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).
* Zero three month activity = risk
* Significant drop in activity = probable churn (midway between risk and true churn)
* Permanent account closure = true churn
For estimating purposes in calculating customer lifetime value, these might be weighted as risk = .50, probable churn = .75, and true churn = 1.00. Once these numbers are applied, it will be possible to back into customer retention ratio (CR).
This was first published in June 2006