NEW YORK—When thinking about the best way to retain their customers, companies often develop recommendation programs, giving them a chance to explore more attractive tariffs and alternative pricing plans. But, a new study from Columbia Business School suggests that sometimes this is the wrong approach—surprisingly, encouraging some customers to switch plans can increase rather than decrease customer turnover.
“Companies are spending heavily on proactive retention campaigns to keep their customers with them for longer,” says Eva Ascarza, co-author of the research and an assistant professor of marketing at Columbia Business School. “But, in fact, many of these efforts are actually having the opposite outcome for which they are intended.”
To draw their conclusions, researchers separated 65,000 customers into two groups; some were offered plan recommendations and others were not. The researchers used a retention campaign similar to many developed in industries such as telecoms, cable TV, credit cards, online services, insurance, and health clubs.
For companies in these sectors, high levels of attrition and rising costs for acquiring new customers can hurt profitability. The annual churn rate for wireless telephone providers, for example, is between 15% and 30% worldwide, costing companies up to $10 billion annually, according to some estimates. Therefore, the ability to retain customers over a long period of time offsets the cost of retention campaigns offering cheaper tariffs with better benefits. But this study shows that while, in theory, this might make sense, the implementation of these programs might actually backfire with today’s customers.
The paper, titled, “The Perils of Proactive Churn Prevention Using Plan Recommendations: Evidence from a Field Experiment,” is forthcoming in the Journal of Marketing Research and co-authored by Columbia Business School PhD candidate Martin Schleicher and Wharton Professor Raghuram Iyengar. The research involved 65,000 customers of a South American wireless communications firm. Some of the participants were randomly selected to receive a recommendation for a plan that was predicted to save them money based on their past behavior and others did not receive the same encouragement. As a result, only 6% of the customers who were not offered a plan suggestion left the supplier within the first three months after the program was launched. However, 10% of those that were given a recommendation left the company high and dry.
The reason? First, the research found, for customers with volatile consumption patterns who may have trouble keeping track of their spending, the offer of a plan upgrade may have the effect of alerting them to how much they are spending, prompting them to leave their provider. “It’s a wake up call,” says Ascarza. “And instead of reducing consumption, they say, ‘I’m out of here.’”
Inertia may be another factor, since it is a primary reason many people stick with a plan. The researchers argue that lowering inertia levels may cause customers to re-examine their options, possibly prompting them to leave their service provider altogether and sign up with a competitor.
Rather than offering a plan to all customers, the researchers argue that selecting the right customers to target could result in lower customer churn than encouraging every “suboptimal” customer to change plans.
“We are in no way saying every marketing intervention is bad,” says Ascarza. “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.”
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About Columbia Business School
Columbia Business School is the only world-class, Ivy League business school that delivers a learning experience where academic excellence meets with real-time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School’s transformative curriculum bridges academic theory with unparalleled exposure to real-world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School’s faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School’s efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School’s position at the very center of business, please visit www.gsb.columbia.edu.