The Financial Case for Reducing Churn
November 19, 2016 – Ron Smouter
The rate at which a company loses customers, or “Customer Churn Rate”, is an area of increasing concern among telecommunications brands with subscription or recurring-billing business models. In particular, communications service providers in industries with high rates of market penetration (like cable TV, wireless, and broadband internet) are investing more heavily in customer retention due to the shrinking pool of available new consumers adopting technologies and services for the first time.
As new customer acquisition opportunities decline, the importance of retaining existing customers increases. However, with the advent of mass digital communication technologies, consumers are usually only one two clicks away from learning about a bigger, better deal being offered by a competitor, and so the development of effective retention strategies is becoming more challenging for brands in the communications sector.
Churn is all over the map. Comparing churn rates is a nearly pointless exercise, due to the variation in customer behaviour by region, industry, and over time. Although it is a global telecom phenomenon, North America has some of the most stable and reasonable churn statistics, while higher churn rates are often seen among Western European countries, and higher still in emerging markets such as India, Turkey, and Poland (Gartner, 2011). Churn rates are usually measured and expressed on a monthly basis, and then sometimes extrapolated out to an annual figure.
According to data published on Statista’s website, the 5 major US wireless carriers experienced monthly churn rates in 2014 ranging from 1.27% per month on the low side (Verizon, Q2 2014) to a high of 2.92% (Sprint, Q1 2014). Average monthly churn for the wireless carriers during this time was 2.1% per month.
Forbes reports that the Q2 2014 average monthly churn rate for US Pay-TV providers was 1.55%. Generally, North American telecommunications companies that are able to keep their annual churn rate below 20% on a consistent basis are considered to be managing churn effectively.
The cost of acquiring new customers in relation to the cost of keeping an existing customer is a popular topic of discussion. Because of the variances by industry, company, and calculation methods, it’s not realistic to offer up a definitive “it costs x times more to acquire a new customer than retain an existing one”, but a reasonable assumption would be to throw out some of the high and low claims (3X on the low side, and up to 30X on the high side) and go with the conclusion that a new customer acquisition will cost somewhere between 5X and 10X the cost of retaining a customer. A good survey and summary of statements compiled by the Chartered Institute of Marketing around the relative cost of acquiring vs. retaining is available here.
On the surface, it seems logical to assume that one new customer has to be recruited in order to replenish the lost revenue represented by one defecting customer.
But when you dig a little deeper, it turns out that the actual number of new customers required to replace the lost margin dollars of a single lost customer ranges from about 1.2 to over 2, due to the loading of telecom costs and the efficiencies of existing customers. Therefore, even as a bare minimum, a 1:1 ratio of new to departing customers is not sufficient to maintain historical margin levels.
The figures suggest that nearly 2 new customers must be acquired for each defection if there is to be an increase in profits. Clearly then, the path to growth and profitability runs through the telecom’s existing customer base.
Let’s put aside the relative costs of acquisition and retention for a moment. In absolute terms, high customer churn forces telecoms to spend heavily on new customer acquisition. Wooing a customer away from a competitor, which is the case in nearly every new acquisition these days, is an expensive proposition. Besides all the usual sales and marketing costs and channel commissions, new signups usually also include significant handset subsidies and plan pricing incentives. Escalating device subsidy amounts have become a real burden for the carriers, and necessitate the levying of highly unpopular early termination charges in order to recoup the unamortized handset “loans” that are offered to new subscribers. Because the Cost to Acquire a Customer (CAC) is a KPI that is calculated differently by providers and obviously one that companies prefer not to share externally, it’s difficult to determine a useful CAC benchmark, but figures that I’ve come across include a low of around $350 to a high of about $720 for wireless carriers. At those numbers, the new customer must contribute many months of revenue in order for the brand to earn a payback on the acquisition investment, and early attrition can often leave the provider in a net loss position on that subscriber.
From any angle, churn is expensive. There will always be churn, and even a basic understanding of human and consumer behaviour suggests there will always be a segment of your customer base that will churn in spite of your best retention efforts. But when you know as a telecom executive that your sales team is already minus 2% in customer growth before they make their first sale of the month, then it stands to reason that minimizing churn ought to be among the key strategic and financial planning processes for any company in the telecom industry. If your mandate is customer retention, be sure to check back here for future posts regarding innovative new concepts you may want to adopt in your war against churn.