Managing Customers for Profit

1. Managing Customers for Profit V. Kumar Chapter – 9 Preventing Attrition of Customers Instructor’s Presentation Slides

2. Relevant Issues

3. Customer Attrition (churn) • Customer attrition, or churn, is the loss of customers • Customer attrition has become a critical concern for many industries such as telecommunication, retail banking, and insurance. • With increased competition, a customer has much more choices of products and services from a number of firms. • Coupled with increased choices for consumers, the firms are constantly trying to acquire high value customers from their competitors.

4. Case Study: Telecommunication Industry • A telecommunication firm offers the following services: local telephone, long distance telephone, wireless phone, and internet. • Under each of the above service categories, the firm offers a variety of features for the customers. (see next slide)

5. Telecommunication Firm Local Telephone Long distance Telephone Wireless phone Internet services Basic DSL (1.5 Mbps) Express DSL (3 Mbps) Sonic DSL (15 Mbps) Unlimited Nationwide International calling plan Single phone Family plan Wireless web Text messaging Caller ID Three-way calling Call waiting Case Study: Telecommunication Industry (cont’d) Figure 9.1: Services Offered by a Telecommunication Firm

6. Case Study: Telecommunication Industry (cont’d) • The firm has observed from the recent bills that Don’s number of long distance calls has dropped significantly. • A local cable operator is running a very attractive promotion for three services as a package – telephone, television, and internet. • The firm started losing some of its customers to the competitor. • It is wondering whether it should intervene to prevent attrition of its customers. “Who are likely to quit and when?”

7. Two Scenarios of Attrition A firm can intervene in non-contractual settings as well. By obtaining purchase frequency information, firms can model inter-purchase time (IPT). The IPT is then used as a benchmark to future purchases

8. Attrition’s Impact

9. Preventing Attrition

10. Predicting Churn There are two components to predicting the churn.

11. Customer 1 defects Company A and starts purchases from Company B Purchases by Customer 1 Purchases by Customer 2 Customer 2 disadopts firm’s products/services Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Purchases from Company A Purchases from Company B Lost-for-Good Treatment of Churn

12. Customer 1’s purchases are split between Company A and B. Purchases by Customer 1 Customer 2 purchases from 4 different firms, but Company B gets higher share from Customer 2. Purchases by Customer 2 2 1 3 Purchase Occasions 4 5 6 7 8 Purchases from Company A Purchases from Company B Purchases from Company C Purchases from Company D Always-a-Share Treatment of Churn

13. Popular Churn Models

14. Popular Churn Models

15. Propensity to Quit 1.0 0.8 0.6 0.4 0.2 0 C B A July 04 A S O N D J05 F M A M J July05 Time Customers B and C are likely to quit in the near future Intervention Strategy The firm is not at the risk of loosing Customer A. It is likely to lose Customers B and C if it does not intervene. The time of intervention depends on when their propensity to quit becomes a predetermined value (usually it can be taken as at least 0.5).

16. Is the Customer Worth Retaining? CLV is the Key

17. Intervention Strategy (cont’d)

18. End of Chapter 9