Mar 24, 2015

How to read customer churn in B2B

“Retaining a customer costs less than acquiring a new one" still holds true. Customer churn or attrition is perhaps the single most ignored metric in today's numbers-driven world.

In a metrics- and numbers-driven world, the final sales numbers are what matters today. If you have met your target, no one questions the approach behind the achievement. The process of “hunting" or getting a “new customer" is given importance over the initiative taken to retain a customer.

Customer churn or attrition is the turnover of customers in a given period of time. It is used to measure how much revenue you lose through customer cancellations and the number of users/accounts that stop using your product or services. Customer churn is generally calculated as a percentage. To give a basic illustration, if an organization with a customer base of 100 loses 15 customers in a particular time period but has added eight customers in the same time period, the net loss to the company is seven and thus the churn would be 7/100 or 7%.

There is a lot of literature about negative churn and how that should be the ultimate goal of any company. Negative churn is when the number of customers gained is greater than the number of customers lost. In the above illustration, if the same company with a customer base of 100 lost 15 customers but gained 25, this would constitute a net gain of 10 customers and result in a negative churn rate.

In a B2B context, the process of churn starts much before the total revenue from a customer becomes zero. Competitors could already have made inroads with a customer, and the process of “churn" could already have started.

It is imperative to note that it is not just the total revenue that is lost when customer attrition takes place; the total cost would kick in throughout the period of churn. This would be in the form of smaller amounts of revenue, which is how customers would test potential vendors, and the opportunity cost that is lost. The opportunity cost would be the loss in extra revenue that could have been accrued either through repeat sales or up-sell opportunities.

Monitoring customer churn is really important. A high amount of churn would definitely mean an underlying issue needs to be addressed immediately. There is a tendency to ignore churn when the target numbers are being met. Negative churn is especially dangerous if the customer attrition rate is high. In such a case, the underlying issue, which is resulting in customers moving to a competitor, is being ignored. There are several effects of customer churn: reduction in price premiums, decrease in profit levels, loss of referrals, and a rise in the cost of acquiring new customers.

With the help of data, analytics, and our process, we can predict which customers will churn in the immediate future to help take immediate steps to arrest the churn.

  • Understand the data that exists and gather this data. Once the data is in place, we slice and dice it to tease out patterns and present it in various definitions to better understand this attrition.
  • Develop a working hypothesis with the data that is presented and analyze the same to come up with reasons for customer attrition. The basic understanding is that any model that is built can only help an organization understand the numbers. While this would be indicative in terms of identifying trends, it will never be able to tell the underlying reasons for the numbers. The validation of the hypothesis is the key to knowing what needs to be done to arrest the churn.

Churn analysis is the first essential step toward implementing effective customer retention. It will help provide justification for appropriate investment in customer retention and target retention efforts toward high-value customers with a high risk of churn.

Author: Abhijit Nagendranath - Assistant Vice President, Genpact