Customer Life Cycle and Customer Retention Management

Customer Life Cycle is typically has 3 phases –Acquisition, Growth and Retention. Customer Life Cycle

Customer Acquisition: Focus is targeting & reaching out to prospects, explaining them about the products and services and on-boarding the customers.
Customer Development/Build/Growth: In this phase organizations leverage the existing relationship for growing the engagement with newly acquired customers or existing customers. So, the focus is both on increasing level of engagement on the existing product or relationship (i.e. spend/balance build on credit card) and identifying customers’ needs & soliciting for a right product (i.e. cross sell a credit card to mortgage customers).

Customer Retention: The most valuable customers are the most sought after customers by the competitors. The organizations have to develop strategies to manage and retain the most valuable customers. Acquiring a new customer is 3-5 times more costly, but still organizations are finding difficult to retain their customers.
Customer Retention Management has few additional dimensions and answers the questions
Customer Retention Management

  • Define attrition: How to define attrition or disengagement or usage drop?
  • Model attrition: What are the significant drivers indicating characteristics of attrition or disengagement or usage drop?
  • Reasons of attrition: Why are customers attriting from the organization? Identifying reasons could be one of the challenging steps. Model variables are not the causes, they only explains the variance.
  • Retention Strategy: What offer construct can be given to the customers? Who should be targeted for retention and who can be left out? Retention offer not only incur marketing cost but also involve a margin forgo (additional reward points or interest on saving product or reduced interest on mortgage); so organizations have to be very careful in selecting right customers for retention campaigns.
  • Campaign Design and Execution: Setting up campaign measurement and execution framework to execute right interventions for retention. How do you set up right test & control group, so that the organization can measure success of a campaign and corrective actions can be taken? What channel or/and combination of channels to be used for targeting the customers?

 

Customer Attrition or Closure or Churn

Different terminology is used for closure of customer relationship with an organization. In banking it is typically called customer attrition. But in the telecom industry, closure of customer relationship is called customer churn. In the insurance industry, customer close a policy and buys policy from the competitors and this is sometime called as Switch and the analysis as Member Switcher Analysis. In a few other industries attrition is also called as Customer defection.
Attrition is typically measured as %
(Number of customers closed in a month)/ (Number of customers in the previous month)
Also note that quite a few times closure is on a product relationship instead of at a customer level. For example, a customer has closed credit card relationship but still holds a few other banking products with the bank.

Customer Disengagement

In a few customer relationship scenarios, the customers may not be closing the relationship but reducing their level of engagement. The reduction in level of engagement may be defined based on the scenarios. Some of the scenarios are as follow.
Spend Disengagement: Drop in spend level (on credit/debit card) for a customer is called spend disengagement. Defining drop can be tricky and it depends on various business factors and drivers. Example: if a customer drop his spend by over 50% then the customer is defined as disengaged customers.
Balance Attrition: In saving or transaction account, size of engagement is measured based on level of balances carried by the customers. Reduction in the level of balance is called Balance Attrition. Balance attrition can be measured and analyzed both at a portfolio level (across customers) and at a customer/account level.
Usage Drop: In telecom and some other industries, a customer may reduce usage (call volume in frequency or monetary amount) and based on level of drop, one can define usage drop indicators.

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4 thoughts on “Customer Life Cycle and Customer Retention Management

  1. Nice article. I am building a customer attrition model for a commercial banking client. I am having difficulty defining target variable - customer attrition. In the data set, i can have multiple records for a single customer. Suppose a customer holds multiple accounts (or products) so there would be multiple records for a customer. The question arises - Should i calculate attrition at customer level or multiple models for each products? I know it all depends on the objective of the study. Which way is the most accepted way that all other major banks also follow? How to measure balance attrition if i have performance window starts from Jan'2015 and ends with Jan'2016.

    • Hi Ujjwal, Apology for late reply. Yes, it depends on overall objective. But when focus is customer retention, we need to get one record per customer and define attrition as customer closing the relationship with the bank. Couple of things you need to check - typically customer closes the last one product and become customer level attrition or attrition of the relationship..So, you need to validate if this is not bias toward one product. Second, we need to check customers have decent overlap of products.. or holding multiple products..

      Performance Window: Period used for creating target variable. In balance attrition typically we consider 3 month performance window. Do not know why you are considering 12 months. I expectation will be that your model performance will be poor if you are using 12 month performance window in Balance Attrition.

      Happy to answer any further question or discuss over the phone

  2. The article is very helpful! I would require further help though.. I am trying to find out why customers are attriting from a known set of attriting customers. What are the parameters that one can study to identify the reasons for attrition? Any help would be appreciated.Thanks!

    • Thanks..Two ways to do

      Option 1: Compare attesting and non-attrition customers and check why differentiate between these two groups..
      Option 2: If you have complain or customer feedback, you can find reason of attrition..You could also look at series of activities before attrition event.

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