We are often asked how high the cost of churn to service providers really is. As often in economics in general, and costing in particular, it really depends how you look at costs and value, i.e. whether you focus on the direct costs only, or include the indirect costs as well.
The direct costs of churn mostly include:
- the SIM card costs (not much these days, but you might want to consider the fully loaded costs i.e. the sourcing, logistics, packaging, and all other costs directly associated with the SIM card, including staff costs)
- the SAC (subscriber acquisition costs), including marketing, advertising and commission of various sorts paid to the acquisition channel (indirect sales) as well as the fully loaded costs of the direct sales channel
- a portion of the SRC (subscriber retention costs), as ‘retention’ money is certainly spent on subscribers who none-the-less decide to leave.
All in all, the direct costs of churn will typically be in the range of $20-$100 per churning customer (depending in which country you are, and how much you spend on acquiring customers).
But the indirect costs can be much higher, if you include the value of the lost customers. Let us take a long at a concrete example.
Say you are a Mobile Network Operator with:
- 10m subs, flat over time
- 5% churn per month, or about 60% per annum.
- $10 ARPU per month
- Total company revenues: $1.2bn per annum
- $150 Enterprise Value (EV) per sub.
- Say also that the direct costs of churn sum up to $25 per churning subs.
Now if you lose an average customer, you are really losing $150, which is the (average) EV per sub. Some customers might have a CLV (Customer Lifetime Value) of $50 only, but high value customers with a CLV of $500 will also be churning, so let us assume that the churn rate is the same in all customer segments – for the sake of simplicity.
In the example above, the direct cost of churn is $25 per churning subs, but if $150 is the total value of a lost customer, then $150-$25 = $125 per sub is the indirect cost of churn. With churn at 5% per month or 500k subs per month, the direct cost is $12.5m per month, or $150m per annum, but the total indirect cost of losing 5m subs is $625m. That’s 50% of the enterprise value!
If you don’t agree with this result, then let us start from the revenues instead, as follows: suppose that you can reduce churn from 5% per month to 4% per month. Then each month, you are saving 1% of your customer base, so 100k subs. Over 1 year, these cumulate to 1.2m subs. So on average over 12 month, you have 600k more subs than before. At $10 ARPU, this means $72m extra revenues. At 15% Profit After Tax (PAT), this means $10.8m extra PAT. If you take the NPV of $10.8m at 10% discount rate, then this gives $108m. If $108m is the lost value associated with 1% point of churn, then the lost value associated with total churn (5% points) would be 5 x $108m = $540m.
Either way, the simple calculations above illustrate that the true cost of churn can be 3-5 times higher than the direct costs.
So if you are in a situation when you lose 30%-60% of your customers annually, it is high time to act. Investaura works with Lumata, a star in the areas of churn reduction and ARPU boost. Lumata’ solution combines real-time predictive analytics with micro-campaigning techniques, including a feedback loop informing the predictive engine about the performance of the marketing campaigns. Whether you already have a data warehouse or not, whether you already have a campaign manager or not, whether you already have a (most likely disappointing) predictive engine or not, we can help you and your business solve your churn problem.
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