4 Pathways & Churn

Calculation

4 Pathways Introduction
4 Pathways is simply a data set, showing who is in the base at the beginning of each month,
that also captures what customers do in the month. The 4 pathways being:
Disconnect, Upgrade, Migrate Off (e.g. to Prepay) & Do Nothing

Using data for any given month(s); behaviour of

customers at different points in contract life can be
observed, to derive propensities to act (top chart).
This enables production of a churn / survival profile
per 100 deals (bottom chart)
Example for 24m 1st Contract Voice
Customers

First few months after connection

6m before to 6m after contract end

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Simplified Churn - Principles

In a recent UK exercise to determine how lifetime value varies for different types of deal
(working with McKinsey), customer churn profiles were simplified to a consistent % churning
off each month:
Applying a consistent % decay each month leads to survival profiles per the below left chart.
Approach used was to ensure the % surviving by 12m post contract end was aligned
between the true decay profile, and the fixed % churn profile, per the below right chart.

Example Maths: 55 in 100 Surviving at 12m post contract end for 24m Voice
Contract (= 36m of decay)
Monthly Fixed Churn % = 1 [(55 / 100) ^ (1 / 36)] = 1.65%
So with 100 deals where 100% 1.65% survive each month for 36m: 100 *

Variables used to distinguish % Churn:

The % of deals surviving to 12m post contract end is used to define the fixed
monthly churn % to apply.
Cases surviving to 12m post contract end determined in 2 stages, per the below:
Provides ability to distinguish churn by (usage) device over the first 12m, without needing to know the profile
of such customers beyond the first 12m (useful for relatively new categories, such as Apple at the time)
Beyond month 12, handset not used to distinguish churn.
Note that Jul 09 re-entry into CPW for acquisition deals after a period of withdrawal meant an incomplete
profile to 12m post contract end for this channel. 12m+ Phones 4U customer behaviour applied instead.
. Note that for 12m Sim Only deals, upgrades occur less often than every 12m and will be a mix of HW &
Non-HW

First
12m

Next 24m Voice / 12m Sim

Voice / Sim Only

Voice / Sim Only

Pricepoint (0-19,
20-29,
30-39, 40+)

Pricepoint (0-19,
20-29,
30-39, 40+)

Channel (Retail,
Online, TSAR, CPW,
Phones 4U, Other)

Channel where
sufficient cases
(Retail, Online, TSAR,
CPW, Phones 4U,
Other)

Usage Device, where

sufficient cases.
(Apple, Blackberry,
Symbian, Android,

How often do customers Upgrade?

The average point in life at which a Voice customer in the UK market upgrades
can be demonstrated to be very close to the tenure of the contract for Voice
customer (unsurprisingly)
st
Example for 24m 1 Contract Voice
Customers

Average upgrade of
a 24m Voice, 1st
contract customer
occurs at 1.2 months
in commitment

24m Voice (1st) = -1.2m

24m Voice (2nd+) =
-0.7m
Note that for 12m Sim Only deals, we see upgrades
12m Sim (1st) = 9.4moccur less often than every 12m and will be a mix of HW
12m Sim (2nd+) = 8.2m
& Non-HW (~60% : 40%)

Retention LTV
Unlike in Acquisition, when considering what the LTV / Contribution months is for an
Upgrade deal, need to bear in mind that some contribution would have been seen in
the event we had failed to do an upgrade, and this needs to be subtracted from
upgrades lifetime.
Method used to estimate this is to look at the propensities around maturity, omitting
the influence of upgrading customers on propensities per the below example:

E.g. Ignoring the population of upgrading customers, customers propensity to

disconnect or migrate off in the month of contract end is boosted
From (3,132 + 555) / 20,020 = 15.6% + 2.8% = 18.4% (So 81.6% survive)
To (3,132 + 555) / (20,020 4,464) = 23.7% (So 76.3% survive)
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By Paul Gillen (VFUK)