Loyalty Reality

“0.5% reduction in mobile subscriber churn rate can increase revenue by 74%” – No really, but don’t stop reading, let us talk realistically about customer loyalty, customer lifetime value and  effect of loyalty on your profit.

Let us take AT&T as an example. It has a current monthly churn rate of 1.17%, the lowest among top 3. Churn rate is the % of current subscribers leaving the service provider. This translates to 14% yearly churn rate. Conversely, AT&T’s customer loyalty is 86%. So lifetime of an average customer with AT&T is  1/14% = 7.14 years.

Let us assume all customers bring in same revenue for simplicity (even though this is wrong)  of $x/year. So customer lifetime value is 7.14x. Let us say AT&T spends $200 to acquire a customer and the monthly bill is $50. The Lifetime Value of the customer (ignoring PV calculation) is$4084.

If AT&T can reduce their monthly churn by 0.5% –  0.5% reduction in churn makes the churn rate 0.67%/month, 8.04%/year, 12.4 years, that is 5.26 years more than previous state and hence 74% increase in revenue. If only AT&T can decrease its monthly churn by 0.5%, it can increase its revenue by 74%.

QED?

Let us pick apart this spurious reasoning and sleight of hand:

  1. Anytime you increase average lifetime of customers you increase revenues proportionately. There is nothing magic here. So stating, ” increasing loyalty, when everything else like prices is held constant, increases revenue ” is self evident truth and not an insight.
  2. I said reduction of 0.5% monthly churn rate. In reality this is reduction from 1.17% to  0.67% – this is confusing two different percentage scales. In reality this is 43% reduction in monthly churn.
  3. What is it going to cost me to reduce churn by 43%? What is the new infrastructure investment needed? What is the opportunity cost of this investment? What is the incremental profit from this investment? Is this going to require “buying loyalty” with price cuts and promotions? Even if you gain or buy loyalty, is that stable and sustainable? If AT&T is going to spend money on this, will Verizon and Sprint stay still? Can the money be better spent in acquiring new customers?

Without answering these questions, it is pointless for me or any management guru to say to you to focus on customer loyalty because, “5% increase in customer retention (from 90% to 95%) will increase profit by 75%“.  It is irresponsible for a decision maker to accept these pseudo-facts without challenging them.