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4 Why customers churn.

Article Excerpt
4.1 Churn definitions

Churn is a measure of the proportion of subscribers that leave a service. Briefly, there are two types of churn:

* involuntary churn is either initiated by the operator (for example, because of bad debt or fraud) or iscaused by unavoidable circumstances (such as the death of the subscriber). Involuntary churn occurs in both competitive and non-competitive markets

* voluntary churn, however, is initiated by the customer and usually results in a defection to a rival operator or supplier. By definition, therefore, it is exclusively part of competitive telecoms markets.

A fuller definition and a discussion on how churn should be measured can be found in Section 2.6 Measuring Churn.

4.2 Reasons for involuntary churn

4.2.1 Unavoidable circumstances

A small percentage of an operator's total churn is beyond its control. In this situation the customer will leave the market altogether and has not just moved to another supplier. Circumstances that might cause a subscriber to churn in this way include:

* relocation to somewhere beyond the operating area

* death or permanent hospitalisation of the subscriber

* failure or reorganisation of businesses

* change in a customer's requirements--they may no longer require the use of a mobile phone, for example

* theft of their mobile handset--this is a common occurrence in some countries and means that the customer has to be issued with a new phone number. Some operators' business processes are such that this has to be counted as a new account.

4.2.2 Operator-initiated involuntary churn

Some customers will be forced to churn, simply because the operator no longer wishes to provide them with a service. The two main reasons for this are:

* bad debt

* subscription fraud.

Bad debtors and fraudulent customers will always be a concern to operators. Although they constitute only a relatively small percentage of the total customer base, the actual cost of fraud and bad debt incurred can be high. Estimates of revenue lost through such events range from 2% in the US to 30% in Asia and are particularly prominent within the mobile sector. E-commerce and content provision mean that potential losses could be even more serious--since operators may be liable to pay third parties for these services even if the end customer does not pay them.

4.3 Involuntary churn due to bad debt

Bad debtors have the intention of paying their accounts, but for one reason or another fail to do so. The issue for operators is to what extent they should try and keep such customers and at which point they should prevent them from using the network.

4.3.1 When should you disconnect?

Operators have often been reluctant to disconnect customers who have failed to pay their bills, becausethey can still benefit from revenue that is generated from incoming calls. If the situation has already reached the stage at which the operator has barred outgoing calls, then they are really only losing out on the potential revenue from line rental. Whether this scenario balances out or not is dependent on individual circumstances and whether continued exposure to bad debt is acceptable to the operator. There are also situations in which an operator is required by the regulator to maintain a connection to non-payers to allow them to continue to make calls to emergency services. In this case they might as well derive some revenue from allowing incoming calls.

4.3.2 Managing debtors

Of course, if the customer is experiencing temporary financial problems then it is in the operator's interest to deal with this sympathetically--particularly if the customer previously generated substantial revenue for the operator. It is also possible that the customer is not paying the bill because they are is disputing it, or did not receive it in time.

It is important therefore to consider all the factors in the customer's interactions with the operator, rather than following a set procedure for debt collection. This may be difficult if regulations prohibit the operator from retaining customer information for more than a few months (as is the case in several major markets). It may well be worth investing in follow-up calls, where the circumstances can be discussed with the debtor, rather than using entirely automated processes.

4.3.3 The contribution of debt to total churn

Despite an operator's best efforts to gain payment, however, there will still be cases where failure to do so will result in disconnection, and this can make up a large part of an operator's annual churn. Figure 4.1 shows the proportion of lines disconnected for non-payment by selected fixed line telcos in the UK between January 1998 and June 2003. This shows some large jumps in disconnection rates (for example, Eurobell 2.7% between July and December 1999, but 9.7% between January and June 2000). Such leaps are usually due to a change in policy on the part of the operator, rather than an actual increase in the number of non-payers. But note that Eurobell's annual churn figures for bad debt alone were 12.4% over a twelve month period. This is equal to what an effective operator would expect to find for its total churn.

It is also notable that the two wireline telcos (BT and Kingston Communications) had far lower bad debt rates than the cable companies. They are both former monopolists within their operating areas and it is usually the case that incumbent operators have less churn than competitive operators. Why this should extend to non-payment of bills is another issue.

Addressing churn due to bad debt

Bad debt is a complex issue, worthy of a report in...

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