This dramatic statement, lacking supportive evidence, was constructed on a thought experiment. They hypothesized that a credit card issuing company loses 10% of its customers each year. Consequently, the average "lifetime" of a customer equates to 10 years. Now, let's say the company managed to reduce its customer churn to 5% annually. This would mean that the duration a customer uses the credit cards would double, reaching 20 years. Considering that a customer brings some profit annually and remains loyal to the company for a more extended period, they should generate more profit for it.
However, this theoretical "conclusion," advocating for investing resources in customer loyalty, is misleading. In essence, their primary "discovery" suggests that if a customer remains for a longer time, they bring more money to the company during that period. But, they committed several significant errors. For instance, in their rationale, reducing customer churn by half didn't cost the company anything. Also, they assert that such a reduction in customer attrition in practice is entirely achievable.
Can companies drastically change their customer churn rate or at least halve it without making significant investments? Calculations suggest this is merely wishful thinking.
In reality, continually reducing the level of customer churn is challenging and costly because its metrics are subject to the Law of Double Jeopardy. This means that the rate at which customers defect from a brand is a function of that brand's market share and the product category to which it belongs.
Competing brands have only marginal differences in their customer churn levels. The number of customers a brand loses each year largely depends on how many customers it had to begin with. It's obvious that a brand can't lose a million customers if it didn't have them in the first place. Therefore, larger brands lose more consumers in absolute terms each year, but they also gain a significant amount.
Moreover, in proportion to their customer base, larger brands lose and acquire fewer customers than smaller ones, meaning their customer churn rate is lower.
Let's imagine a market where only two brands are present. One is small with a 20% market share and only 200 customers. The other is larger, holding an 80% market share with a customer base of 800 people.
Assuming the consumer shares remain constant, one brand's attrition should match the other's gain. Let's suppose the larger brand loses and acquires a hundred customers each year. Then, in this simplified two-brand market scenario, the smaller brand should also lose and gain 100 customers. In this case, the smaller brand's churn rate is 50% (100/200), while the larger brand's rate is only 12.5% (100/800).