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Customer churn will erode a customer base and diminish profits. Companies routinely take steps to understand and combat customer defection to minimize its effect, but do companies accurately value the impact of a retained customer for the business?
Customer retention valuations should be forward thinking, not backwards looking, with churn considered lost potential revenue. Revenue lost to customer churn should be pursued as vigorously as revenue generated by newly acquired customers. The ARPU (Average Revenue per User) of each customer should be projected into the future and considered a potential income stream similar to Customer Lifetime Value for acquisition, not a cycle to cycle proposition.
The opportunity cost of not creating an effective long term plan for engagement should consider the compounding effect these saved revenues will have on the future.
If Company X creates a program that engages customers and keeps them from churning for six months at an ARPU of $50 per month, the future value of the customer, or income stream is now $300, not the ARPU of a single cycle. Just consider the compounding effect when you view the customer base as a whole rather than individuals in a set and how it will deliver meaningful results for your efforts.
If you save and retain one customer per cycle for five cycles with an ARPU of $50, most would think you “added” or “saved” $250 of revenue. Because of the compounding effect, here is the real value of that program:
Typically what gets lost in most conversations is the exponential effect business cycles have on the revenue generated and how it relates to overall profitability. Companies account for the number of business cycles a customer is expected to remain a customer in the Customer Lifetime Valuation, but increasing billing cycles past projected time frames increases value and has a direct effect on the Customer Lifetime Value.
We all know that most marketing departments’ primary focus and budget is customer acquisition, and there are tried and true methods for calculating a ROI for the acquisition efforts, but we sometimes struggle to justify the retention strategy and budgets due to a lack of clearly defined and uniform methods for calculating the ROI. Could we use the churn rate and additional business cycles beyond the CLV to create a better view of the ROI for a retention program?
If Company X has 100,000 customers and an average churn rate of 3% per cycle, but creates an effective engagement program that reduces the churn rate to 2.5%, Company X saves 500 churning customers the first month. At an ARPU of $50 per month that is $25,000 for month one. Using the table from above, in five business cycles Company X would generate an additional $375,000 in revenue.
If the average customer life cycle for a defined customer segment within Company X is six months and an effective retention program increases that life cycle to 10 months over a period of time, couldn’t Company X value the retention program by using the additional revenue from churning customers and the cost of the program and measure the ROI?
What is the difference between customer churn and customer retention?
They are two different terms whose purpose is to quantify the number of customers lost or retained as a percentage during a business cycle, but the impact of how they are stated speaks volumes about the corporate culture within an organization.
Let’s make the differentiation between customer churn and customer retention. Customer churn is the act of customer defection. Customer retention is the act of retaining customers. They are completely different terms and have completely different connotations. If Company X is always addressing customer churn, then it is always playing defense and will have a difficult time catching up to the objective. If the focus is on customer retention, which is an offensive approach and positive mind set, it will be much easier creating a corporate culture whose priority is customer facing. The terms may seem somewhat interchangeable on the surface, but it speaks volumes about the corporate culture and how the customer relationship is perceived.