BT4211

Data-Driven Marketing
Customer: Churn, Multi-Channel
Management

March 14, 2018 1

Customer Churn Management

 Customer churn
– Individual level
• Probability a customer leaves the firm in a given time
period
– Firm level
• Percentage of a firm’s customer base that leaves in a
given time period
• Churn = 1 – retention rate = 1 – r
• High customer churn is a concern for any industry
where a CLV model is applicable
– Service industries such as insurance, healthcare, banking,
telecoms, cable TV and Internet service providers, etc.
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Customer Churn Management

 Types of customer churn

– Voluntary churn
• Customer deciding to terminate the relationship with the
company
– Deliberate churn
» Customer is dissatisfied or has received a better competitive offer
– Incidental churn
» Customer cancels service because he or she no longer needs it or
has moved to a location where the firm does not operate

– Involuntary churn
• Company deciding to terminate the customer-firm
relationship, typically because of poor payment history
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Churn Rates in Industries

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Churn & Lifetime Duration

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Churn & Lifetime Value

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Factors of Customer Churn

 Customer satisfaction
– Service quality
– More satisfied customers are less likely to churn
– Fit-to-needs
– Low fit to needs leads to lower satisfaction and higher churn
– Meeting expectations
– Less churn if information used leads to more accurate expectations

 Switching costs
– Physical: inconvenience costs, penalties, rewards
– Psychological: inertia, brand pull, familiarity, relation
– Higher switching costs are associated with lower churn
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Factors of Customer Churn

 Customer characteristics
– Traits
– Risk takers, variety seekers, innovators, shopping mavens, and
deal prone consumers might be more likely to churn
– Income
– High income customers are less likely to churn

 Marketing efforts
– Marketing efforts, discount promotions and loyalty programs
are associated with lower churn

 Competition
– Increased within and between-category competition leads to
higher churn rates
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Predicting Customer Churn

 Data requirements for modeling

– Recency, frequency and monetary value
– Customer complaints and/or compliments
– Current prices paid
– Previous retention efforts
– Acquisition source
– Physical switching costs
– Psychographics or demographic measures
– Competitive offer information, if available
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Predicting Customer Churn

 Single future period models

– Predictors are available for one or more time
periods before the observed “churn period”
• Example
– Predictors might be measured for February and March, and
those data are used to predict whether customer churns in April
– Lemmens and Croux (2006)
• Logistic regression and decision tree models with
boosting and bagging techniques for predicting churn
• Mobile phone service customers
– How long a customer has owned his or her handset is the most
important predictor of churn
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Predicting Customer Churn

 Single future period models

– Neslin, et al. (2006a)
• Logistic regression and decision tree modeling
approaches predicted churn most accurately
• Mobile phone service data and customers
• 171 predictors including customer characteristics,
previous cell phone usage, and previous contact
variables
• Major lessons
– Variable selection, estimation/holdout samples, need to study
predictive modeling holistically rather than as a statistical
model are also important issues
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Predicting Customer Churn

 Time series models

– Predictors and churn measure are observed
simultaneously as they occur period to period
• Example
– Data from period t−1, t−2,…, are used to predict for period t or later
– Churn is observed over time rather than in a single future period
– Lu (2001)
• Hazard model with log-normal parametric baseline hazard
• Predictors
– Demographics, internal customer data (RFM, plan type, customer
segmentation code, ownership of other products, billing disputes,
late fee charges, etc.), and customer contact data
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Reducing Customer Churn

 Overview
– Approaches to reducing churn
• Untargeted
– Increase customer satisfaction or switching costs by improving
product, advertising, or using loyalty programs
• Targeted
– Identify customers most likely to churn and attempt to prevent
churning
– Reactive approach
– Proactive approach

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Reducing Customer Churn

 Overview
– Types of targeted approach
• Reactive churn management
– Wait for customer to identify him/herself as a likely churner,
usually when the customer calls to cancel service
» Perfect or near-perfect prediction, so can offer strong retention offers
» May involve high costs, and train customers to seek retention offers
• Proactive churn management
– Identifies customers most likely to churn in advance, and targets
an appropriate action or incentive to induce the customer to stay
» Imperfect prediction accuracy, so cannot spend much for offers
» May not need to spend as much, since customers may not be
churning quite soon
» May stimulate non-would-be churners to contemplate churning 17
Reducing Customer Churn
 Framework for proactive churn management

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Reducing Customer Churn

 Framework for proactive churn management

– Total profit for proactive churn management

incremental profit incremental cost

• ROI

• Maximum a firm can spend on retention incentive

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Reducing Customer Churn
 Framework for proactive churn management

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Reducing Customer Churn

 Implementing proactive churn management

– Identify potential churners
– Understand why they might churn
– Design contact/offer strategy for the churners
– Monitor and evaluate results
• Field test of treatment vs. control groups

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Reducing Customer Churn

 Implementing proactive churn management

– Monitor and evaluate results
• Field test of treatment vs. control groups
– Impact of proactive churn management programme

– Estimate churner rescue rate

– Estimate non-churner rescue rate

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Multi-Channel Customer
Management

 Emergence of multi-channel customer

management
– Design, deployment & evaluation of channels to
enhance customer value by acquisition & retention
– Channels
• E-commerce stores, mobile apps, call centers, sales forces,
catalogs, retail stores, interactive TVs, etc.
– Push factors
• Company, customer and competitive forces
– Pull factors
• Improvements in loyalty, sales growth and efficiency 23
Framework for Customer Channel
Choice

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Characteristics of Multi-Channel
Customers

 Multi-channel customers
– Are younger and have higher incomes
– Have higher purchase frequency, lifetime tenure,
contacts with the firm
– Have higher purchase volume
• Loyalty
– Multi-channel buying increases customer service and satisfaction
• Self-selection
– High volume customers have more complex needs and more
purchase occasions, so naturally use more channels
• Marketing
– Marketing exposures from more volume, channels & distributions 25
Characteristics of Multi-Channel
Customers

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Determinants of Channel Choice
 Channel attributes
– Verhoef, et al. (2007)
• Internet
• Store
• Catalog

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Determinants of Channel Choice

 Channel attributes

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Determinants of Channel Choice

 Channel attributes

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Models of Customer Channel
Migration

 Joint models for channel choice, purchase

frequency and order size
– Ansari, et al. (2008)
• Type-2 Tobit model of purchase frequency & order size
• Binary probit model of choice between catalog & Internet

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Models of Customer Channel
Migration

 Joint models for channel choice, purchase

frequency and order size
– Ansari, et al. (2008)

• Error terms
– Assumed to follow a multivariate normal distribution
– Correlated across equations
» Selectivity effects driven by unobserved variables are controlled for 32
Models of Customer Channel
Migration

 Joint models for channel choice, purchase

frequency and order size
– Ansari, et al. (2008)
• Findings
– Catalog choice exhibited strong inertia
– E-mails were associated with choosing the Internet, although with
decreasing returns to scale
– Several significant coefficients in purchase frequency model, but
few significant parameters in order size model
– Negative association between cumulative use of the Internet and
purchase incidence

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Models of Customer Channel
Migration

 Challenges in modeling channel migration

– Selectivity bias
• Extent of marketing received
– Unobserved variables, e.g., Internet orientation, that may be
correlated to marketing exposure and affect channel choice
• Channel choice or usage
– Customers may select channels due to unobserved factors,
e.g., customer involvement with the category, and these drive
both channel usage and total revenues or profits
• Methods to control for selectivity bias
– Simultaneous equations model
– Selection model
– Instrumental variables method
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Selection Model

 Heckman selection model

– Selection equation (e.g., whether to join FB page?)

– Outcome equation (e.g., how much to spend?)

• Assume BVN distribution & correlation between error terms

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Instrumental Variables

 Problem: E(u|X) ≠ 0

• Inconsistent parameter estimation in the presence of

endogenous regressors
 Instrument or instrumental variable z (IV)
– Changes in z are associated with changes in x but
do not lead to change in y (aside from indirect route
via x)

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Instrumental Variables

 Instrument or instrumental variable z (IV)

– z is uncorrelated with error u:
– z is correlated with regressor x:

 Examples of IVs (binary/discrete/continuous)

• For retail price
– Wholesale price, weather conditions for crops
• For unobserved individual ability
– Proximity to a college or university, month of birth
• For observed own-product attributes
– Rival’s or competitor’s product attributes 39