Managing churn to maximize profits: how firms can optimise their customer retention efforts

Not all customers are equally important

Dr Aurélie Lemmens says these traditional methods of trying to retain customers are flawed. The two steps are not set up to maximise bottom-line profit of the retention campaign because they ignore a simple but important fact: not all customers are equally important to the firm. She further explains: “They focus on the customer's churn risk, but not on the incremental profit the firm can make by targeting particular customers. Some customers are likely to leave but there is nothing the firm can do to retain them. In fact, even among the customers that can be retained, some are worth larger investments than others because they bring in more value to the firm than others.

“In contrast to prior approaches to churn management, our approach focuses on the return-on-investment – which we call profit lift – of the retention interventions. We demonstrate the benefits of using an approach that estimates the financial impact of a targeted marketing intervention. Our findings highlight the need for marketing academics and practitioners to pay attention to the choice of their objective (or loss) function, a feature that is often neglected in model estimation processes. This choice should match managers’ objectives.”
 

Consider all potential costs

For companies to have insight in this overall profitability, they should consider how much more customers would spend, and much longer they’ll remain as customers, if they get an incentive – a retention offer, compared to a situation where they would not get one. The researchers’ predictive model takes all these factors into account, and determines the optimal number of customers to target. Of course, companies don't want to lose customers, but targeting too many of them can be too expensive to be worthwhile.
 

A more profitable approach

The study demonstrates that optimising which customers and how many of them to target has a substantial impact on firms’ profits. Two field experiments found this approach to be significantly more profitable than the ones that firms currently use. In terms of impact, the authors speculate that a single retention campaign using their method could increase a firm’s overall profits by at least 4 per cent.

For firms, it is important to know that these extra profits come with few implementation costs. Lemmens and Gupta explain: "All we did was use the same incentive you would otherwise use. There was no change in anything except who you target, so there was no additional cost."

In general, this research provides broader implications beyond churn prevention for academics and firms. The approach fits many contexts, within and outside marketing, in fact wherever organisations seek to target a set of individuals with a specific intervention (e.g., catalogue mailing, charitable giving, and personalised medicine).