QUESTION POSED ON: 13 June 2006
Can you provide some advice on measuring customer churn rate for an Internet company? For example, in the business of online money transfer, how would you define churn or customer drop-out?
In this case, would churn be:
* Permanent account closures, or
* Significant drop in activity (say, more than 90% in average transaction volume over a two-month period), or
* Zero activity in the last three-month period?
My plan is to attain the customer churn rate so that I can then determine the customer lifetime (N) using the relationship customer retention (CR) = 1- 1/N. (This is a calculation I found in Peppers and Roger's book, The One to One Future). Once I have found N, I can calculate the net present value (NPV) of future cash flow stream on a per customer basis.
Please let me know if this approach makes sense and how should I go about finding/defining customer churn rate and therefore calculating customer retention ratio (CR).
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