The customer retention challenge | October 1, 2006

In saturated and competitive mobile markets, operators will need to focus more on customer retention

The loss of customers — churn — is one of the banes of a mobile operator’s business. It leads to higher subscriber acquisition costs (SACs) and — invariably — cheaper products and services to try and beat off rivals’ offers. It’s a profit killer.

And worryingly, many mobile operators don’t seem to be doing a very good job at bringing churn levels down.

According to figures supplied by Wireless Intelligence, blended monthly churn levels in Western Europe — combining post-paid and pre-paid customers — have remained around the two percent mark over the last year (Figure 1). This translates into around a quarter of a mobile operator’s customer base churning off the network in the course of the year — a staggering amount.

If the pre-paid market is taken in isolation, the churn levels can be a lot higher. In the UK, Vodafone’s prepaid churn rate for the year ended 30 June 2006 was a jaw-dropping 40.9 per cent. By comparison, churn rate for Vodafone’s contract customers in the UK over the same period was 20.1 per cent. Not as high as prepaid churn but still high enough to be a problem.

“In the saturated mobile markets of Western Europe, operators have traditionally spent more time and money on customer acquisition than customer retention,” says Marta Muñoz Méndez-Villamil, principal analyst at Ovum’s strategy practice. “That’s why the churn levels have remained fairly steady because one operator’s offer to lure customers — which is usually based on price and handset functionality — is quickly matched by a competitor. More emphasis on customer retention would help to break this vicious cycle.”

If intense competition and the absence of differentiation in the mobile marketplace are the two main causes of churn, then a customer retention strategy that distinguishes one operator from another would seem wise. But what form should customer retention take?

Rewarding customers who are loyal seems an obvious way to reduce churn. In the highly competitive UK market (penetration exceeds 110 per cent), O2 introduced a range of loyalty programmes in 2005, offering different segments of its subscriber base — post-paid and prepaid — with different offers according to the amounts of money spent within a certain timeframe.

And as Ovum admiringly observes — it compiled a case study of O2’s customer retention strategy in the UK — the mobile operator stipulated from the outset that to become eligible for its loyalty programme, customers must first provide their personal details.

As customer ‘disloyalty’ is highest among pre-paid users, and it’s a group that operators know very little about in terms of demographics, it’s a sensible move by O2. Knowing more about their pre-paid customers should enable them to cross-sell and up-sell more intelligently to this group.

And if you reward customers who spend more then it can have the pleasing side-effect that customers will spend more to qualify for the offers.

So what effect has O2’s customer retention efforts had on its rates of churn? During 2005, O2’s post-paid subscriber churn fell by 12 per cent to a monthly rate of 2.25 per cent; pre-paid subscriber churn fell 21 per cent over the same rate to a monthly churn rate of 2.42 per cent. While Ovum is cautious about attributing these falls in churn entirely to O2’s loyalty programmes, it seems reasonable to conclude that they have made a positive contribution.

Is ICM the route to lower churn?

ICM is one acronym that European operators — according to IT consultancy and systems integrator Capgemini — need to pay a lot more attention to of they are to retain customers. Standing for Inbound Customer Marketing, Capgemini argues that a ‘sophisticated’ ICM system, using best-of-breed vendors, can significantly reduce churn and boost sales pitch conversion rates up to the 50 per cent level.

Telefonica Moviles in Spain is also pursuing a loyalty scheme where users, depending on the amount of usage over a period of time, can get loyalty points. These points can then be used towards reducing the cost of the handset when an upgrade is due. According to its financial statement for Q1 2006, this loyalty programme ‘helped significantly’ to reduce Telefonica Moviles’ average monthly churn rate of 2.0 per cent during Q1 2005 to 1.9 per cent in the same period the following year.

But keeping churn in check in a fiercely competitive like Spain, which also has number portability, is an extremely difficult task as Mario Soro, CRM technology director at Telefonica Moviles, readily admits. “If anything, average churn rates across all mobile operators in Spain have been going up in recent months,” he says, “but we believe we’ve got an advantage over our competitors.”

For nearly two years, Telefonica Moviles has been pursuing a multi-channel strategy where customers, according to their own preference, can select the way they can interact with the mobile operator. They can either use the standard call centre and IVR, the internet, or SMS. “We’ve even launched a video IVR, which is also unique in Spain,” says Soro. “The more channels that a customer has to choose from, the greater interaction we can have them and that helps to retain customers. In fact, we want to know the preferred method of interaction that each of our customers has so we can communicate directly back.”

At the beginning of 2005, Telefonica Moviles commercially launched its SMSbased CRM service using a platform supplied by Telsis, a UK-based vendor. “The service is used mainly by customers checking their loyalty points tally and to respond to promotions,” says Soro. “We started off with around 500,000 text messages per month on the service but now that’s increased to 1.5 million texts per month.”

Soro says that Telefonica Moviles has managed to synchronise promotions throughout its channels — that is, a promotion selected by a customer via one channel is reflected in all the other channels. The mobile operator is now working on getting all its commercial products and services synchronised across each of its channels.

As with O2, Telefonica Moviles’ prepaid customers wishing to qualify for the loyalty programme have to submit personal details, including country of origin. “With that information, we can then offer special packages for customers who need to ring home on a regular basis,” says Soro.

Another way in which Telefonica Moviles is trying to reduce churn amongst its pre-paid subscribers — a group that accounts for around half of the mobile operator’s subscriber base — is to offer micro credits of €2 via an SMS request. A useful service for customers who may be temporarily unable to buy phone credits.

Smart, a mobile operator in the Philippines also offers micro credits to its customers — 98 per cent of which are prepaid users — as a market differentiator. “In 2002, Smart’s annualised churn rate was running at 40 per cent but that’s now down to 30 per cent, helped by its micro credit service,” says Méndez-Villamil.

Pre-paid customers, not locked into any contract, have the highest propensity to churn. In Eastern Europe and Africa, where the overwhelming majority of customers are pre-paid, the churn rates are the highest. According to Wireless Intelligence, they were running at a monthly rate of 3.1 per cent and 4.0 per cent respectively during Q2 2006.

As we have already seen, operators generally don’t know who their pre-paid customers are in terms of name, age, sex and interests, which is a barrier to effective marketing.

“The future battles in the mobile and fixed industries will be to get better profiles of customers,” says Sandy Aitken, a BCS (business consulting services) partner at IBM. “The more an operator knows about the customer profile, the higher the chance of reducing churn. They will be able to offer services they actually want.”

Other than O2’s tactic of gathering personal information as a pre-condition of customer eligibility for offers, Aitken points out a range of options that operators can pursue to gather data: raffles, lotteries and other competitions where customers have to send in personal details to enter. “This is not rocket science,” says Aitken. “I don’t know why operators aren’t doing more of this.”

According to Alastair Hanlon, product strategy manager at Convergys — a USheadquartered company providing billing and outsourced contact centre services — it’s is still possible for an operator to work effectively at reducing pre-paid churn by simply knowing the usage patterns associated with the pre-paid number.

“We have built a software product around the customer lifetime value management processes developed by the McKinsey consultancy,” says Hanlon. “We can monitor the value of the customer [both prepaid and post-paid] on behalf of the operator and inform the contact centre agents how to act accordingly.”

In practice, this means that customers will be treated differently according to how much perceived value they have for the operator. “A customer who is a highvolume user, for example, can be routed directly to a call centre agent for any enquiries. The call centre agent will then be alerted to the most appropriate upgrade offers to try and persuade that customer to stay with the operator,” says Hanlon. “On the other hand, a low-value customer, one who doesn’t use much airtime, can be routed to an IVR system where perhaps only the most basic upgrade is offered. Some customers, from an economic view, are not worth holding on to.”

Hanlon is confident, as with most industry observers, that a bundled package of mobile services, with special discount rates, can play a big part in minimising churn. But he believes the residential market has so far been underserved when it comes to mobile service bundling.

“In dealing with business customers, it’s quite common for mobile operators to offer special discount rates but the same thing could be done for family members,” he says. “If, for example, four handsets were offered as part of a bundled family package, teenagers would be disincentivised to churn because they would lose the advantage of being part of the bundled family service.”

For this to work, there would need to be family cooperation — not always guaranteed, of course — but Hanlon’s view is that money talks and it would have an impact. IBM’s Aitken goes one step further and argues that customers should be able to create their own bundles of content, voice and data. “There is little customisation of services or packages in the phone industry,” he says, “so customers just get what’s on the shelf. But when mobile operators get to the stage where customers can chose their own bundle, they will reduce churn.”

According to Aitken, this self-creation scenario is at least two years away but he says there is ‘widespread acceptance’ among mobile operators that this is the route to go down. “The building blocks to do this are already there in the shape of IP and IMS. “ he says, “ but implementation will take time.”

So what about the short term? Is there anything that can be implemented now to reduce churn?

According to Aitken, there are plenty of ways for mobile operators to encourage their customers to stay on their networks. Multi-player gaming is one way, he says, as it’s still difficult for that to be done across different networks.

Making it easier for customers to use IM is another way. Software can be embedded in the phone so users can access IM from Yahoo! Google and MSN accounts. That would be a market differentiator, says Aitken.

And given the high quality sound of handsets, such as the Sony Walkman, Aitken believes it makes sense for mobile operators to offer a network storage service for personalised playlists. “With a serverbased approach, mobile operators could offer access to music from anywhere in the world and churn would be far less likely,” he says. “It baffles me why mobile operators aren’t doing this already.”

Moving forward, operators are beginning to bundle in fixed broadband services with mobile packages — the idea being, of course, that customers are far less likely to disengage from an operator that supplies a multitude of services (at discount prices) compared to a so-called ‘one-dimensional’ operator.

In saturated markets, if mobile operators want to avoid simply competing on price, they will have to look to service innovation, quality of service and ease-of-use as market differentiators. Only then will churn fall below current levels.