Anyone familiar with the Great Recession will understand the “damper effect” on customer retention and lifetime value of which recent MIT Sloan marketing research speaks. The paper provides advice and mathematical formulas to help marketers decide if customer retention efforts are worth the cost.
“Modeling Customer Lifetimes with Multiple Causes of Churn,” announced on Sept. 20 by the school, elaborates on how marketers can calculate controllable reasons for churn as well as those killjoys at the party—the uncontrollable reasons for churn. “Using this framework, we demonstrate that the impact of a firm’s efforts to reduce customer churn for controllable reasons is mitigated by the prevalence of uncontrollable ones, resulting in a ‘damper effect’ on the return from a firm’s retention marketing efforts.”
Authors Michael Braun, associate professor of management science at MIT Sloan School of Management, and David A. Schweidel, assistant professor of marketing at the University of Wisconsin at Madison, also saw the paper published online in the August issue of Marketing Science journal.
In the paper’s Sept. 20 announcement, Braun summarizes: “In aggregate, a company should not spend more on customer retention than the expected payback, in terms of cash flow.”
Other takeaways from the research include:
1. Formulas listed in the paper will help marketers calculate the risk of customer churn and determine which individual customers to target and when—in order to “delay churn.”
For instance, “If those reasons for churn that the firm can influence become more likely the longer that a customer has maintained service, the firm may see larger returns from retention marketing by taking actions later in customer relationships.”
2. Using data from a U.S.-based telecommunications service provider, researchers cited examples that fell within their framework. Controllable churn factors included price, dissatisfaction with service and dissatisfaction with products. Uncontrollable factors included moving from the service area and death/divorce/family issues. (While the Great Recession isn’t mentioned by name, it and customer job losses are implied by another reason for uncontrollable churn listed elsewhere in the paper: “Unexpected changes in economic circumstances.”)
Researchers placed company-initiated churn in a third category, “nonpay/abuse.”
Among the conclusions reached are: “In the presence of multiple causes of churn, the economic return on retention management activities depends on variation in customer characteristics and customer tenure with the firm, as well as the specific tactics that the firm chooses to deploy. … As the likelihood of churning due to each risk varies with a customer’s tenure, so too will the impact of marketing actions, suggesting that the firm’s retention strategy be dynamic.”
3. ” … Customers who are more susceptible to churning from a controllable risk may also be more susceptible to churning from an uncontrollable risk.”
4. “For a firm to maintain its market share, it will have to replace the customers it loses (regardless of the reason for which they churn) with new ones … The same activities that contribute to increased retention may also influence the acquisition process. Since marketing actions and service improvements can influence both the acquisition and retention processes simultaneously, firms should evaluate these processes jointly.”
5. “Because the reasons for which a customer is likely to churn may evolve as time elapsed since acquisition, an ‘optimal’ balance between acquisition and retention activities may depend on current customers’ tenures to date … Therefore, marketing efforts and improvements to service quality, for example, may play a larger role in the acquisition process than in the retention process.”