Marketing and Retail Analytics

- Module 2

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Churn
• Churn is degradation of customer, in the form of discontinuing your service or products ,
or moving to a lower-value segment.

• In most cases, the impact on business is similar –negative impact on sales and
profitability

• Churn Analysis involves identifying those consumers who are most likely to discontinue
using your service or product
Churn Examples

• Cancelation of a subscription
• Closure of an account
• Non-renewal of a contract or service agreement
• Decision to shop at another store
• Use another service provider
Leaky Bucket Approach
• Historically, companies have focused primarily on customer acquisition to solve customer
retention problems.

“Get a lot of people through the door and we are bound to keep some.”
“Customers are leaving, let’s spend on acquiring more customers.”

• This is referred to as the Leaky Bucket approach.

Leaky Bucket Approach
• The problem with focusing solely on customer acquisition is that you’re filling a bucket
with a leak and hence, you’ll always be spending more and more on acquisition without
ever filling that bucket.

• The cost of keeping an existing customer is at least 5 times cheaper than the cost of
acquisition of a new customer. In addition, positive word-of-mouth from your existing
customers leads to cheap, almost free customer acquisition.

• Focusing on customer retention and expanding the revenues from your existing customers
by up-selling them is a much more profitable strategy for growth than spending just on
acquisition
Customer Churn Rate
Why to prevent Churn rate ?

• Customer churn reduces profitability through revenue loss

• Churn results in greater marketing and re-acquisition costs
• The probability of selling to an existing customer is a lot higher than to a new prospect
• Knowing the customer churn rate is helpful for calculating customer lifetime value
• It is a measure of the company’s health and long-term prospects
• It helps identify which customers and segments are the best fit for your product
Reducing Churn Rates Through Predictive Analytics
• Predictive churn modeling will achieve three goals :
– understand the key factors of attrition
– identify the customers most at risk of leaving
– provide targeted insights on which retention actions should be implemented

• Measure customer attrition using each customer's own individual purchase history to
determine when that customer has shown attrition.

• This approach means that each customer has their own definition of attrition based on
their own historical purchase patterns.
Churn Framework
Customer Lifetime Value
CLTV
• value a customer contributes to your business over the entire lifetime at your company

• prediction of the net profit attributed to the entire future relationship with a customer

• It is useful metric used by marketing managers especially at a time of acquiring a

customer

• The basic formula for calculating CLTV is:

(Average Order Value) x (Number of Repeat Sales) x (Average Retention Time)

• The longer a customer continues to purchase from a company, the greater their lifetime
value becomes.
Simple CLV Calculation
• For example, In a Health Club, customers pay Rs 1000 per month and the average time that a person
remains a customer in the club is 3 years.

• Lifetime value of each customer is:

Rs 1,000 per month x 12 months x 3 years = Rs 36,000.

• This means each customer is worth a lifetime value of Rs 36,000.

Simple CLV Example 2
• Customer lifetime value, is the average amount of money your customers will spend on
your business over the entire life of your relationship, minus any money you spent to
acquire that customer.

• You spend $5 in advertising to attract a customer. He or she buys an average of 7 pairs of

socks every year for 10 years. Your profit margin on each pair of socks is $10.

• profit per year from the customer is $70, which works out to $700 over the decade.

• Subtract the amount of money you spent to acquire the customer, which results in a net
customer lifetime value of $695.
The Traditional CLV Formula
• allows for fluctuations in customer revenue over time and each year is adjusted by a rate
of discount to account for inflation

Where GC  is yearly gross contribution per customer,

r is yearly retention rate,
d is yearly discount rate
Traditional CLV Example
• Average Customer Spend / month = $100
• Average Customer Lifespan = 12 months
• Margin = 15%
• Discount Rate = 10%
• Retention Rate = 60%

Average Gross Margin Per Customer Lifespan = Average Customer Lifespan X (Average Customer Spend X Profit
Margin)
GC = 12 * (100 * 0.15) = 12 * 15 = $180
CLTV = $180 * (0.60 / (1+ 0.1 – 0.6) = 180 * 1.2 = $216
Benefit of CLV
• Once we calculate CLTV we know how much the company can spend on paid advertising
such as Facebook ads, YouTube ads, Google Adwords etc. in order to acquire a new
customer

• Also retaining existing customers through email marketing, SMS marketing, social media
marketing, etc.
Market Basket Analysis
Association Rules Learning
• If-then rules-based unsupervised learning, to find an association/rule between different
objects

• The rule X -> Y, indicating that if you have all items in X then you are more likely to
have items in Y as well.

• X is the antecedent, Y is the consequent

• Example: Product recommendations, Product Bundling/Combo offers/Cross selling

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MBA
• Market Basket Analysis, an application of Association rules, is one of the key techniques
used by large retailers to uncover associations between items.

• It works by looking for combinations of items that occur together frequently in transactions,
which allows retailers to identify relationships between the items that people buy.

• Makes use of the concept of joint and conditional probability

• Based on Support, Confidence, Lift

 Total Transactions = 1000
 Cereals- 60
 Milk - 80
 Cereals and Milk - 45
 Support, Confidence and Lift

• Results of an actual analysis would look like this:

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Support
• Indication of how frequently the itemset appears in the dataset

• # of transactions with both X and Y divided by the total number of transactions

• Implies the popularity of the product or set of products in the transaction set

• Higher the support, more popular the product or product bundle

• Support (X and Y) = Freq(X and Y) / N

– 45/1000
Confidence
• Conditional probability that customer buy product A will also buy product B

• shows the % of transactions in which Y is bought with X

• Indication of how often the rule has found to be true

• Rule T-shirt => Trousers has a confidence of 3/4, which means 75% of the times a
customer buys a t-shirt, trousers are bought as well.

• Higher confidence is preferred

• Confidence = Freq (X and Y) / Freq (X)
– P(Y|X) = P(X and Y) / P(X)
– 45/60
Lift
• If someone buys product A, what % of chance of buying product B would increase

• The lift of a rule is the ratio of the observed support to that expected if X and Y were
independent

• Greater lift values indicate stronger associations

• Lift = Support(X and Y) / [Support(X) * Support(Y)]

– P(X)*P(Y) = P(X and Y)
– Lift = P(X and Y)/P(X)*P(Y)
– [45/1000]/[(60/1000)/(80/1000)]
Questions?