Posted: 12/1997

Understand Churn or Die

Long distance industry veterans know customer churn is high,
especially for the largest carriers. But other industry segments
struggle with high churn as well, especially those that are
competitive. Cable television historically has had annual churn
in the 30 to 35 percent range, while U.S. wireless carriers see
30 percent churn. Is there any reason to think matters will be
different for providers of local telecom services? Or for
providers of bundled local and long distance?

Look at it this way: If you have 33 percent annual churn,
every three years you have to replace virtually 100 percent of
your current customer base. And it’s a lot more expensive to get
a new customer than it is to retain a current account. But churn
is a complex phenomena.

For starters, some churn is uncontrollable: people move out of
your service territory. This is not a problem for providers of
nationwide long distance, but it’s a potential headache for
virtually everybody else. Depending on the ubiquity of your
network’s coverage, uncontrollable churn might range from 10
percent to 20 percent of your total customer base.

"Real" churn–when a customer deserts you for
another provider–might range from 5 percent to 10 percent of
annual total churn. So where’s the rest of the mobility coming
from? Quite often, it’s coming from customers who upgrade or
downgrade their service. For a wireless carrier, churn can come
from customers who switch from analog to digital service or from
a low-usage to a higher-usage airtime plan.

So, some types of churn aren’t necessarily harmful. Moving
customers to a higher-consumption package is a good thing.
Disconnecting customers for fraudulent usage, bad debt or
business insolvency isn’t a bad thing, either.

But downgrades–when a customer drops a higher-priced package
for a lower-priced service–are an issue. So is "spin,"
when a customer substitutes one offering for another. Spin can be
costly because there’s overhead involved, and may involve
incentives of one type or another that slice revenue even when
the account is shifted.

The point: For the first time ever, virtually all carriers and
sales agents need to focus specifically on churn management, not
just on gross aquisitions. So important is this that some
carriers already have language and accounting categories to
describe the phenomenon. "Gross additions" is the total
number of "new" customers signed up in a period of
time. "Net additions" is what carriers have left after
accounting for the disconnects.

Signing and retaining the right customers at the right
price–not gross customer additions–is the new game.

Until next time,
Gary Kim
Editor