools and Applications to predict attrition
- Mineful, Data Analysis and Automated Actions to promote customer retention.
- Dynamic Data Web, 2.0 BI platform based on Data Mining and Predictive Analysis techniques.
Reducing customer attrition
There are organizations that have developed international standards regarding recognition and sharing of global best practice in customer serviceCustomer service
Customer service is the provision of service to customers before, during and after a purchase.According to Turban et al. , “Customer service is a series of activities designed to enhance the level of customer satisfaction – that is, the feeling that a product or service has met the customer...
in order to reduce customer attrition . The International Customer Service Institute
The International Customer Service Institute
The International Customer Service Institute is an international organisation enabling the recognition and sharing of global best practice in customer service...
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.
Additional 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), "CRM at a Pay-TV Company: Using Analytical Models to Reduce Customer Attrition by Targeted Marketing for Subscription Services," Expert Systems with Applications, 32 (2), 277-288.
- Prinzie Anita, Dirk Van den Poel (2005), “Incorporating sequential information into traditional classification models by using an element/position-sensitive SAM”, Decision Support Systems, 42 (2), 508-526.
- Pohl Stefan (2007), Zeitraumbezogene Stornomodellierung in der Kraftfahrtversicherung, Zeitschrift für Versicherungswesen (ZfV), 59 (11), 361-368.