The importance of churn management
For every business, customer churn is one of the most important factors affecting revenue and growth, and this is why it must always remain at the top of the corporate agenda. Even if revenues are rising, churn rates can reveal an underlying decline in profit-per-customer – an essential measure of business productivity and marketing return-on-investment. There are numerous factors which may affect how the market develops and they are often interdependent: new technologies, innovative business models, changing expectations across generations, to name a few. During unstable periods, businesses can expect to contend with disruption to supply chains, panic buying by consumers or a reduced interest in non-essential goods and services. A lack of deep insight into the customer base, who is churning, and why, will be detrimental to customer retention and profitability in the longer-term.
The two tiers of churn
Churn tends to fall into two tiers. The first tier encompasses sectors providing essential products or services where consumers tend to have one exclusive (or at least one principal) relationship with a single supplier. Supermarkets, banks, insurers, utility companies, mobile phone providers and broadband providers fall into this category.
The second tier comprises sectors where consumers tend to have multiple suppliers (more discretionary spending), and which are typified by higher churn. These sectors experience overall customer churn rates in the 30-40% range, rising to 50-80% for newly-acquired customers. Purchases in this category might include clothing, holidays, a gym membership or a restaurant meal.
For these sectors where churn rates are high, investing in effective churn management has the potential to produce very significant return – more than for lower churn industries. Nevertheless, in lower-churn sectors, which should theoretically be experiencing stable churn rates, our research found that rates are going up – notably among supermarkets, motor insurance companies and gas providers – suggesting that these industries could also benefit from revisiting their churn management strategies.
Smart churn management
A smart churn management strategy is typically based on a high-functioning loyalty programme. Loyalty schemes which link customers to transactions provide a basic database to analyse purchasing and subsequently build a strategy around these data insights.
Smart marketers understand that the emphasis should be on rewarding and incentivising the most loyal (and valuable) customers, encouraging them to stay on, buy more and buy more frequently. In the real world, however, instead of rewarding loyal customers who have contributed to many years’ worth of profits, many marketing strategies actually pay greater attention to introductory incentives to bring new customers on board. This is even though many of these newly attracted customers are then likely to leave after benefiting from the offer.
Nurturing high-loyal high-value customer relationships makes a disproportionately positive and productive contribution to long-term business value. Though rewarding loyalty may demand a greater investment in intelligence and expertise, it provides a better and more sustainable return on investment than blanket introductory offers.
Monitoring the customer journey
Collating data from loyalty programmes also enables the identification of lookalike customers that could be encouraged to grow and move up into the high-loyal and high-value category, which is significantly more profitable in the long-term. Analysing data over time will reveal the stages that customers typically go through before becoming high-value high-loyal, as well as the typical profiles and behaviours of customers who have the greatest potential to occupy this category.
Many high-churn businesses still do not have an effective churn management strategy in place – a particularly dangerous position in these volatile times - especially if they do not have alternative means of capturing customer data or tracking transactions.
Measuring what matters
Smart businesses are also questioning whether they are measuring what is important. Many less expert marketing departments are in the habit of reporting metrics that do not truly demonstrate the return on marketing investment. Regular data monitoring can help businesses to see whether new and existing customers are behaving as expected, on the basis of a typical customer journey. If actions fall short of expectation, this is a trigger for marketers to implement remedial actions; on the other hand, if expectations are exceeded, this opportunity to accelerate or amplify the positive effects must not go unseized. Each marketing campaign must be tracked with a view to assessing the incremental revenue gained; that’s the only true measure of sustainable business uplift. Controlled experiments testing different variables are an efficient way of identifying where optimisation is possible.
Though the importance of rewarding loyal customers cannot be stressed enough, this is not to say that gaining new customers is without its own value. No company has customer churn rates of zero. However, there must be a smart approach where the ‘right’ customers (by definition, low-value low-loyal when they first come on board) are selected and fostered because they have the typical characteristics to become high-value-high-loyal.
Smart churn management is therefore an optimal combination of data collection and monitoring, rewarding the most loyal customers, and recognising potentially high-profit futures. The first priority must always be to hold on to those high-value high-loyal customers who tend to make a disproportionately high contribution to profits.
Any drop in this cohort spells future trouble for the business. A sound reward system will ensure that the ‘right’ customers stay on, even when times are hard.
Patrick Headley, group chief executive at Go Inspire Group.