Customer Churn

What Is Churn? And Why Do We Fight It?

Graphics courtesy of PredicaOpens in new window A primary goal for any product or service is to grow by adding customers or users through marketing and sales. (This is true for both for-profit and nonprofit enterprises.) When customers leave, it counteracts the company’s growth and can even lead to contraction.

The word churn originally meant “to move about vigorously” (as in churning butter). In the business context, churn is now used as both a verb— “the customer is churning” or “the customer churned”—and as a noun— “the customer is a churn” or “make a report on last quarter’s churns.”

Voluntary and involuntary churns are two main categories of churners.

The former is tougher to identify in general. It occurs when a decision was made by the service user to terminate his/her service with the provider.

It costs more than five times as much to acquire a customer than to retain a customer. But, sadly, most service providers focus on acquisitions. To be successful, a service must also work to minimize churn. If churn is not addressed in an ongoing, proactive way, the product or service won’t reach its full potential.

Churn prevention through churn prediction is one of the methods to ensure customer loyaltyOpens in new window. An improvement of 5% in customer retentionOpens in new window leads to an increase of 25% to 85% in profits.

Many businesses with large customer bases, particularly subscriber-based businesses (like telecommunication companies, cable television companies but also banks and retail companies) monitor and manage their churn numbers very closely.

The metric tracked is typically known as the churn rate, which refers to the proportion of customers departing in a given period; and is expressed as a percentage. Basic calculation to express churn rate is relatively straightforward:

Customer retentionOpens in new window, i.e., keeping customers using a service and renewing their subscription (if there are subscriptions), is the opposite of churn.

Reducing churn is equivalent to increasing customer retentionOpens in new window, and the terms are interchangeable to a large extent. When a goal is stated as retaining more customers longer, then in addition to saving customers who are at risk of churning, there should also be a focus on keeping customers engaged.

Customer churn is an important issue for any company, and it is especially important in mature industries where the initial period of exponential growth has been left behind.

Churn (or retention, if we look at it from the opposite side) is one of the most important application of data mining. For introduction example, let us consider telco companies.

Telecommunication industry is volatile and rapidly growing, in terms of the market dynamicity and competition. Over the last decade, telecommunication industry witnessed rapid growth in service subscription.

By the beginning of year 2015, the number of cell phone customers has arrived at about 8 billion around the globe roughly same as total population. Therefore, the major problem faced by the telecom industry is retention of customersOpens in new window in order to maintain good revenue.

Also, it is broadly acknowledged that holding of existing customer is more valuable than acquiring new customer. As, finding a new customer is costly affair pertaining to certain factors like satisfaction of demands, loyalty with the service providers, and many more.