The big CRM challenge: understanding churn

Updated: Jan 5 2006, 05:30am hrs
One of the greatest concerns of CRM managers is customer churn. In the CRM space, involuntary churn is not of much consequence. It is very rare that a service provider in the CRM space would voluntarily cut off a customer. But voluntary churn is giving relationship managers sleepless nights.

Customer churn is a common way of referring to lost customers. The telecommunications industry started using the term customer churn a few years ago and the term has now become a standard measurement yardstick for the entire service industry. Simply put, the term refers to the percentage derived by dividing deactivated or lost customers by total customers. Typical churn rates for larger service companies fall in the low single digits, and a 2% change in churn rate can realistically translate into six months of additional service per customer. So measuring churn rate and the factors that lead to customer churn can be critical to the health of a company. If you are like most companies, you probably know what your churn rate is, but do you know which key factors are affecting customer churn and to what degree

An alarming factor in the last two years or so, is the spiraling churn rates. While churn was more or less static in the early stages of the service industry, it is growing by leaps and bounds now.

Customer churn rates are higher than ever, and businesses havent figured out how to stop the bleeding. New research points to the cause: although businesses say they are devoted to loyalty, their management systems and budgets dont back that up.

Loyalty experts agree it is more cost effective to retain customers than to acquire them, but few companies have strong programmes in place. And those that do may be focusing on the wrong things. From a recent survey, we learned that even though more than 70% of customers say poor service caused them to take their business elsewhere, business managers believe price to be a prime factor for defection. In a landscape of similar products and global competition, cutting down on defection-or churn-and building loyalty can be a significant way to grow your business. For example, churn rates for mobile telecommunications companies in Great Britain average between 25% and 35%, according to Customer Value Management expert Graham Hill. At the low end is Virgin Mobile, with about 14% of its customers leaving annually. At the high end is T-Mobile, with a 34.8% churn rate.

The cost to replace the departing customers is far much higher than earlier anticipated. Most business leaders believe in loyalty. Unfortunately, they may be investing their money in the wrong areas.

Continuous, rapid analysis is very useful when tied into the efforts of marketing, customer care, and other relevant departments. Analytical tools must allow marketers to have an interactive conversation with their data and allow a cross-functional team to review the latest data and design meaningful interactions with customers that are most at risk at any given time.

Better access to and understanding of customer data helps informed decision-making and helps build better customer relationships. Faster cycle times generate deeper understanding and improve time-to-market-both keys to success in an increasingly competitive marketplace. However, the cycle itself is not a sequential process, it includes cycles within cycles at each stage.

In the telecom industry in the US, the key to effectively combating number portability related churn is a flexible, interactive approach. People are constantly reacting to changes in circumstances, and the analytic environment has to be dynamic enough to keep up with these constant fluctuations and continuously feed the process of creating incremental customer value. Only then can service providers begin to truly grapple with the sizeable phenomenon of customer churn related to number portability.

The relationship between customer loyalty and profitable growth has been proven by industry leaders. Based on several studies, we have zeroed in on four major steps to improve loyalty and retention, which, if focused on appropriate customers, will improve profitability.

Understand drivers of loyalty and defection, from the customers point of view;

Develop a loyalty strategy focused on the right customers;

Systematically deliver what your customers value, and fix it quickly when you dont;

Implement measurement and reward systems to encourage customer-centric behaviour.

Following these steps will make your organisation more customer-centricwhat Customer Relationship Management s should be about. And it will enable your business to grow faster and earn more money. And thats the business benefit that CRM should deliver.

The author is chief executive officer, CustomerThink Corp