New research on customer retention surprisingly reveals that companies encouraging their customers to switch products can increase rather than decrease customer turnover. Therefore, proactive retention campaigns may backfire producing higher attrition.
The study from Columbia Business School found customers with volatile consumption patterns who may have trouble keeping track of their spending, the offer of a product upgrade may have the effect of alerting them to how much they are spending, prompting them to leave their provider.
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.
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.
To access the report: http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID2560136_code1316350.pdf?abstractid=2339604&mirid=1
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