Importance of Customer Retention
When a customer, user or subscriber terminates his or her relationship with a company, the customer is said to have churned. Customer churn represents not only lost revenue for a company but also represents additional customer acquisition expenses to replace the lost revenue stream with a new customer. Hence for every business that has a subscription based business model or is online, reducing customer churn and thereby improving customer retention is of paramount importance.
Challenges associated with Customer Retention
Typically, customer retention starts with predicting customer churn, and proactively designing appropriate market offers to keep customers happy (and thereby dissuading them from churning). Both of these, however, are easier said than done. Companies have struggled with these problems for decades.
- Churn Prediction: Churn prediction is done usually with the help of models – sometimes heuristic, and sometimes mathematical. Traditionally, linear logistic regression has been the model of choice. However, there are two problems here: First, linear logistic models have their limitations – they rely on data being normally distributed, they do not perform as well when there are categorical variables, and are usually susceptible to co-linearlity, non-linearlity, concurvity and similar data issues. Second, the whole approach relies of looking at past patterns in the data and predicting churn propensity. However, if the market (and hence the data pattern) evolves, the predictions may not be very accurate
- Market Offers: Assuming one is able to predict churn with reasonable confidence, there is still a question about which customers to retain and how. For instance, if a particular customer appears to be likely to churn, but is not a profitable customer, it may not make sense to retain them. But if a profitable and desirable customer shows a propensity to churn, then appropriate market offers are required to save them. These offers may be sent to the customer proactively, or may be used by the “Save Desk” when a customer calls to cancel their service
Management Foresight Solution
Management Foresight holistically addresses all issues related to customer retention and maximizes a company’s chances of retaining customers.
- Market analyses are required to discern changing market conditions and shifting data patterns. Trends in the market are analyzed to focus on the right aspects for analysis. For example, traditionally companies used customer satisfaction as a measure to gauge a customer’s churn propensity. However, in this day and age with a plethora of competing products and services, it is entirely possible that a customer may be satisfied, but just may not need the company’s product or service any more
- Gamma Analytics Predictive AnalysisTM is used to model churn likelihood. The proprietary analytical technique addresses all shortcomings inherent in other techniques used out there in the market e.g. non-normality, non-linearity, co-linearity, concurvity, categorical variables, and general interpretability of the model
- In the Management Foresight Customer Retention solution, a customer lifetime value analysis is used to determine which customers might be desirable and hence, targets for retention
- Sensitivity Analysis is performed based on recommendations from Gamma Analytics Predictive AnalysisTM to inform the design of appropriate market offers for various customer segments
- Finally, with the help of our agency partner, we can also create the necessary marketing programs and materials to implement a full-fledged customer retention program
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