It has been well established for nearly two decades now that it is a wise company that makes customer loyalty a priority. A 1% reduction in customer churn can translate into millions of dollars of additional sales for a company. Annual churn among wireless telephone providers alone is estimated to cost these organizations more than $10 billion annually!
Recognizing this, many companies have sophisticated systems in place to handle complaints more effectively, and service companies such as banks, cellular service providers, and fitness clubs even offer incentives and reduced prices to encourage potential defectors to stay.
A natural outgrowth of this focus on customer loyalty is that some leading companies are now taking a more proactive and, it would seem, enlightened approach to customer churn management by proactively recommending that customers switch to plans that better suit their usage.
If a cable customer pays for an expensive sports package, for example, but never watches those channels, the cable provider might recommend that the customer switch to a less expensive base cable package. Verizon, Vodafone, and AT&T, for example, recommend more appropriate plans to customers based on individual monthly usage.
In my consulting, I’ve seen plenty of evidence of how favorably such proactive attempts by companies to look out for customers’ best interests are received by customers. Because research also shows that customer overspending (or underuse) is a cause of customer churn, it wouldn’t take much to convince me that a proactive plan-of-attack like Verizon, Vodafone, and AT&T take should be pursued.
If you share my belief in the brilliance of this strategy – and your company may even be forward-thinking enough to be doing this – then I caution you not to give yourself a pat on the back too quickly.
Not So Fast – Proactive Churn Prevention Could Do More Harm than Good
You see, a soon-to-be-published study by Professors Eva Ascarza, Raghuram Iyengar, and Martin Schleicher of Columbia University, Wharton, and IAE Business School, respectively, have shown that a proactive churn prevention program like these companies have can actually increase the very churn it is intended to reduce. Yes, you read that right – be more proactive, get more churn!
In their paper, “The Perils of Proactive Churn Prevention Using Plan Recommendations: Evidence from a Field Experiment,” to be published in the Journal of Marketing Research in 2016, the researchers conducted a large scale experiment with a South American wireless communications provider. The research team randomly assigned 64,147 current customers to either a treatment (54,089) or a control (10,058) condition.
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All individuals in the experiment were customers of a pre-paid monthly plan in which the customer receives $40 of wireless credit at the beginning of the month and can buy additional credit if, at any point in the month, their balance reaches zero. All 64,147 customers in the experiment had monthly spending above a level at which they would have benefitted from purchasing a higher-level plan, such as a $50 or $60 monthly credit plan.
In the treatment condition, the firm called each customer to encourage them to switch to a higher-priced plan that would actually save them money. Customers in the control group were not contacted.
And here’s where the results are surprising. In the three months after the intervention, customers in the treatment group had higher average churn (10%) than those in the control condition (6%). It seems that the intervention – while well intended – had a detrimental effect on customer loyalty by breaking the inertia that keeps some customers with the firm even when the fit isn’t optimal.
Is There Any Place for a Proactive Churn Prevention Campaign?
Further analyses by the research team revealed that those customers most prone to churn based on their observable behavior before the intervention were more likely to be negatively affected by the encouragement to switch plans. Specifically, the research showed that the treatment had a more negative effect on churn among customers with higher usage variability, higher overage in usage compared to their plan, and a downward usage trend over time.
And that leads us to the silver lining in this otherwise gloomy story. The churn among customers who were both in the bottom 20% of usage variability and in the bottom 20% of use overage was actually modestly lower for the treatment group in comparison to the control group. And revenue actually went up. The opposite was found for every other combination of usage variability and overage!
The research makes it clear that firms should approach a campaign for proactive churn prevention with extreme care. The campaign could have the opposite effect as intended. However, the research also makes it clear that a campaign like this can reduce churn and increase revenues for a very select group of customers. Choose wisely!
Better yet, the research reveals the benefit – and really the critical importance – of experimentation in the modern marketing organization. This is the only way a company can really understand the true effects of even such customer-focused campaigns as trying to encourage customers to pay for the best plan for their usage. Absent such experimentation, many companies spend money on marketing endeavors that never provide a return or, even worse, actually detract from the bottom-line.