The Wrong Way to Reduce Churn

Customer attrition plagues many businesses in the service industry, from telecom and cable TV providers to credit card companies to health clubs. The churn rate for mobile phone customers in Europe, for example, was recently estimated to be 21% to 38% a year. Efforts to prevent churn by helping new customers choose the best plan for them (with tools such as cost estimators, for instance) have proved largely futile, in part because of complex pricing menus that are hard to navigate even with assistance. Many people end up with plans that don’t meet their needs—they use more phone minutes than they’re allotted, say—and then they jump ship because of the mismatch. So firms have taken another tack: identifying customers who are at risk of defecting and suggesting other plans that would better serve them. On the face of it, such outreach should be a win-win: If your provider finds a way to save you money, why wouldn’t you accept the offer and stick around? Turns out it’s not that simple: Customers who are overspending and are pitched a better deal are actually much likelier to defect than overspenders who aren’t approached. Eva Ascarza, of Columbia Business School, and two colleagues reached this conclusion after conducting a field experiment with 65,000 customers of a South American wireless communications firm, all of whose records showed that they would benefit from monthly plans with more minutes. Some of the customers were encouraged to upgrade (as added incentive, they were offered a monetary credit); the rest were not contacted. Three months later, 10.0% of the customers who were approached had canceled their service, whereas only 6.4% of those in the control group had. Far from discouraging churn, the intervention significantly increased it. Why would such a customer-friendly move backfire? The researchers propose two explanations. First, many customers hang on to suboptimal plans purely out of inertia. Asking them to consider other options may dispel their inertia too much, leading them not only to explore their provider’s menu but to look at competitors as well. Second, highlighting people’s excess minutes may serve as a wake-up call, prompting customers to cancel by drawing attention to their overspending. How, then, should providers address the problem of defections? Ascarza’s team recommends more-finely-targeted marketing. By segmenting the wireless users according to various factors and reviewing the data to see how each segment had behaved, the researchers found some red flags. For example, people were more likely to cancel their service after the campaign if they had significantly exceeded their monthly allowance or if their usage was highly variable. Aiming offers at customers who have both modest minute overages and relatively steady usage can help companies ensure that their efforts don’t come back to haunt them. About the Research: “The Perils of Proactive Churn Prevention Using Plan Recommendations: Evidence from a Field Experiment,” by Eva Ascarza, Raghuram Iyengar, and Martin Schleicher

The Wrong Way to Reduce Churn

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