Statistical Methods in Customer Relationship Management

6.1 Introduction

In the previous chapters the focus has been on models that help with acquiring the most profitable customers, retaining the most profitable customers, and finally balancing marketing resources across acquisition and retention efforts to maximize profitability. While the ultimate goal of customer retention is to prevent customers from switching merchandisers and stay with the current service provider, there is always going to be customer attrition. And this customer churn can be extremely costly for firms that do not understand when customers are likely to quit the relationship or what warning signals exist that help explain why a customer is likely to quit. For instance, a firm will have to spend significantly more to acquire a new customer than to continue to retain most customers on average. Thus, it becomes financially important to try and get a clear picture of the customer churn process and manage it appropriately.

The most effective way to manage customer churn is to understand the causes or determinants of customer churning behavior, predict which customers are most likely to leave, and conduct promotions or other strategies to encourage them to stay (given that they are likely to be profitable to bring back). For this chapter of the book the focus will be on the following two questions:

• What are the drivers of customer churn?
• Given that a customer has not yet left the firm, when is the customer likely to end the relationship?

In the next chapter we will ...