Increase profitability by predicting customer churn
Henrik Wahlström, Analyst at PBI
Customer churn is defined as the process of a customer ending its business with a specific brand, product or service. Churn predictors can include information such as customer behavior, demographics and perception of the company. Any of these variables individually or in conjunction can give an indication of when a customer is about to leave. The end-goal is to combine predictions with precise and prioritized actions to prevent customers from churning and thereby retain business. As has been said many times before, the cost of keeping an old customer is a fraction of the cost of gaining a new one.
Nowadays, customer-centric business practices are prioritized at many brands. Still customers leave constantly for multiple reasons. These reasons might seem minor from a business perspective, such as an individual bad experience, lack of listening to the customer or a minor product failure. Each customer has their individual story of why they left. Customer experience management is there to support capturing the experiences the customers perceive, but this is not enough when trying to predict and adverse churn on a larger scale.
Churn prediction is not only for B2C
B2C digital and retail businesses have expanded and grown to become experts at predicting customer churn. Their ability to manage operational business with data and algorithms is impressive. You have most likely come across one of their automated and optimized churn prediction processes without you even realizing it. That is why you as a subscriber can seemingly randomly receive promotions or be recommended new content.
For B2B companies with fewer large accounts, it is very important to understand the value and potential of each customer. Some customers are not worth keeping because they cost more to manage than the revenue, they bring in. Therefore, managers need to balance the efforts for retaining and letting go of customers. However, while preventing the customers from churning that are profitable now or are expected to be in the future is what all businesses want, it may feel merely like a pipe dream.
The potential value of predicting customer churn is huge
PBI has a long background working with industrial B2B and project business, and we have seen that in businesses that have continuous and recurring so-called lifecycle customer relationships, for example through operations and maintenance agreements, predicting customer churn is in fact also possible. In addition, simple math provides some perspective into the financial gains from successful churn prediction. Even small improvements in retention rates have great impact in the long run. As low as 1% customer retention improvement on a cumulative yearly basis sums up to significant gains. Likewise, the opportunity cost of gaining new customers to replace the churning ones is far higher than developing and monitoring customer churn predictions and taking actions on them.
We at PBI have seen increased interest in customer churn topics over the last year and therefore decided to write this piece. We see great potential for analyzing and predicting customer churn also in the b2b world. For more information about our experiences with customers please be in contact with us via our website contact details, LinkedIn, or Facebook!