Introduction: Customer Churn & The Leaky Tire Problem

Imagine that you have set out for a family picnic on a bright Sunday morning. The picnic spot is only a few miles away from your home, and your newly bought car should be able to get you there in no time. The only problem is that one of your tires keeps flattening out, causing you to stop the car every few minutes and pump it back to life. Frustrated, you soon realize that you have a leaky tire. The distance that you could have covered in less than twenty minutes now takes you two hours instead. It also costs you twice as much.

In the world of business, the leaky tire problem occurs when enterprises lose the lion’s share of their existing customers despite faring amazingly well in acquiring new customers. The loss of customers, members, and/or subscribers over a period of time, also known as the Customer Churn Rate, can make or break a business’s growth engine.

While there are several ways to calculate the Customer Churn Rate, here’s a simple way to understand it in terms of the numbers involved. If your company acquired 1000 customers and lost 52 customers in the last month, then your monthly Customer Churn Rate would be the 52 churned customers divided by the 1000 onboarded customers multiplied by 100%. This gives you a customer churn rate of (52/1000)*100% = 5.2%. To put things into perspective, one study suggests that reducing Customer Churn Rate by merely 5% can boost profitability by as much as 75%[1].

How Customer Churn Eats Away at Your Bottomline

Direct Losses

In the rush to onboard more and more new customers, it is easy to overlook the damaging effects of a high Churn Rate. But, how much impact can a difference of say 5% in the monthly Customer Churn Rate of two companies lead to? Let’s find out. Let’s take the example of two companies that have the same customer acquisition rate of 25%. Both companies start with 100 customers at the beginning of January 2018. Company A has a 5% monthly Churn Rate and Company B has a 10% monthly Churn Rate. On the face of it, a 5% difference seems negligible. But, due to the compounding effect of Customer Churn Rates over the next 3 years, Company A will have 59,066 customers at the end of 2020, whereas Company B will have 13,317 customers.

This implies a 4.6X difference in the number of customers between A and B at the end of the year 2020 – just because of a 5% difference in their monthly Customer Churn Rates! Thus, it is no surprise that companies in the U.S. lose $1.6 trillion[2] every year owing to Customer Churn, of which about $136.8 billion is lost per year due to avoidable consumer switching, and hence, it represents a gigantic unrealized opportunity for businesses.[3]

Indirect Losses

Apart from the direct loss of business due to Customer Churn, there are also indirect and perhaps more damaging effects that perpetuate over a period of time. These long-term dents in the business’s coffers are measured by the depletion in the value of two variables, namely the Customer Acquisition Cost (CAC) and the Customer Lifetime Value (CLV).

Customer Churn Results in Increased CAC

Simply put, Customer Acquisition Cost (CAC) refers to the cost of sales and marketing incurred by a business to acquire a single customer.

To understand the relationship between the CAC, the Profitability, and the Customer Churn Rate, let’s consider the following scenario. Let’s say that the cost to acquire a customer by your business, that is the CAC, is $100. Now, if a customer leaves in just 10 days, let’s assume that in those 10 days you are only able to earn a revenue of $25 from that customer, i.e. you recover only 25% of your CAC.

If this happens with only one customer or just a handful of customers, the impact on your bottom-line won’t be superlatively detrimental. But, if your churn rate rises to the extent that for the majority of your customers you are unable to recover the CAC because the vast majority of your customers are churning too quickly, then the more customers you acquire, the more money you lose. That is, the churning makes your customer acquisition cost expensive to the point that acquiring new customers only to lose them before recovering the CAC is no longer profitable for your business. So no matter how aggressively you acquire new customers, if they are churning in large numbers and at a rapid pace, you will end up depleting your bottom line.

Given that acquiring a new customer is 5 to 20 times[4] more expensive than retaining an existing customer, coupled with the fact that the probability of up-selling or cross-selling to an existing customer is 60-70% as compared to 5%-20% when selling to a new customer[5], the scales of profitability and revenue growth invariably tip in favor of businesses that have a robust retention strategy as opposed to businesses that only focus on aggressive customer acquisition.

Customer Churn Causes CLV to Plummet

The Customer Lifetime Value (CLV) of a customer refers to the total amount of revenue a customer generates for your business by spending on the products and/or services that you offer during their lifetime.

A simple way to look at the relationship between CLV is to break it into two parts – ‘Lifetime’ and ‘Value’. The ‘Value’ of each transaction with the customer is somewhat in the hands of the business, as it largely concerns the pricing aspect of the products and/or services being offered. However, how long or short the ‘Lifetime’ of a customer will be is essentially a question of how long the customer chooses to use the products and/or services of the business. From a business perspective, this directly translates to managing the Customer Churn Rate. The lower the Churn Rate, the higher the ‘Lifetime’ span, and the higher the ‘Value’ generated from sustained transactions between the customer and the business.

Image Source: https://chartio.com/blog/calculate-your-customer-lifetime-value-but-understand-its-limitations/

Here, Retention Rate is the percentage of your customers who don’t leave your business in a given period. It is simply the inverse of Churn Rate, i.e., if your Churn Rate is 10%, then your Retention Rate is 90%. The discount rate refers to your business’s cost of capital and is usually constant over a period of time.

Despite the fact that more than 76% of companies see CLV as an important concept for their organization, only 42% of companies are able to measure Customer Lifetime Value (CLV) accurately[6]. Goes without saying that keeping the Customer Churn Rate at bay is one of the most important ways of ensuring that your CLV does not get eroded over time. It is crucial to remember that when CLV diminishes beyond a threshold number, every new customer you onboard becomes a cost-driver and not a revenue-driver.

Factors Causing Customer Churn

While customers leaving a business might sound like a pretty straightforward problem to fix, in reality, it is a complex, multi-faceted, and often unrecognized and unpredictable predicament. Several studies have been conducted to probe into Customer Churn and all the factors that go into causing it. For example, a Customer Experience Impact Report by Oracle[7] found that incompetence and rudeness of staff and unbearably slow service were the top two reasons for customers choosing to discontinue the usage of a product or a service.

A research study conducted by Forum Corporation[8] found that 70% of churns happen due to poor customer service. Other reasons like quality and price of product or service, functionality, convenience, and change in the customers’ needs also contribute to churn but to a significantly lower extent. The results of the study are summarized in the image below.

While customer service emerges as a clear winner in most studies in terms of factors that cause Customer Churn, other reasons why customers might leave include poor fit between customer needs and products/services, incorrect segmentation and lack of personalization in marketing and communication efforts, wrong channel strategy, not ensuring continuous customer satisfaction and delight, better value proposition by competitors, and so on.

A Few Examples of High Churn Industries

It is important to consider that there is no fixed benchmark for a ‘good’ or ‘acceptable’ Churn Rate that cuts across all sectors. This is because not all industries and business models are equally susceptible to Churn. For example, credit card providers in the U.S. report customer churn rates of around 20%[9], while cellular network carriers in Europe typically have churn rates of between 20-38%[10]. The following chart uses data from a report by Statista[11] that summarizes the churn rates in various industries in the U.S. in 2018.

Example 1: Customer Churn Rate in Mobile Apps

Skyscraping churn rates are a wake-up call for many businesses, but it is more so for consumer mobile application developers. Here are a few numbers that paint a picture of the harsh reality:

On average, mobile apps lose 77% of their Daily Active Users (DAUs) within the first 3 days of install, then they lose 90% of DAUs within 30 days of install and 95% within 90 days of install.[12]

The above statistics have been shared in this article by Andrew Chen, a general partner at Andreessen Horowitz (a Silicon Valley venture capital firm), in collaboration with Ankit Jain, founder of Quettra (a mobile intelligence startup), based on the analysis of anonymized app usage data from over 125 Million mobile phones.

Based on these churn figures, they generated a retention curve for Android apps on average by mapping the number of DAUs with respect to the number of days since installing the app, as shown in the image below.

Image courtesy: https://andrewchen.co/new-data-shows-why-losing-80-of-your-mobile-users-is-normal-and-that-the-best-apps-do-much-better/

When they probed further, they found that managing churn rates well is indeed a key differentiating factor between the top-performing Android apps and the rest. The second image below, also borrowed from the same article, compares the retention curves across top 10, next 50, next 100, and next 5000 apps, thereby revealing that the top 10 apps are significantly better at keeping their Customer Churn Rates at bay as compared to others.

Image courtesy: https://andrewchen.co/new-data-shows-why-losing-80-of-your-mobile-users-is-normal-and-that-the-best-apps-do-much-better/

Example 2: Customer Churn Rate in Telecom Companies

According to a study, the top four U.S. telecom companies (AT&T, Verizon, T-Mobile, Sprint) have a Customer Churn Rate of about 1.9% annually and lose a whopping USD 65 Million every year due to churn.[13]

The acquisition cost for a new customer is USD 315, while the average customer lifetime is 52 months with a CLV of USD 1,782. Churn typically takes place at the 19-months-mark for customers, and the lost revenue from a churned customer is USD 1,117 on average.[14] Mobile operators in the U.S. spend 15-20%[15] of their revenues on average on the acquisition and retention of customers, but the industry continues to be one of the most churn-prone segments due to poor customer satisfaction (measured by the American Customer Satisfaction Index, or ACSI), as shown in the image below:

Source of data: https://www.theacsi.org/images/stories/images/nationalquarterlyscores/20nov-acsi_sector_scores.pdf

Reducing Customer Churn Rate with MECBot

As a frontrunner in data innovation through AI, Machine Learning, and Big Data Analytics, we have long been fascinated by the critical problem posed by customer churn to businesses across sectors. To tackle this challenge head-on, we have equipped our flagship unified data analytics product MECBot with the capabilities to detect, prevent, and reduce customer churn at scale for all kinds of businesses at scale and in real-time, as shown in the image below.

But, before we explore MECBot’s Churn Analytics capabilities in more detail, here’s a quick overview of MECBot for all those who are not familiar with our product.

About MECBot

MECBot is an augmented data management platform. Our award-winning product puts your business first by adopting the Business Domain Entity-Model approach without any dependency on the underlying databases or the structure of the data. With MECBot, a business model can be directly created by CXOs, Data Scientists, or Data Analysts, or all of them collaboratively. MECBot directly pulls the data from the configured sources and maps it to the specified Business Domain-Entity Model.

Ink is a unique feature of MECBot geared to clean, analyze, contextualize, and unify unstructured data with structured data in a seamless manner in real-time. Powered by a state-of-the-art Knowledge Base that is based on the concepts of Linked Data, MECBot Ink can understand various domains and semantics across industries by enhancing the existing Universal Knowledge Base with Domain and Tribal Knowledge.

In MECBot’s smart data grid or Knowledge Graph, data takes the back-seat, while relationships between the data are first-class citizens. Since graphs are highly versatile and flexible formal data structures, all the available data formats can be easily converted into graphs using standard tools. In MECBot, these tools are embedded into an automated functionality that underlies the data ingestion process and converts all ingested data instantly into graph format without any coding by the user.

MECBot allows you to create a flattened data view for the chosen entities without writing any complex SQL joins. Unlike other platforms where data needs to be teleported to various external tools for advanced analytics and modeling, MECBot’s AI, Machine Learning, and Deep Learning modules work out-of-the-box and allow you to build models like loyalty, churn, and segmentation within the platform without having to dump the file or moving the data around.

How MECBot Helps to Significantly Reduce Customer Churn Rates and Increase CLV

MECBot scientifically breaks down the problem of high customer churn in businesses into 4 crucial components:

1. Lack of intelligence – the inability to measure churn accurately, the inability to identify causes of churn, and excluding critical unstructured data from analysis and decision-making.

2. Lack of insights – the inability to identify customer segments that are at the highest risk of churning, the lack of data-driven understanding on customizing customer campaigns to reduce the propensity to churn.

3. Lack of proactiveness – the absence of personalized retention programs to keep existing customers delighted and reward their loyalty for increased longevity in doing business with them.

4. The missing link to the business bottom-line – the lack of initiatives that directly generate value for the customers and improved profitability and revenue for the business through smart and timely opportunities for up-selling and cross-selling.

Accordingly, MECBot provides an innovative and out-of-the-box feature by having the necessary algorithms to support the following functions to address the above problems

Accordingly, MECBot provides an innovative and out-of-the-box feature by having the necessary algorithms to support the following functions to address the above problems

• Estimate churn probability and rank customers using churn scores.

• Automatically adjust and update churn values in real-time.

• Rate and rank various factors causing customer churn like poor onboarding experience, unresolved issues, incompetence of customer-handling teams, better offer by competitors, poor product/service quality, and so on to identify the root cause of churn in your business.

• Identify proven, data-driven steps to drastically reduce the Customer Acquisition Cost (CAC) by lowering your churn rates proactively.

• Intelligently target both voluntary churn (e.g. a customer choosing to opt-out because she/he is dissatisfied) and involuntary churn (e.g. a subscription customer forgetting to pay the bill or not remembering to renew the contract).

• Capture customer’s socio-demographic profile, usage, and behavioral data, and all unstructured data in the form of reviews, interactions with customer service agents, emails and voice calls, and so on.

• Leverage micro-segmentation and customer 360o to know which marketing approach has the greatest impact on the retention of each customer segment.

• Receive early warnings on which campaigns are not effective in ensuring retention and what can be done to improve the same based on earlier success.

• Design outcome-driven campaigns optimizable for churn-reduction by orchestrating and performing all the necessary analytics on top of MECBot, like CLV analysis, assessment of churn-risk, NPS indexing and ranking, influencer analysis, and much more.

• Rank and score each customer based on their loyalty and value-generation ability.

• Automatically identify the next-best-step for each customer based on their loyalty rank and Net Promoter Score (NPS).

• Target loyal, high-value customers with premium retention offers.

1. CLV Maximization Through Customer Advocacy

• Proactively capture a higher share of your customers’ wallet by up-selling and cross-selling products and services to each customer segment that they will find the most useful and enticing.

• Correlate movement of customers and segments across pricing tiers and design offers that make the most sense to each group.

• Track, monitor and augment metrics like ARPU (Average Revenue Per User), ARR (Annual Recurring Revenue), MRR (Monthly Recurring Revenue), and RFMC (Recency, Frequency, Monetary, and Clumpiness) to improve your CLV.

Conclusion

To preserve and improve your business’s financial health, it is indispensable to manage and reduce Customer Churn Rates on a continuous basis, and MECBot is unrivaled when it comes to that. Need more reasons to choose MECBot? Here we go.

• Simplicity: Sets up the application with just a few clicks. Gives results from day one.

• Speed: Matches the pace of decision-making with the speed of the original data generation.

• Scale: Performs elastic scaling based on business needs with dynamic clustering.

• Security: Offers banking grade security and role-specific access to the platform.

MECBot saves more than 80% of pre-processing time & cost and delivers highly actionable insights to boost the ROI manifold. It is the only platform that puts the business first, not data. Its unique, built-in capabilities drastically reduce the burden on IT infrastructure and empower business decisions with powerful business intelligence in real-time through augmented data management.

Interested to know more about MECBot? Visit https://formcept.com/products/mecbot/. To know about the state-of-the-art technologies we use, check out our platform architecture here: https://formcept.com/products/mecbot/platform

Wish to take a deep dive into what MECBot can do for your business? Request a demo here: https://formcept.com/contact/

[1] Reference: https://clevertap.com/blog/churn-rate/

[2] Reference: https://newsroom.accenture.com/news/us-companies-losing-customers-as-consumers-demand-more-human-interaction-accenture-strategy-study-finds.htm

[4] Reference: https://www.invespcro.com/blog/customer-acquisition-retention/

[5] Reference: https://www.superoffice.com/blog/reduce-customer-churn/

[6] Reference: https://www.invespcro.com/blog/customer-acquisition-retention/

[7] Reference: http://www.oracle.com/us/products/applications/cust-exp-impact-report-epss-1560493.pdf

[8] Reference: https://www.superoffice.com/blog/reduce-customer-churn/

[9]Reference: http://www.forbes.com/sites/hbsworkingknowledge/2013/11/11/a-smarter-way-to-reduce-customer-churn/

[10] Reference: http://hbswk.hbs.edu/item/7350.html

[11] Reference: https://www.statista.com/statistics/816735/customer-churn-rate-by-industry-us/

[12] Reference: https://andrewchen.co/new-data-shows-why-losing-80-of-your-mobile-users-is-normal-and-that-the-best-apps-do-much-better/

[13] Reference: https://wp.nyu.edu/adityakapoor/2017/02/17/churn-in-the-telecom-industry-identifying-customers-likely-to-churn-and-how-to-retain-them/

[14] Reference: https://wp.nyu.edu/adityakapoor/2017/02/17/churn-in-the-telecom-industry-identifying-customers-likely-to-churn-and-how-to-retain-them/

[15] Reference:https://www.computerweekly.com/blog/The-Full-Spectrum/How-churn-is-breaking-the-telecoms-market-and-what-service-providers-can-do-about-it