Customer Attrition Models: Tips & How to Improve Churn 

attrition modeling

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When people say “customer attrition”, “customer churn,” “customer turnover,” “customer cancellation,” or “customer defection,” they mean the same thing every time: Customers who have already provided revenue to your business and could have provided more in the future but who decided they no longer need your services and took their business elsewhere. 

It sounds devastating, but it’s important to remember that this is a natural part of any business cycle. Every business has a churn rate because no customer stays forever — if for no other reason than the fact that no business lasts forever. Needs change. Clients go out of business. It happens. 

However, if you ignore the reasons why customers leave, you make a grave mistake. Your customer attrition rate represents the overall health and stability of your business and your ability to plan for the long term. If many customers leave at once, there’s likely a good reason. If you don’t address that reason, you’ll lose even more. 

Regular customer loss has incredible costs. It’s comparable to the hiring process. When you fill a new position, it’s cheaper and easier to promote an existing and trusted employee than market to, interview, test, and recruit from outside the company. 

In the same way, it costs less time and money to convince an existing customer to make another purchase than it does to convert a new prospect. 

As many contracts cover a long period, you’ll find that clients end contracts for good reasons. They’ve had time to consider and come to the conclusion that continued partnership is not in their best interests. 

We can help you predict these interests with expert attrition modeling, so you can address them and prevent additional revenue loss from the loss of your best customers. 

What are Customer Attrition Models? 

What do banks, telecommunications, internet service providers, insurance companies, and software-as-a-service (SaaS) providers all have in common? 

Each writes contracts to keep customers for set periods and create a reliable revenue stream during that period. When renewal time approaches, it’s critical to know who will stay and who will go to plan for future revenue and budgets. 

Sales models are well and good, but revenue flow from existing customers creates a revenue stream as large — or larger than — that provided by new customers. Existing customers are the business you can rely on, and if you don’t take steps to retain them, money will be lost. 

An attrition model built in the moment with current data isn’t enough. Modern business demands accurate predictions for the future, and a predictive attrition model ensures you can properly determine what and who you are going to lose — your attrition rate.

It also determines the value that each customer brings. Not every customer is one that you want to keep. For those worth retention, attrition models also help determine which marketing methods are most likely to retain them — and help you to apply them. 

Human beings can’t sift through all of the data modern businesses generate, let alone apply it. Predictive analytics use machine learning and AI analysis to make the impossible possible. They turn this information from a burden to a benefit and build a realistic and intuitive workflow that businesses can act upon.

Customer Attrition Model Workflow 

Attrition models begin with the most important step: prediction. In today’s market, companies can’t be reactive but must be proactive. By applying existing data and previous examples and experience, it’s much easier to predict which customers are most like those that have left — and are therefore at the highest risk of leaving. 

This analysis is easier said than done, thanks to the sheer volume of data. To determine the customer attrition rate, you must first gather and collate all retention and churn data into a single place.

Then, you must analyze it. We recommend an AI trained with machine learning rather than human analysis since this approach sorts the data faster and more accurately than any human. Leave the logistic regression math to the machines, and use it to make informed decisions to retain the customers with the highest churn risk.

If you don’t know who plans to leave, you can’t make an effort to make them stay. Once you identify these customers and their value, you can determine which marketing efforts might retain them. 

Demographic information like account age, previous responses to retention efforts, earlier purchases, prior surveys, feedback, and concerns are all valuable puzzle pieces to fit into the retention effort. Tailoring your retention efforts to these needs can turn a quick churn into a longtime customer — or drive them out the door. 

The elderly won’t respond well to text messages, and bulk buyers won’t care about tailored big-ticket items. Meet the customer’s needs at every step of the process, and they’re more likely to stay. 

With that being said, the customer is not always right. If a customer that plans to leave costs more than they spend, let them go.

Why Customer Attrition Is Critical to the Health of Your Business 

Not every customer is worth the time. Some spend less money than the amount it costs to keep their business or even lead-convert in the first place. 

Marketing and advertising dollars, labor hours spent on sales and service costs, data storage, and other administrative costs — remember that customers are expensive, and their loss can sometimes work in your favor. 

Take, for example, car insurance. To make a profit, insurers want to insure and retain as many safe, low-risk drivers as they can. These drivers pay their premiums every policy renewal period but don’t get into accidents that cost the company money. 

This disparity is why insurance companies raise rates after an accident, or if there are more accidents in your area — they’re recouping the losses they paid out on. 

But for many post-accident drivers, the raised cost of premiums is too high — or too insulting. Those customers cancel their policies and go elsewhere. This departure decreases insurance company income on a small scale since the company loses this revenue, but it improves overall business metrics. 

These customers, who are likely to cause another accident, are no longer the insurance company’s responsibility. They will not lose money on future claims — even better, the competition will. 

Attrition models are about far more than determining which customers will stay and which will go. No business should strive to keep all customers, but all businesses should strive to keep the right ones.

If you’re losing customers that you want to keep — like when an insurance company drives away its low-risk policyholders — it’s a sign that you are making the wrong decisions and driving away the customers who will continue to add value for months or years to come. 

When that happens, you not only lose their money but must also spend the money to replace them — and then hope the next customer will bring the same value. 

Let QBIX Analytics Build An Attrition Model For You

Cost of Customer Acquisition vs. Cost of Customer Retention 

It costs five times more to acquire a new customer than it does to convince an existing one to spend more money.

Sales are an important metric to measure growth and prepare for future expansion, but the money lies with retention. Customers who commit to the long term are customers you can rely on to spend money with you and cost you less at the same time. 

To convert a new customer, you market to them through your preferred method — and marketing is not cheap. Whether you prefer online advertisements, traditional print ads, TV and radio commercials, email campaigns, cold-calling, or word of mouth, marketing research, design, and implementation take time, and time is money. 

When converting a new customer, you must research your target audience, target them with tailored advertisements, deliver the information to them, answer their questions, help them open accounts and sign contracts, and ensure they have a pleasant and seamless experience from start to finish. 

They could leave at any moment and waste the time you invested. Time is money, and hours upon hours go into a single lead conversion. 

Compare this cost to an existing customer with an existing account and knowledge of your user experience. They decide to buy a product, skip all the hoops of authentication and account creation, choose a product, and buy. That’s all. 

Even better, because you already possess demographic information and purchasing behavior for your existing clients, you can leverage tailored advertising to target them and their future needs, thereby maximizing your marketing return on investment. 

When you anticipate the right needs, it’s a sign that your attrition models were a success. If customers feel valued by your predictions, deals, discounts, and offered services, they recognize that they are being rewarded for their loyalty and are more likely to stick around and tell others about the way you made them feel. 

The Importance of Customer Satisfaction and Loyalty 

Brand loyalty has power. Customers who stuck by your business in the long term provide free marketing when they spread the word. When their needs expand or you offer a similar service, their trust in you ensures they’ll come to you first. 

If your business doesn’t work to satisfy customers after the initial sale, then you lose every opportunity for a repeat purchase. Given that many customers stick with the same provider for years or decades, this loss of a customer can add up to incredible revenue losses. 

You are only as good as your most recent customer interaction. If you upset or disgust a client, they will go. And when they do, all of the time invested in a personal, loyal relationship is soiled, possibly forever. 

Even worse, the longer a customer has patronized your services, the more likely they are to share your perceived disrespect for their loyalty with others. Word of mouth is just as powerful in the negative as it is in the positive and grows more vicious the more spurned a customer feels. 

Ways to Maximize Lifetime Client Value 

An object in motion will stay in motion unless acted upon by an external force. Customers are no different. If satisfied with the existing service, they will buy again. 

They prefer not to change when they find something that works for them and are encouraged to not make the effort when rewarded with special discounts and other rewards programs that make them feel valued.

Even small incentives to stay have huge ROI and can even occasion organic word-of-mouth referrals that bring leads you could never have converted on your own.

Some decades-long customers even induct their children into their plans, and those children remain loyal because your service is the only one they’ve ever known. These legacy customers help build reliable revenue over multiple lifetimes. 

While SaaS firms market to business clients, not families, the point stands. If a client is loyal to you, your profits will expand as they continue to succeed. 

Predict Churn Today With QBIX Analytics 

Existing customers are an investment. If you can measure which customers are most likely to leave and make sure you can keep the right ones, you can grow your profits while minimizing churn. 

Taking those steps is daunting. Schedule a meeting with QBIX analytics today, so we can build attrition models that put your data to work and turn it from a burden into a benefit. 

Further Reading