Customer retention is central to the growth strategy of any business, but for those in particularly saturated markets — like mobile telephone carriers — where growth can only be achieved through poaching competitors’ clients while retaining your own, it is absolutely central.
Globally, Ericsson, the Swedish telecom giant, estimates cell phone penetration to have passed 92 percent at the end of 2013. With virtually every potential customer already served by some provider, much of the action in these markets is customer churn: users swapping from one service provider to another. Each year, cell providers lose 15 to 30 percent of their subscribers, costing companies an estimated $10 billion. In the US, where 98 percent of adults aged 18–49 own a cell phone, competition is particularly fierce, leading to aggressive promotions like T-Mobile’s recent offer to pay up to $650 — equivalent to 13 months of service on a full-featured plan — to buy Verizon customers out of their contracts. In other words, T-Mobile is willing to potentially forfeit more than a year’s worth of revenue to poach a single customer from a competitor.
In the face of such stiff competition, companies are going to great lengths to retain their current customers, but according to new research by Eva Ascarza, when it comes to some customers, companies may be better off leaving them alone.
“For years,” Ascarza relates, in a story that will be familiar to anyone who’s ever threatened to cancel a cable or cell phone plan, “the strategy was to wait until customers called, and then give them whatever they want.” Increasingly, however, companies are taking proactive measures to keep their customers. “Companies are spending heavily on proactive retention campaigns to keep their customers with them for longer. But, in fact, many of these efforts are actually having the opposite effect,” Ascarza says.
A common retention strategy for service plan providers — including cellular, cable television, broadband Internet, credit cards, insurance, and gyms — is to offer customers the opportunity to move to a plan that better suits their usage patterns, like offering a customer who regularly incurs overage charges an opportunity to move to a plan with more minutes. Ascarza, along with co-researchers Raghuram Iyengar of the Wharton School of Business and Martin Schleicher, a former PhD student at Columbia Business School, initially expected these campaigns to deliver results. In a randomized control study of 65,000 South American cell phone users, however, Ascarza found that proactively contacting users to encourage them to switch plans nearly doubled the company’s customer churn rate, from 6 to 10 percent.
For some customers, these proactive interventions may alert them to just how much they’re spending on the service. “It’s a wake-up call,” Ascarza says. “And instead of reducing consumption, they say, ‘I’m out of here.’” For others, just seeing the details of a new plan could be enough to encourage them to check out the competition and sign up elsewhere.
Critically, however, not all customers responded the same to the intervention. Attrition was highest for subscribers with highly variable usage patterns, decreasing usage trends, and higher levels of overage, while for those with more stable but increasing usage and only small overages churn was significantly lower. The results suggest that these types of proactive retention campaigns alone aren’t to blame for the increased turnover. Rather, campaigns must be carefully tailored to hit the right customers with the right offers.
“We are in no way saying every marketing intervention is bad. But what you have to do is really decide which customers you’re going to talk to — and we show that for customers with certain characteristics, it’s simply better to leave them alone.”
About the researcher
Eva Ascarza is an Associate Professor of Marketing at Columbia Business School. She is a marketing modeler who uses tools from statistics and economics...Read more.