Modeling Customer Lifetimes with Multiple Causes of Churn

Abstract

Customer retention and customer churn are key metrics of interest to marketers, but little attention has been placed on linking the different reasons for which customers churn to their value to a contractual service provider. In this article, we put forth a hierarchical competing risk model to jointly model when customers choose to terminate their service and why. Some of these reasons for churn can be influenced by the firm (e.g., service problems or price-value tradeoffs), but others are uncontrollable (e.g., customer relocation and death). Using data from a provider of land-based telecommunication services, we examine how the relative likelihood to end service due to different reasons shifts during the course of the customer-firm relationship. We then show how the effect of a firm’s efforts to reduce customer churn for controllable reasons are mitigated by presence of uncontrollable ones. The result is a measure of the incremental customer value that a firm can expect to accrue by delaying churn for different reasons. This “upper bound” on the return of retention marketing is always less than what one would estimate from a model with a single cause of churn and depends on a customer’s tenure to date with the firm. We discuss how our framework can be employed to tailor the firm’s retention strategy to individual customers, both in terms of which customers to target and when to focus efforts on reducing which causes of churn.