Analyzing Customer Churn – Cox Regression

Last week, we discussed using Kaplan-Meier estimators, survival curves, and the log-rank test to start analyzing customer churn data. We plotted survival curves for a customer base, then bifurcated them by gender, and confirmed that the difference between the gender curves was statistically significant. Of course, these methods can only get us so far… What if you want to use multiple variables to predict churn? Will you create 5, 12, 80 survival curves and try to spot differences between them? Or, what if you want to predict churn based on a continuous variable like age? Surely you wouldn’t want to create a curve for each individual age. That’s preposterous!

Too Many Survival Curves

Don’t do this. This isn’t useful analysis. This is an etch-a-sketch gone horribly wrong.

Luckily, statisticians (once again, primarily in the medical and engineering fields) are way ahead of us here. A technique called cox regression lets us do everything we just mentioned in a statistically accurate and user-friendly fashion. In fact, because the technique is powerful, rigorous, and easy to interpret, cox regression has largely become the “gold standard” for statistical survival analysis. Sound cool? Let’s get started.

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Analyzing Customer Churn – Basic Survival Analysis

If your company operates on any type of Software as a Service or subscription model, you understand the importance of customer churn to your bottom line. When a customer leaves, you lose not only a recurring source of revenue, but also the marketing dollars you paid out to bring them in. As such, small changes in customer churn can easily bankrupt a profitable business, or turn a slow-mover into a powerhouse.

If you’re ready to get a handle on customer churn in your business, you’re ready to start doing some survival analysis. These statistical methods, which have been applied for decades in medicine and engineering, come in handy any time you’re interested in understanding how long something (customers, patients, car parts) survives and what actions can help it survive longer.

And the best part? The methods involved are mathematically simple, easy to understand and interpret, and widely available in free tools. You don’t need a PhD in stats to do this!

Dog at Computer

This won’t be you… I promise!

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