7 - 2 - (2) Customer Retention (18-24).txt

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[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 compa
  [MUSIC]Alright, we are back and now, we are goingto talk about customer retention.And, I hope you know where I am going withthis.There is really two themes, I'm going tosee through all of these discussions.I'm going to begin by asking the sameexact question that I asked about customeracquisition.Which is, what metric do we use to guageand guide our retention activities?And so, once again, there's a very commonmetric out there.In fact, it goes by severaldifferent names.Some companies call it a retention rate.Some call it a turn rate, or an attritionrate.Let's just explain what it is, realquickly, although youprobably get the idea if you're notfamiliar 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 staywith us.So, what percent, of that srcinal chunkof customers, stayed with us?That's the retention rate.Of course, we can look at what percent ofcustomers left.And, that goes by different names, as Isaid.A churn rate, or an attrition rate.So either way, whether you look at the,the glass as half full, or half's that kind of metric that, that firmsuse to say,how good a job are we doing at keeping ourexisting customers?So, again, very common metric and here'smy view on it.Unlike CPA, cost peracquisition, which I view as a very badmetric.I see the retention rate, or the churnrate, as a pretty good metric.But, you have to be careful about how youlook at it,how you use it, and how you make decisionsbased on it.So, I'm going to start with a real worldexample.One of the things that I like to do, is Ilike to look atthe information that public companies putout there,about their retention rates or theirattrition rates.  What do they say,about how many of their customers stickaround?And, what implications does it have?How do they manage.Around the attrition rates.Instead of viewing it as just a nice toknow number.Let's understand, how we can, actually,use that information, to go all theway, to even coming up with a financialvalue of the entire customer base.So, so, here's the example that I'd liketo work with.The example comes from Vodafone, a bigcellphone operator, I'm sure many ofyou are familiar with.and, and they actually puts statements outthere to their investors tosay, here's our attrition rate, and here'show 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, onan annualized basis, as welook at it from one quarter to another, isaround 20%, okay?A little, a little bit lower,but around 20%.So, let's think for a second about whatthat means.Okay, so, if if we're losing around 20% ofour customers, at any given time.How long do we expect those customers tostay with us?Pretty simple math question, but let memake it even simpler.Suppose the attrition rate with 50%.Okay, suppose we're loosing half ourcustomers every period, God forbid.Then, how long is a typical customerstayingwith us.So, if our attrition rate is 50%, thena typical life time would be around, twoyears.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 5years.So, if we want to come up with, kind of, aquick anddirty evaluation, not just for a givencustomer, but for the entire customerbase.If our attrition rate is a little under20%, itmeans, the typical customer's with us a  little over 5 years.We can multiply that by the amount ofrevenue, per customer.Multiply that by the size of the customerbase, andboom, that's our customer equity, that'sthe value of the firm.At least, again, as a, as a first passapproximation.And, I don't want to I don't want tounderstate that.There's a lot of companies out there, thataredoing, exactly, that kind of calculation,tofigure out what their customers are worth.So, here's my question.What's wrong with this picture?And, that sounds like a very nicecalculation 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 seetheirattrition rate, for the customer, base asa whole.But, what is it that we celebratein the customer-centric world?You got it, we celebrate heterogeneity,right?We don't want to, just, see a singlenumber.We don't want to say what, what is theattrition ratelook like for an average customer,because, there is no average customer.We want to know how that attrition rate,how that attrition propensity variesacross the customers.So, here's what I want you to thinkabout, and this is a very, very importantquestion.How does, the attrition propensity variesacross the customers?Just imagine, if we can reach into themindof each and every customer, and pull outjust how.Churn prone, or not churn prone, they are.Okay, how likely they are to leave at, atany given time.And, we look at that, tho, those numbersacross the customer base.What will that distribution look like?Kay, will we tend to have a lot of verychurn-prone customers?Will we have a lot of customers, who tendto stick around for awhile?  Will it be kind of a nice, bell-shapednormal distribution?Who knows?Well I know, and you know.And, I think its a very importantquestion.So, let me show you what it looks like forVodafone.But, before I do, I want to emphasize toyou, thatthe, the figure you're about to see is,actually, very, very typical.This is the basic shape that we see, foralmost all businesses.Not just in telecommunications.Not just for a phone company that, thatprimarily operates in Europe.But for, pretty much, any company thatoperates on some kindof contractual sub, subscription basis,and here it what it looks like.Here is the celebration of heterogeneityfor Vodafone.So, don't ask me where the numbers comefrom, again, it comes from,these are numbers that Vodafone calculatedon their own.And, to their credit, shared with theirinvestors.And, they broke their customer base intothree groups.And, they found that these three groupsvaryin terms of their return, or attritionrates.They found that there's one real smallgroup, that has a very high attritionrate.Kay, so those are people who are very,verylikely to leave at, you know, the nextpossible opportunity.And then, there's this middle size, middleattritiongroup, and then, there's this largestgroup tothe left, that has a fairly low attritionrate.So, first thing I want to ask is, is thisgoodnews or bad news, for Votafone and formost companies.And the answer is.Yeah, it's pretty good news.It suggests that most of their companies,most of the customers tend tostick around for awhile and, and don'thave a propensity to leave right away.Now, the next question is, why is that?Why,

Asphaltene Eng

Jul 23, 2017
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