Paula: Hello and welcome to Let’s Talk Loyalty, an industry podcast for loyalty marketing professionals. I’m Paula Thomas, the Founder and CEO of Let’s Talk Loyalty and also now Loyalty TV.
Today’s episode is hosted by Amanda Cromhout, the Founder of Truth, an international loyalty consultancy, and the author of the book, Blind Loyalty, 101 Loyalty Concepts Radically Simplified.
If you work in loyalty marketing, you can watch our latest video interviews every Thursday, Wednesday, and Friday on www.loyalty.tv. And of course, you can also listen to Let’s Talk Loyalty every Tuesday, every Wednesday, and every Thursday to learn the latest ideas from loyalty experts around the world.
Amanda: Hi, I’m Amanda Cromhout, the Founder and CEO of Truth, and author of Blind Loyalty. Today on Let’s Talk Loyalty, I have the absolute pleasure of talking to Dan McCarthy. He is Assistant Professor of Marketing at Emory University. We discuss retention, churn, and customer lifetime value. There’s no question in the world of loyalty that we look at churn rates, we focus obsessively on retention. And Dan gives us insight into sometimes, how reducing churn rates are not necessarily an indicator of business improvement.
Dan refers to in the B2C world, that customers are a bit like melting ice cubes. They all tend to melt, but the speed at which they melt is variable. However, in the B2B environment, If customers are active, those customers which stay actually can improve their customer value quite dramatically. We see less melt.
Throughout this interview, Dan McCarthy unpacks this extremely important measure of churn. We look at subscription, non subscription, free trials, and different industries to really understand the power of measuring customer lifetime value, the importance of churn and retention measurements. I personally thought I knew quite a lot about this measurement of churn and retention and customer lifetime value until I had the pleasure of interviewing and meeting Dan McCarthy.
So thank you again to Dan McCarthy for joining Let’s Talk Loyalty. Dan has been on Let’s Talk Loyalty twice before. Episode 64 in December, 2020. Goodness, a long time ago. And episode 191 in March, 2022. So Dan is the Assistant Professor of Marketing at Emory University at Goizueta School of Business. So Dan, welcome back to Let’s Talk Loyalty for the third time.
Daniel: I’m blindly loyal. So, but time flies when you’re having fun. I still remember the original one with Paula and we were talking about many things, but one of them was the retention smile. So I feel like we’re coming full circle again to really do a deep dive into the same topic, but definitely speaks to how long we’ve been exploring and studying this important area.
Amanda: Absolutely. Yeah. I was going to say, I think this is one of those topics that will never ever stop being discussed because of its strategic importance to anyone who’s listening to this show. So from everyone at Let’s Talk Loyalty, I know we’re all waiting to unpack the subject matter today. So what we really want to talk about today, which we’ll get into is the way in which organizations measure retention and churn.cAnd the impact that has on how we actually apply success or failure to KPIs and so forth.
But before we do, I think, you know, Paula’s favorite question at the start of Let’s Talk Loyalty. So it is actually a play on the word favorite. What is your favorite loyalty program?
Daniel: My favorite loyalty program is probably Delta SkyMiles. And obviously I’m here in Atlanta, you know, we’re the Delta hub, so this is obviously, you know, gotten a lot more familiar with Delta since I’ve been here, but yeah, I’d say, you know, broadly speaking, um, the big concern I have with a lot of loyalty programs is that they give away a lot of freebies that are expensive but don’t actually fundamentally change consumer behavior. You know, people will take free stuff if you give it to them, but they’re not buying any more often than they would have otherwise in the absence of the program.
And I would say, you know, just speaking for myself, you know, with the Starbucks app and with the Panera app I’ll often get these free things that pop up every once in a while. And while I can never really know how I would have been if I didn’t have those incentives. I don’t feel like my behavior has changed there. So I feel like you know, those companies have just kind of given away margin without getting anything for it.
I feel Delta SkyMiles is one of the programs where at least for me personally, I’ve gotten a lot of value from it. But I can tell that it’s definitely changed my behavior. You know that I want to do more of my flying through Delta. I find myself spending on my Delta reserve card just to get all the points to try and scrape my way back to gold. So you know, those are all things that if Delta SkyMiles wasn’t a thing, I wouldn’t be doing any of that. So, so I think that’s, it’s good for them. It’s good for me, you know, which I think you know, speaks to a good loyalty program.
Amanda: Definitely. And you’re not alone in nominating Delta SkyMiles and blind loyalty. Chapter 100. We analyze this question to what are the top hundred programs mentioned by guests on Let’s Talk Loyalty and Delta Skymiles is in the top 10. So, you’re not alone. So that’s great. Lovely. And a lovely explanation. Why obviously a win for you and a win for the brand.
So Dan, you have an incredible career and an incredible background, which is quite different from a lot of our guests on the show. So before we start to unpack the subject today, I think it’s really important we understand where you’re coming from. Ultimately, what gets you to a place to be able to talk with so much authority on the subject matter of churn and retention? So tell us a little bit more about yourself, please.
Daniel: Yeah, I went to Wharton for undergrad. I was a dyed in the Wolf Wall Street person went to work for a hedge fund for about six years. So analyzing balance sheets, you know, financial statements and doing all that good stuff. After that, it was kind of my last chance to go back for the PhD. I love statistics. I’m a statistician by training. And so I went back to Wharton for a PhD in statistics. And in the middle of the PhD program I came across Pete Fader, who’s a marketing professor at the Wharton school. And he won me over to the problem of predicting what customers will do in the future. So it’s still very much you know, statistical in that is still very focused on prediction, but now it’s kind of narrowing the focus to what are consumers going to do?
And then probably a year later I had converged on this topic of customer based corporate valuation. Which is again, taking customer level prediction, but then showing how it can really help understand the health of a company, the valuation of the company you know, what its unit economics are. And so that was really going back to my hedge fund days. I can kind of bring all that back in. So it was just such, it’s been such a fun topic to study.
The other cap that I wear in addition to being a professor, so I’ve been researching all these topics really, you know, since then and teaching them. I teach a course called Customer Lifetime Valuation is as an entrepreneur, but specifically a CLV focused entrepreneur. So Pete Feder and I had started a company called Zodiac. They were, it was a software as a service company.
We primarily helped marketers. We ingest transactional data, CRM data, fit all of our predictive models for what every customer is going to do. Push all that back out to companies systems so that they can make better tactical customer acquisition and retention decisions, grew it and sold it to Nike in March of 2018. And then we’re able to carve into our non compete with them that we can use the same sort of models, but we can use them for investment use cases. And so, yeah that obviously that takes us back to customer based corporate valuation. So we’d probably analyze maybe 300 companies data as part of paid engagements through Zodiac before the Nike acquisition.
And now here at Theta, Theta is the new company that again, is focused on the same sort of models. We probably done another 150 or so paid engagements and originally, it was all private equity investment type firms, but now that the non compete with Nike has expired, we can move back into all of the marketing use cases again, which we’ve been so familiar with through Zodiac.
So, you’ve got this nice balance between kind of investment clients and corporate clients and between more diligence type analysis and, you know, the sort of, who do we send the mail or to a problem that we had focused on before? So, yes, I think you kind of have the ivory tower perspective, you know, researching, writing the papers, and then also you just get your hands dirty doing this sort of stuff with a whole bunch of companies.
Amanda: And I think just listening to you, how you’ve managed to take the subject that is so deeply important to not just the loyalty industry, but particularly everyone who will be listening to the show and then combine it with your corporate experience, your corporate financing experience. I can truly understand how that can add value, but I’ve never heard of it before in that way, I always think of all the other measures that go into you know, into M&A discussions or valuation discussions. So this is what intrigues me the most.
And then as you described, your company was so respected that you actually sold it out to tonight, you know, the value, which you were creating is super obvious. The fact that Nike acquired the organization, as you said, back in 2018. So, I think that’s kudos to what you achieved in terms of value given to your clients.
So, but Dan, you told me you’re actually moving roles soon. So just share with us quickly where you’re moving to, and then we’ll get stuck into our discussion.
Daniel: That’s right. So the next big phase is you know, publish or perish. If you don’t publish enough papers, you don’t get tenure. So tenure is the big thing. Yeah, I think I was able to get a tenure at the University of Maryland in College Park. I love it here at Emory. It’s been a wonderful place to be.
Honestly, the big reason that I’m moving in addition to the faculty at Maryland being wonderful is all of my family is from Maryland. So it’ll be a move back home, which I’m very excited about. So my parents, my brother, you know, we’ll have everybody there. So it’ll be a big reunion, but that’ll be come August, which we’re all very excited about.
Amanda: And congratulations. That’s great news. Wonderful. Wonderful. Okay. So what we need to talk about today, not because we need to, because we absolutely desperately want to, is about retention and churn. So these are very often, maybe loosely used definitions, but just, you’ve told us a little bit about Zodiac and the work you did before, but now you’re going so deep into this subject.
I mean, I’ve had the privilege since I met you a couple of weeks ago of reading a lot of your materials because I wanted to be better informed. And trust me, I thought I knew quite a lot about this subject. And it’s pretty clear to me that there are layers and layers of ways of really analyzing this to have a much more profound understanding. So what brought you into this specialized subject?
Daniel: I was really through customer lifetime value research, you know, that if you want to understand how much the customer has worked after you’ve acquired them, you need to predict a series of things. And one of them is how long are they going to have a maintain a relationship with you?
You know, so they may not buy every day, but you know, they still have an ongoing relationship and they will have some positive probability of making a purchase. And then there’s kind of all these other things that we need to predict. How many times are you going to buy, how much they’re going to spend when they buy, and then how much margin you get to keep as profit contribution profit on each of those revenue dollars.
And so, so each of those components is important, you know, those in conjunction with customer acquisition costs. But retention is kind of one of the big things that you need to do as part of that exercise. And so, so if you don’t have a good retention model, you’re kind of stuck. I’d say the other kind of nuances subscription versus non subscription.
So for subscription firms, you actually have a contract and if you wanted to, you know, and that contract with your cell phone provider, you know, you need to call them up and cancel. With a non subscription firm, you just kind of stop buying. And so, the notion of retention becomes trickier to kind of get your arms around. You kind of know that it’s there, like people will stop buying from a brand, but they don’t have to tear up a contract to do so.
Amanda: Yes, and I want to come back to that the subscription versus non subscription and also the different industries where this is, where the results and approaches varied. So, you’ve given us a sense of the importance of measuring customer lifetime value. I don’t think anyone listening to the show is going to debate that.
I think what I was most fascinated by when we first chatted was the thought that maybe the way we’re all measuring it or have been measuring it for so long potentially is flawed. So as reading through the declining churn fallacy over the product life cycle, which is a paper you shared with me, and I love the example you gave and you named Spotify where Spotify’s claim in a company report that monthly churn had reduced by 30 percent over four years and therefore was indicating business improvement.
And I think that’s a really common understanding, right? Like if we reduce churn and increase retention, therefore our business must be improving. And I think that’s the main discussion point here is why is that approach flawed in your opinion?
Daniel: Yeah, I think it, it really revolves around what we mean exactly when we say churn, you know, if churn is going down and like, what is the specific measure or metric that we’re looking at? And if the measure that we’re looking at is the overall churn rate, our turn rates moving down and that’s what Spotify was referring to. That is problematic. I think that is kind of one of the key. The key points of that paper. If instead the turn metric was something more like, you know, one month churn, you take everyone who was acquired a month ago. How many people turned out this month? Or 6 month churn or 12 month churn, you know, just different measures that are all what we would say cohort specific.
Those are more comparable over time. You know, that can give you a good indication of whether things are getting better or getting worse, but far and away the most typically disclosed measure is the churn rate when we’re talking about retention. And that’s the one that it kind of is a funny object when you start really thinking about it. And so, yeah, so that’s the one that can kind of get you in trouble if you’re not, you know, thinking about it carefully.
Amanda: Yeah, and that just that little. It’s not a little, that statement you’ve just made on answering the last question, Dan, is, I think, fundamentally different to how every organization I’ve spoken to measures churn.
So, I’m going to make sure in the show notes that we have as many links to your papers and understanding so that those individuals who are listening to this are interested in it can really go deeper and, you know, follow what you’re saying. I mean, we can explain it on the show today, but I think that what you’ve just said is the, is a headline that organizations need to understand.
So what would you say you’ve mentioned different cohorts, specific churn measures and so forth, but overall, if you were, you know, if you were trying to help organizations identify the correct measurement approach, what would that be?
Daniel: It would be to look at their business in a cohorted way. If you think about a business like Hulu or Netflix or Spotify, you’re acquiring customers over time. And once those customers are acquired, it’s as if there’s kind of a stopwatch that’s going on in the background that says, all right, you’ve been with us for X amount of months. How long is it going to be until you drop out?
And what typically will happen, especially at a B2C business is that you acquire a whole bunch of people and a lot of them, they very quickly realized that this is not the service for them. And they drop out and then some of them say, you know, actually this is amazing and they’ll stay on for these extended periods of time, but you always end up with this retention curve that ends up looking like this, it kind of go, it sharply falls and then it kind of starts to go flat and that’s what always tends to happen.
And so really what we want to know then is we want to have a good way of kind of summarizing how that shape is changing across each of those different acquisition cohorts. And that’s really the key. So, yeah, typically, yeah, what we would advise is looking at cohort triangles, and so this is something that I think a lot of people some of the audience members may be somewhat familiar with already.
But there’s kind of different cohort triangles that you could look at, but typically the rows are going to be your cohorts. You know, so people that were born, you know, that were acquired for the first time in January of 2024 and February of 2024, et cetera. And then the columns represent just different calendar time points. And then the cells represent, say, the proportion of people from a cohort who are still alive at a different time point. And that’s really what you want to track if you want to understand how your business is performing, you know, in an apples to apples way across those different cohorts.
Amanda: And your definition of alive in that sense is still active in the bus, active with your brand.
Daniel: Yeah, and this does go back to that distinction between subscription and non subscription. Yeah, I think it’s easier to start with a subscription setting because there, you know, how many people are, you know, quote unquote, alive, you know, that they have maintained their subscription with you. I think you’re absolutely right that when you move to non subscription, it gets a little bit trickier because you really don’t know how many people may make a purchase in the future.
What you can actually observe is you acquired a hundred people and then you get this flow of purchases afterwards, you know, so you can see, oh, you know, 90 of them made a purchase in the first month, 80 of them made a purchase in the second month. And that’s really all you can objectively auditively track without any sort of a model.
So typically if we’re talking about a non subscription firm, that’s the sort of thing that we would look to. It’s you acquired a hundred people from that cohort. You know, what proportion of them are still active? You have made at least one purchase and or you acquired a hundred people. How many total orders did they apply? Did they place in, in future months? I think those are obviously really important numbers to know even if they’re not quite the same as retention as we would, you know, state it in a subscription setting.
Amanda: And I assume, Dan, your frequency of measurement or frequency of analysis against those cohorts for the non subscription business will vary depending on the industry, right? So if you’ve got grocery retailing versus furniture retailing, you’d have a very different measurement period.
Daniel: Yeah, if you’re talking about a furniture retailer or an automotive company, that probably be the, or a mattress company, the inter purchase cycles are going to be so long that you could use a weekly unit of time, but it’s going to be kind of, not very diagnostic.
Amanda: Yeah.
Daniel: So typically you may want to like, you can do that and then just look over, you know, cumulative periods of time, you know, but probably what would be the most diagnostics will manager would be to use the longer period of time and say, all right, you know, within the first three months, you know, how many people made a purchase or not, et cetera.
Amanda: Yeah. Yeah. Amazing. How does it vary, in your opinion? So we talked about obviously subscription versus non subscription, but how does it vary across the difference between a B2B or B2C environment?
Daniel: Yes, a B2C it tends, the customers tend to be more like melting ice cubes. That you know, they all end up, ending the relationship. It’s just how quick is the melt? And again, typically there’s a lot of melt at the beginning and then it slows down.
It’d be in B2B settings. It’s a little different in that the, you still have that initial dropout phase where a bunch of the companies now that are clients of yours. They decide that it’s not a good fit for them. But those that stay, they tend to pick up the pace of their activity a lot more than you would typically see in a B2C setting. So if you think about Netflix or Spotify, if you like them, you just kind of hold on to that subscription, but it’s not like you’re going to go from spending, you know, 20 dollars a month to 100 dollars a month. You know, you just still continue renewing. So the spend while you’re alive tends to be relatively constant.
But if you think about slack technologies. Again, it’s still a subscription. You know, you need to have your contract, but if you like them a lot, then slacks relationship, they may have started just with the developers of your organization, but then they may have moved to the entire company.
And if you take a cohort of companies. Some of them might go bust, but the ones that do stay oftentimes they’ll get that next round of funding. They’ll grow, you know, they’ll have more seats. And so, they’ll have more people who are paying you know, they’ll have more users that means more revenue for Slack and as companies grow, typically they’ll have to move from the basic plan to the professional plan. You know, they need to get the enterprise grade security, you know, et cetera, et cetera.
And so, pound for pound, each user is going to result in more revenue for the company. So, yeah, so the development factor tends to be a lot stronger in B2B which typically will mean you know, just a different retention sort of profile that then in B2C settings.
Amanda: Yeah, absolutely. It makes sense. I love that. What did you say? The customers are like melting ice cubes. They all tend to melt eventually. I love that. Okay. Another, I’m really intrigued by the variable response on the different industries and different subscription versus non subscription. You also mentioned around the impact of a free trial. What does that do typically to the free trial, what does that tend to do to the response, the churn rates?
Daniel: Yeah, this is a question that will often come up is how do you even define a customer? Yeah. Does someone become a customer when they engage with you in any form, even if they’re not paying you yet, or did they become a customer when they first open up their checkbook and pay?
And I’m not sure anyone, yeah, I think it, I don’t think that there’s any, I don’t objective answer to that question, you know, but I think either way you would want to account for all the different drivers of the business. And so typically personally, I would say that someone becomes a customer when they start to pay.
And so if you have a company with a free trial, then you have a whole bunch of people who may be on the trial plan again, thinking of slack there’s a lot of people, you know, they’re on the free trial and they could use that forever if they wanted to I would call them trialists and and then the important thing that slack is going to want to know is what is the length of time it takes to get people to migrate from the trial.
You know, the trial level plan to, to being paid customers. And so, so you can think of that again as another timing process, you know, where we have to basically start that stopwatch, you know, as soon as people for the very first time engaged with the free trial plan, And then look and see how long is it until X percent of them convert into being paid customers.
So, so if you think about it that way, then typically customer retention would be stronger for companies that have free trials because it means they’ve had the ability to kind of test the waters, determine that they like it. And now they’re paying money. You know that they’re probably more serious about it than they would have been if they had zero relationship with your company, and now they’re spending money for the very first time.
Amanda: Makes absolute sense. Makes perfect sense. But as you say, I guess it all lies in that definition of customer. So if a company is determined to register or announce high customer volumes, and yet maybe they’re on a free trial, they don’t have that they are going to be deeply disappointed in terms of the future value. Right. Whereas if they hold back and only record a customer as a customer instead of a trial list on the revenue exchange, then that would make a lot more sense.
Daniel: Speaks to issues of disclosure and what does the company want to convey to other stakeholders? And you’re right, I think we’ll find a lot of companies, they want to report very big customer base numbers. We have a million people who are using us. And so they want to be as liberal as they can in how they define someone to be a user or a customer. But you know, companies also want to have good retention.
So, and monetization, you know, if they’re getting no revenue per user, then that also would not be a very good thing. So yeah, so it is a question, it’s an empirical question. I would say too you know, having a free plan is no free lunch, you know, I think it may lead to more seriousness from the people who end up paying and it might lead to more users, but, you know, free plans mean you’re given something away for free, you know, you’re not making any money on those people yet.
And so, you know, so you really, you know, If you’re trying to make as much money as you can for the business as a whole there’s a very careful calculus that needs to go into just how good you want to make the free plan, how long, you know, are there any strings attached, et cetera. You just to avoid having that become a real money sink and and lead to, you know, a less healthy business than if you didn’t have the trial plan.
Amanda: Absolutely. Absolutely. I really appreciated that when I read your paper around or one of the papers around this disclosure of numbers because we see enormous volumes of customers announced to be, you know, our membership has 30 million members and yet maybe they’ve got less than a 50 percent activity rate. The numbers have been acquired through XYZ campaigns, but actually there’s no stickiness whatsoever. So is that positive or negative? They’re carrying this enormous weight of marketing to 30 million instead of a engaged base.
Daniel: We’ve brought in 10 million customers. But the 10 million, it’s not how many people are active right now. It’s really how many people had ever made a purchase with them at any point in their history. And it’s a grand big number. You really can’t get any bigger. And that, but there’s a question of how diagnostic that number is.
Amanda: Yeah, absolutely. So Dan, you’ve got a lot of material that I think is useful for the loyalty and CRM industry to, to take into account, but I think let’s share a couple of the definitions. Cause I, I got a little bit tongue tied over a few of them and I think. I’m super interested in this, so I’m sure others will be as well. So I’m going to fire a couple of your own definitions at you. And if you could give us explanations to them, I think we’ll all be better educated afterwards. So what’s you talk about revenue churn versus logo churn.
Daniel: Logo churn is you acquire a hundred customers. What proportion of them have ended the relationship with you. So it’s very much about the number of customers. They could be big customers. They could be small customers. But you’re kind of giving equal weight to each of them and saying, you know, if I lost 20 and I had 100 customers, then my logo churn was 20%.
Amanda: Yeah. Okay.
Daniel: Now, revenue churn. It’s similar except it’s based on revenue. And so effectively what it does is it accounts for the different sizes of the companies that are kind of bringing in the revenue from the cohort. So you may have a hundred customers, but they may have spent a thousand dollars when they were collectively first acquired.
And a revenue churn would be what percent of that thousand dollars have you lost? You know, so if you made 800 dollars in revenue the next month, then that would represent 20 percent revenue churn. And, you know, what you often find is that, you know, especially with B2B firms they’ll actually end up having net negative revenue churn. And all that means is that you may have, you may have gotten a thousand dollars when you first acquired the cohort, but if you were to look two years later, you may actually be getting 2, 000 dollars worth of revenue from that cohort. And even though customers have been churning out the ones who have stayed, they may have expanded, they may have moved to the enterprise grade plan, et cetera, as we talked about before, all of that goodness basically means you can bring in a lot more revenue.
And so, yeah, typically. So called land and expand software as a service firms where they try to, you know, start you off with that either a trial plan or something that allows more people to have a smaller scale relationship and then develop over time they’ll often have that sort of that sort of dynamic.
Amanda: It’s interesting though, the term logo churn, would that be incorrect? Simplifying that to say customer churn?
Daniel: Those would be the same. Yeah, typically logo churn is it’s like a term that’s used in B2B settings.
Amanda: Yeah.
Daniel: Because obviously, yeah their companies their customers are McKinsey, McDonald’s. And so it’s referring to the logos of those companies. But in truth, you’re right. The more general term, which would be applicable for B2B and B2C firms would be, you know, just kind of straight up customer churn.
Amanda: Great. Okay. Thank you. And then I’m going to throw two more at you. They’ve come straight from your papers. I understand them now having been through your papers, but you can explain them to everyone. So you talk about the hazard, the falling hazard effect and the acquisition growth effect. You have touched on both of these already, but let’s unpack them in those definitions.
Daniel: Yes, maybe just to also to level set. This is kind of the most important definition. What is the churn rate? And I assume everyone think, Oh, yeah, I know what the trend rate is, but just to make sure it’s absolutely clear, it’s saying, here we are, it’s the end of May, you know, 2024, let’s look back over this month, see how many people canceled their subscriptions. And then let’s look at how many people had a subscription at the end of April, and then just take the one number divided by the other number. That is the overall trend rate.
So you could be, you could have had a whole bunch of people who canceled. You know, who had been acquired recently, those customers could have been acquired a long time ago, wherever, whatever point they were required. And we’re just going to take the number of churners divided by the number of people who had subscribed as of the beginning of the period. And that is the trend rate.
The hazard rate is kind of the, you could think of it as a cohort specific number, you know, so I acquired a hundred people a year ago, maybe I’ve got 10 of them left, you know, as of April, then if I lose a customer, then I’ve gone from 10 to 9, so I’ve lost 1. So my hazard rate is 1 divided by 10. Yes, it’s saying take however many people I had from that cohort as of the end of the previous period. And let’s look at how many people turned in relation to that number. And that’s kind of the hazard rate. So, yeah, kind of the churn rate and hazard rate that they’re related to each other.
But, you know, 1 is typically a cohort specific term, whereas the overall churn rate, which is the one that companies will most typically disclose that is kind of cohort. It’s aggregating across the pillars, so to speak.
Amanda: Yeah, makes sense. It makes sense. You’ve explained it. Thank you. And the acquisition growth effects, you did, you definitely talked about when you described the shape of the graph, typically of subscribers and then non subscribers, but is there anything to add to that?
Daniel: Yes. So that effect, there’s this question of what causes the overall churn rate to change over time? And the acquisition growth effect, it’s basically a reflection of the fact that when you acquire a bunch of when you acquire a bunch of customers, a lot of them are going to churn out very shortly after you acquire them.
And so what can end up happening then is if you, for whatever reason, had a spike of customer acquisition, then in the next period, your turn rate might move up. And the reason why is not necessarily because your business has gotten any worse. It’s just, you had a whole bunch of people who were acquired for the very first time last month, you know? And so, when you have that inevitable drop off that you always tend to do, it just means you can have more churners. You know, in the current month,
Amanda: Yeah.
Daniel: So I think it is somewhat counterintuitive that one might think that if your turn rate moves up in a particular period, that’s a sign that things are not going well, but in fact, it could actually be a sign that things are great.
Amanda: Exactly.
Daniel: If those cohorts are performing fine, you know, it just means that you brought in a whole bunch of customers, which, you know, acquiring customers typically ain’t a bad thing. All those being equal.
Amanda: Exactly. Exactly. That’s what I love about how you’ve just, how you actually that summary instead of us just looking at a churn rate is looking at it more holistically, which I think is a lot of what you’re trying to get across here, which leads me to, I’ve got a couple more questions, but the question I’d love to ask you then, based on what you’ve just said is, if you could give the most impactful and simplified advice to maybe you’ve already given us this advice, but let’s summarize it to the listeners. In terms of how they must approach measuring customer lifetime value and churn, what would it be?
Daniel: Yeah, if you want to understand the unit economics of a business, look at the data cohort by cohort and that’s what’s going to allow you to see how the business has been performing and how the quality of customers has been changing across cohorts. That’s really what you need.
And so, so if the company has disclosed enough data to be able to do that, great. You know, look at it that way. If they haven’t disclosed enough data, for example, if they’ve only disclosed the churn rate, then you may end up in a weird position where yeah, the trend rate’s moving down, but you should know that you don’t know yet. You know, you need more information to really be able to say, is this a good thing or is this a bad thing? So I’d say if you’re kind of on the outside looking in, you know, maybe you’re potentially making an investment in a company, something like that, then I think that would be kind of the key takeaway. Look at the cohorts.
Amanda: Fantastic. Thank you. My brain’s buzzing. So you earlier on, when we actually asked about your professional background and your current role, you talked about the course you have on Customer Lifetime Value. Is that something that’s available online or is it only available at the business school?
Daniel: It’s a great question. Probably not this year. I think it’ll be available starting next year through executive education at the University of Maryland. You know, this year we’re ramping it up. So the CLV course will be available but it’s going to be to the, you know, the degree holders at the University of Maryland. So, so stay tuned. I would say to the extent that anyone is interested in learning more about these concepts, I’m very liberal in terms of sharing material. So, you please do reach out as I would be more than happy to help you know, just kind of get you up to speed, you know, share what I can and help you up that learning curve.
Amanda: Amazing. So we’re going to make sure Dan that’s your contact details from LinkedIn and so on in the show notes. I’ll also make sure the previous discussions you’ve had, because I think they’ll all tie back nicely on Let’s Talk Loyalty in December 2020 and March 2022 are also in the show notes. And then any immediate reading you’d like to share with the listeners. We’ll pop those in the show notes as well. Cause I think that’ll be incredible. I found it incredibly interesting. I couldn’t wait to have this discussion today. So before we finish down, is there anything else you’d like to add?
Daniel: I think the main final piece and you’ve kind of gotten a sense of it already is ultimately what companies should care about is growing shareholder value from a financial perspective. There’s a lot of other things that companies should care about. But so retention is a really important piece. It’s 1 of those main drivers that impacts the OB. But ultimately, what you really care about is how is my CLV evolving over time? And then when we take into account, not only the quality of the customers, but the quantity of the customers that we’re acquiring, that’s what gets us to, you know, to, to shareholder value impacts. So, so again, retention is really important. That’s all that we’ve talked about today.
But it’s not the end all be all. And ultimately what companies also care about is you know, I’m making all of these investments and hopefully they’re improving my retention. How do those two pieces trade off against each other? And so, yes, I just want to make sure that there doesn’t become an obsessive focus on a single metric, which I think can oftentimes also get some companies into trouble.
Amanda: Yeah, it makes absolute sense. Amazing. Well, I’m feeling utterly inspired and wanting to learn more. So thank you ever so much, Dan. Thanks for sharing your insights with us. And we look forward to, well, you’ve had a good run of every two years talking to Let’s Talk Loyalty. So let’s look forward to 2026.
Daniel: We’ll make it happen.
Amanda: Good luck with your move and thank you for everything you’ve shared with us. It’s been an absolute pleasure.
Paula: This show is brought to you by the Australian Loyalty Association, the leading organization for loyalty networking and education in the Asia Pacific region. Their Asia Pacific Loyalty Conference will take place on the 7th and 8th of August this year at the Gold Coast, Australia, with over 350 guests in attendance, including yours truly from Let’s Talk Loyalty.
I can’t wait to meet so many loyalty experts from the Asia Pacific region in person. Register now to hear global experts discuss current trends in loyalty marketing, there will be fantastic networking opportunities, hosted drinks and dinners, appointment bookings, competitions, and great prizes to be won.
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