Notes

[MUSIC]
Alright, we are back and now, we are going
to talk about customer retention.
And, I hope you know where I am going with
this.
There is really two themes, I'm going to
see through all of these discussions.
I'm going to begin by asking the same
exact question that I asked about customer
acquisition.
Which is, what metric do we use to guage
and guide our retention activities?
And so, once again, there's a very common
metric out there.
In fact, it goes by several
different names.
Some companies call it a retention rate.
Some call it a turn rate, or an attrition
rate.
Let's just explain what it is, real
quickly, although you
probably get the idea if you're not
familiar with it already.
We look at all the customers we had, say,
at the beginning of the period.
We ask ourselves, how many of them stay
with us.
So, what percent, of that original chunk
of customers, stayed with us?
That's the retention rate.
Of course, we can look at what percent of
customers left.
And, that goes by different names, as I
said.
A churn rate, or an attrition rate.
So either way, whether you look at the,
the glass as half full, or half empty.
it's that kind of metric that, that firms
use to say,
how good a job are we doing at keeping our
existing customers?
So, again, very common metric and here's
my view on it.
Unlike CPA, cost per
acquisition, which I view as a very bad
metric.
I see the retention rate, or the churn
rate, as a pretty good metric.
But, you have to be careful about how you
look at it,
how you use it, and how you make decisions
based on it.
So, I'm going to start with a real world
example.
One of the things that I like to do, is I
like to look at
the information that public companies put
out there,
about their retention rates or their
attrition rates.
What do they say,
about how many of their customers stick
around?
And, what implications does it have?
How do they manage.
Around the attrition rates.
Instead of viewing it as just a nice to
know number.
Let's understand, how we can, actually,
use that information, to go all the
way, to even coming up with a financial
value of the entire customer base.
So, so, here's the example that I'd like
to work with.
The example comes from Vodafone, a big
cellphone operator, I'm sure many of
you are familiar with.
and, and they actually puts statements out
there to their investors to
say, here's our attrition rate, and here's
how it varies over time.
And so you can see the graphic right here.
And, and from a very, kind of, quick look.
It appears that their attrition rate, on
an annualized basis, as we
look at it from one quarter to another, is
around 20%, okay?
A little, a little bit lower,
but around 20%.
So, let's think for a second about what
that means.
Okay, so, if if we're losing around 20% of
our customers, at any given time.
How long do we expect those customers to
stay with us?
Pretty simple math question, but let me
make it even simpler.
Suppose the attrition rate with 50%.
Okay, suppose we're loosing half our
customers every period, God forbid.
Then, how long is a typical customer
staying
with us.
So, if our attrition rate is 50%, then
a typical life time would be around, two
years.
Right?
So, if the attrition rates's around 20%.
The typical lifetime is around 5 years.
It's a little bit less than 20%.
It'll be a little bit greater than 5
years.
So, if we want to come up with, kind of, a
quick and
dirty evaluation, not just for a given
customer, but for the entire customer
base.
If our attrition rate is a little under
20%, it
means, the typical customer's with us a
little over 5 years.
We can multiply that by the amount of
revenue, per customer.
Multiply that by the size of the customer
base, and
boom, that's our customer equity, that's
the value of the firm.
At least, again, as a, as a first pass
approximation.
And, I don't want to I don't want to
understate that.
There's a lot of companies out there, that
are
doing, exactly, that kind of calculation,
to
figure out what their customers are worth.
So, here's my question.
What's wrong with this picture?
And, that sounds like a very nice
calculation right?
It's great to see their attrition rate.
But, what's wrong with it?
What's missing?
What is it, that we really want to see?
I contend that it's not enough to see
their
attrition rate, for the customer, base as
a whole.
But, what is it that we celebrate
in the customer-centric world?
You got it, we celebrate heterogeneity,
right?
We don't want to, just, see a single
number.
We don't want to say what, what is the
attrition rate
look like for an average customer,
because, there is no average customer.
We want to know how that attrition rate,
how that attrition propensity varies
across the customers.
So, here's what I want you to think
about, and this is a very, very important
question.
How does, the attrition propensity varies
across the customers?
Just imagine, if we can reach into the
mind
of each and every customer, and pull out
just how.
Churn prone, or not churn prone, they are.
Okay, how likely they are to leave at, at
any given time.
And, we look at that, tho, those numbers
across the customer base.
What will that distribution look like?
Kay, will we tend to have a lot of very
churn-prone customers?
Will we have a lot of customers, who tend
to stick around for awhile?
Will it be kind of a nice, bell-shaped
normal distribution?
Who knows?
Well I know, and you know.
And, I think its a very important
question.
So, let me show you what it looks like for
Vodafone.
But, before I do, I want to emphasize to
you, that
the, the figure you're about to see is,
actually, very, very typical.
This is the basic shape that we see, for
almost all businesses.
Not just in telecommunications.
Not just for a phone company that, that
primarily operates in Europe.
But for, pretty much, any company that
operates on some kind
of contractual sub, subscription basis,
and here it what it looks like.
Here is the celebration of heterogeneity
for Vodafone.
So, don't ask me where the numbers come
from, again, it comes from,
these are numbers that Vodafone calculated
on their own.
And, to their credit, shared with their
investors.
And, they broke their customer base into
three groups.
And, they found that these three groups
vary
in terms of their return, or attrition
rates.
They found that there's one real small
group, that has a very high attrition
rate.
Kay, so those are people who are very,
very
likely to leave at, you know, the next
possible opportunity.
And then, there's this middle size, middle
attrition
group, and then, there's this largest
group to
the left, that has a fairly low attrition
rate.
So, first thing I want to ask is, is this
good
news or bad news, for Votafone and for
most companies.
And the answer is.
Yeah, it's pretty good news.
It suggests that most of their companies,
most of the customers tend to
stick around for awhile and, and don't
have a propensity to leave right away.
Now, the next question is, why is that?
Why,
I mean, again, it's great to know.
But, but, what is it about those
customers?
What words would be used to describe
the customers, with the fairly low
attrition rates?
What most companies, what most managers,
like to use, would be a word like, loyal.
Those customers are really loyal.
They love us.
They'll run through the gates of Hell to
stay with us!
Maybe.
That's probably true for some of the
customers.
But, what other words
could we use to describe them?
How about words like lazy, inertial,
indifferent?
Maybe, they just don't care very much.
They're not very involved with this
particular product or service.
They're working with the service provider,
and it doesn't really matter
enough to them, to decide whether to stay
or whether to go.
They just don't care very much.
Now, I don't know what the breakdown is
here.
We have this big bar to the left.
Some of them are loyal, some of them are
lazy.
I don't know.
And, for the purpose of this exercise, I
don't necessarily care.
But, I do want to emphasize, that when we
see all
of those customers, who tend to have a low
attrition rate.
It's not necessarily a reflection of great
marketing or
strong branding on our part, although it
might be.
It might be that a lot of customers just
don't care very much.
And so, let's, let's keep that in mind.
So,
here's my question, now that we
celebrating heterogeneity, what difference
does it make?
How are we going to use the information,
that you see
on this chart, in order to make a more
informed assessment.
Of what the customer base is worth.
So, let me make it a little bit easier for
you.
In addition to the graph, I'm just
going to look
carefully at the graph, and pick off the
various numbers.
You see this table over here, that shows
you both the size
of each of the three groups.
What percent of the customer base is
associated, with each of the three groups.
And the attrition rate okay, again, as we
see
the a high medium low risk of, of, of
churning.
So, let's do the math right now.
In fact, take a moment to think about how
you would take this information that's in
front of you.
And, combine it together in order to come
up with an overall value of the customer
base, what would you do?
Think about that.
Okay, let's talk about the calculation.