Why is Churn Prediction important?

M. Ahmed Tayib
22 Janurary 2021
5 Minutes Read

What is Churn?

The word “Churn” is mainly referred to as Customer Churn or User Churn. In terms of definition, churn happens when a customer or user discontinues purchasing the offered products and services by the company.

For instance, think of Netflix, if one customer unsubscribed from the service then that customer is considered as a churned customer. For other nonsubscription-based companies, the definition is not that explicit. For instance, take Walmart like retailers, they have no subscription to look for churn customers. Rather they can say like if a customer does not shop from Walmart for more than 3 months, that customer is considered as a churned customer. The definition can vary, however, the effects are there all the time.

For instance, think of Netflix, if one customer unsubscribed from the service then that customer is considered as a churned customer. For other nonsubscription-based companies, the definition is not that explicit. For instance, take Walmart like retailers, they have no subscription to look for churn customers. Rather they can say like if a customer does not shop from Walmart for more than 3 months, that customer is considered as a churned customer. The definition can vary, however, the effects are there all the time.

In a nutshell, it's all about losing the customer base for your products and services provided.

How Does it Effect?

Different companies will experience the effects differently. This depends on their version of churn definition and their business model.

  • One is for subscription-based products and services. They are generally more affected by the churn rate than other companies. Think of Netflix, if one customer unsubscribed from the service, Netflix will not be getting the revenue from that customer. This is more severe as the revenue was fixed and stable for upcoming months if the customer continued the subscription with Netflix. The effect is thus more direct and explicit as they will be missing a guaranteed revenue in the months to come.
  • Another type is more implicit. The effects are not directly observed but the effects are there nonetheless. For instance, a retailer like Walmart will experience the effect a little differently. Since there is no subscription to track directly, their churn term can be a little different. For the argument only, let's say they can define a customer churn if that customer does not shop from Walmart for more than 3 months. There is no stable periodic revenue like the subscription-based models, rather they will be missing out on the future sales revenue from those customers.

So the moral of the story is that no matter what type of company and what type of business model you have, churn will hurt anyone.

Although it's a trivial thing to mention, but hear me anyway. If the Churn Rate is higher than the New Customer Acquisition Rate then you are in big trouble.

Calculating Churn Rate

The churn rate will vary from industry to industry and company to company. So how do we calculate the churn rate? Well, the answer will again vary.

  • For subscription-based companies, it's pretty easy. Just find out how many customers unsubscribed. You can also calculate the lost revenue directly from that rate as well.
  • For other companies, it's more like an estimation. You can set a period of time to define a churn. For instance, if customers stop purchasing your products for more than 3 months you can consider them churn. The lost revenue is however much harder to calculate. As there is no fixed subscription fee, you can only estimate the average sales revenue from those customers that you will be missing out on.

Losing customers like this means losing a big chunk of the sales and revenue.

How to Reduce Churn Rate?

If you have read this far, then you know by now what is churn and how it can affect your company. Now you must be eager to know how to reduce the churn rate.

The most effective way to reduce churn over time is to engage and reach out to the right customers and retain them. You might say everyone engages with their customers and how come they can’t reduce the churn rate. Well here is the catch; engaging customers is not enough. Rather the most important factor is to engage the right customers, the customers who are about to become churn.

The right question should be; how do I know which customer will churn?

How do I know which customer will churn?

That’s where Churn Prediction comes in. If you can predict the churn likelihood of customers then you will have a clearer picture of the whole customer base. Simply engage the customers who are very likely to churn and try to retain them.

The engagement can vary according to the company policy, you may choose to provide them with huge promotions, coupons, discounts, offers, etc. Whatever is most suitable to your company and your products, and whatever is best suited for customer satisfaction.

If you can engage the right customers in that way, you will be able to retain them, maybe not all of them but most portion of them. We don't live in a perfect world and thus don't expect the churn rate to go to zero, that is very unlikely to happen, and also don't expect the churn rate to fall overnight. What will happen though, is that you will be reducing the churn rate over time and retaining the revenue that would have been lost otherwise.

To learn how to predict the churn customers and how to learn what behavior of the customers leads to churn, please tune in next week. In the next blog post, I will be explaining just that.

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Written By M. Ahmed Tayib
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