CHANNEL OVER CHURN

Posted: 09/1997

CHANNEL OVER CHURN

The Way You Get Customers Says a Lot About
Whether You’ll Keep Them

By Dr. Judy Reed Smith

No doubt you’ve been reading a lot about churn and how to curb
it by improving service, adding products, meeting customer
expectations, etc. New research from ATLANTIC-ACM suggests that
you also should be looking at your sales channel…not what your
AEs tell prospects (although that is very important) but which
sales channel you are using.

According to ATLANTIC-ACM’s 1997 reseller survey, most
resellers of telecommunications services use a range of channels
– outbound telemarketing, direct sales, independent agents,
direct mail and affinity programs–while only a few have
cultivated a "silver bullet" method (e.g. Excel’s
multilevel marketing program or TNC’s affinity approach). Sales
channels vary in efficacy by customer type–business and
residential.

On average, direct sales, independent agents and outbound
telemarketing account for more than 80 percent of resellers’
business revenue. While these three routes seem to be proven ways
for attracting business customers, a broader range of channels is
used successfully by resellers to attract residential customers.
That is not to say that each reseller will use all channels but
that as a group resellers are using all of the methods with
relative success. For example, independent agents contribute 22
percent of revenues from residential consumers with direct sales
following a close second at 21 percent of residential revenues,
outbound telemarketing at 14 percent and affinity programs and
direct mail tied at 13 percent apiece. Interestingly, resellers
in our survey group are relying more heavily on agents (up 11
percent from 1995 to 1996) and less on outbound telemarketing
(down 9 percent from 1995 to 1996).

Differences also emerge between facilities-based and
switchless resellers vis a vis the percentage of revenue derived
from business marketing channels. Switchless resellers, for
example, generate more revenue from business customers through
agent sales (31 percent vs. 17 percent) and less than those sold
through direct sales (31 percent vs. 53 percent) than do
facilities-based resellers. The hypothesis here is that
switchless resellers’ heavy reliance on agents and outbound
telemarketing allow them to target large geographic areas with
little investment, whereas facilities-based competitors are
likely to invest in sales offices near their switches. Both
reseller categories generate similar revenues from outbound
telemarketing (15 percent), direct mail (less than 5 percent) and
affinity programs (less than 7 percent).

In analyzing the performance of the sales channels against
customer-retention rates, ATLANTIC-ACM concluded that churn
levels correlate to the degree of relationship the channel
fosters with the customer. Relationship building seems to be the
trump card–even surpassing brand. As resellers’ use and reliance
on direct mail increases, erosion of the residential customer
base increases; the opposite is true for the use of affinity
group relationships. (See graphs A & B on page XX.) Companies
that attribute between 0 percent and 30 percent of their revenue
to direct mail marketing experience slightly below the industry
average 3.2 percent attrition rate for residential customers. If
a company generates between 31 percent and 75 percent of its
residential customer revenue through the use of direct mail,
attrition increases dramatically (plus 1.8 percent). The premise
here is that if you can get them by mail, you will lose them by
mail–someone else’s, that is. In ATLANTIC-ACM’s research, direct
mail shows itself to be a weaker channel for retaining customers.
However, those resellers deriving a majority (61 percent or more)
of residential revenues utilizing affinity programs have a 2.2%
churn rate–a remarkable 30 percent less than the industry
average. Sales through affinity groups have the benefit of
consumer loyalty to an organization, which is benefited by their
long distance subscription.

On the commercial side, personal sales count. As emphasis on
direct sales increases, a reseller’s overall churn rate
decreases. Conversely, as outbound telemarketing increases,
turnover increases. (See charts C & D on page XX).
Specifically, for resellers that derive more than 76 percent of
their business customer revenues from outbound telemarketing,
customer attrition is 4.2 percent, nearly twice the industry
average of 2.4 percent. Resellers generating the most revenue
from direct sales channels experienced a churn rate of 2.1
percent, slightly below the industry average. While the
differences in these churn rates may seem small from one channel
to the next, they can have a huge impact on your bottom line. For
example, a mere 5-percent reduction in annual attrition can
increase profits by 25 percent. A quick look at the long distance
companies that have grown and prospered support ATLANTIC-ACM’s
hypothesis that relationship-oriented channels are the most
successful at staving off churn.

What does this mean to you? Considering the cost of acquiring
a customer versus the length of time they stay, a firm handshake
and a smile combined with a personal connection is more likely to
win a long-term customer than a voice on the phone or a mail
drop. If the higher up-front cost of direct sales, agents or
multilevel marketers reduces churn enough to increase profits
over time, you have a winning scenario.

Dr. Judy Reed Smith is chief executive officer of
ATLANTIC-ACM Inc., a Boston-based strategy consulting firm.
She can be reached at (617) 720-3700, fax: (617) 720-1077,
e-mail: [email protected].