Consultant Value Added

It is coming the day when the Spanish telecom operators will have to disconnect all pre-paid mobile cell phones unless the owners are registered. Just for those that are unaware of this, let’s explain a little bit the policy: In an attempt to prevent terrorists and criminals using anonymous prepaid mobile phones for communication, the Spanish government issued a decree to disconnect any un-registered phones in the operator’s networks.

The campaign was called “Identifícate” and intended to get the country’s estimated 20 million prepaid mobile phone users to register. The deadline is November 7 2009, after which phone operators will be instructed to switch off service to those who have not provided proof of identity.

It’s not clear what will really happen; According to the Spanish publication “El Mundo”, there are still 9 million subscribers pending registration. Let’s make a simple calculation of what does this mean: according to MarketResearch.com the Spanish monthly average ARPUs will continue to decline across operators. The industry average monthly ARPU will fall from €29.62 in 2008 to €20.05 in 2013 so we can roughly assume that the ARPU in 2009 can be positioned in the €25. Considering a total amount of 8 million clients stopping consumption in November, that means that the Spanish operators will stop generating 200 million Euros / month in November and so on…

Will operators accept loosing this relevant amount of money? How are they going to replace this revenues? How will prepaid users coming from other countries to visit Spain be treated? Does this really make business sense?

I had a similar case when we were working in Sudan for one of the mobile players. The government also required the deactivation of the unregistered prepaid clients for security issues. It was clearly stated that this requirement significantly hurt our client that strictly followed the policy affecting to near a 40% of their base. I have to say that we recommended not doing so, as the financial and market-repositioning impact was so big that we would require no less than a year to recover.

Now the personal part. I know that the law is the law, but I guess that no-one in the government level have dedicated one single minute to think seriously about this. This move will doubtless please the authoritarian “nothing to hide, nothing to fear” brigade, however it’s another major blow against the right to privacy and the presumption of innocence. Yes, cellphones can be used by criminals and terrorists. As can the postal service and – for example in London – public buses. Should letters only be delivered if an authorised sender id is attached? Should we have to provide identification every time we board public transport?

Taking out the more-than-relevant financial issues that all players will suffer as a result of such a decree, a move such as this is not only a direct threat to privacy, it reverses any assumption of innocence. If you don’t register your phone you must be up to something so you’ll be cut off. At the moment this is purely a Spanish issue, but how long will it remain so? The British government in particular have a record of justifying attacks on privacy using the fear of terrorism and the argument that “Everybody else is doing it”. Watch out for something similar coming soon in legislation near you…

I clearly remember when my previous employer was referring to Telecom churn as a disease that should be treated as a Flu. As happens with today’s Flu A (H1N1) where most of the prevention messages come from the ability to detect and treat it correctly, Telecom churn should be firstly understood, then detected and finally treated.

I think there are real similarities between how to face a churn reduction program and a H1N1 infection. For that reason, I would like to share an introductory document to churn management, where we would like to briefly share the slides that were presented in a customer value management project where churn reduction was one of the key objectives.  We have already written a lot about the subject in this blog (when we discussed on channel fraud management techniques or churn retention levers) but we never wrote concretely about the different types of churn options present in the industry and their detection and treating measures.

Please find embedded after the post one of our presentation with an executive summary of the churn types you will normally find in both prepaid and post paid segments. One common message that applies to any of these churn variations is that:

A. Understanding is mandatory…

With the increasing complexity of the mature and developing markets (e.g. multi-SIM environments as a rule, channel fraud in emerging markets, increasing presence of pure data clients, etc) it comes the time when churn has to be managed differently depending on the target segment (prepaid vs. post-paid) and service (voice vs. data). The churn implications (and reasons) in prepaid have significant differences with those affecting to the post-paid customers. In order to design efficient techniques of churn reduction, it is key to differentiate the existing churn practices across segments, services and customer cycle.

B. Accurate detecting is required…

Starting with an aprioristic churn characterization, most of the operators where we work stop the exercise in identifying the churner reasons and diagnosing the symptoms. This model has to evolve including (or detecting through different analytical techniques) the key moments of truth across the lifecycle to accurately detect (and therefore, prevent) why the client leaves.

C. …but Prevention is the solution.

The complete characterization of churn practices will allow us to design efficient strategies focused on the reduction (on the eradication, in some cases) of the different types of churn considered.

The Telecoms have two significant advantages over other industries: 1) The operators have the names and addresses of their customers, and 2) the operators have the customer’s monthly revenue and consumption. Telecoms can use a method that is more cost effective than mass marketing: database marketing.

Using database marketing (or how we call it: Customer Value Management), it is possible to build a relationship with customers that will keep them from leaving. The secret? Personalized communications. If you can develop a dialogue with your customers, you will effectively treat churn before it appears and your customers will rarely leave.

It seems then, going back to the H1N1 comparison that Tamiflu is to Flu A what CVM is to churn in Telecom. The only difference resides in the fact that operators that use a CVM approach dont ever leave this methodology on client management, while those who get the influenza seem to be cured once they finish the medical treatment (and hopefully never have Tamiflu again). In any case, I have to agree once again with my former colleagues.

Best regards.

CVA

I’ve just come from the middle east, visiting different markets where we’ve seen huge pricing competition battles among operators. One of my clients requested my point of view on pricing and how to fight in such a pricing war. Here it is.

Few levers have as much power to influence profitability as pricing does. For a typical company, a 1 percent increase in price boosts profits two to three times as much as a 1 percent increase in sales volume. Mobile operators have to improve both pricing strategy and their ability to manage pricing over the long term in a scenario of a real war: a pricing one. The key thing here for the operator is to react to the competitive landscape that affect lots of the emerging markets while tapping their full pricing potential in the mid term. A rapid diagnostic analysis allows operators to quickly identify the largest pricing opportunities and tailor an approach to go after them successfully. Our work has helped our clients to gain market share, enhance their product positioning, and grow their bottom line. This should be the main objective in the short term.

mmC GROUP’s Approach

We approach pricing strategy by market, product and transaction. We identify how customizing prices across markets and products can affect buying behavior and differentiate offerings. Working jointly with a client team, we define and implement improvements to the pricing process-everything from integrating it with product design to creating tools and models that measure its financial impact.

Price Optimization Models are business and mathematical programs that calculate price elasticities, or how demand varies at different price levels, then combine that data with information on costs and inventory levels to recommend prices that will improve profits. Price Optimization Models simulate how customers will respond to price changes, supplementing managers’ instincts with data-driven scenarios. The insights help to forecast demand, develop pricing and promotion strategies, control inventory levels, and improve customer satisfaction.

Please take a look at a detailed case of pricing that was conducted in 2008. Now that it has been implemented with success we can share it with the whole of you. It illustrates how to conduct a repricing exercise in a challenging environment with the main objective of boosting acquisition.

Methodology

To implement a Price Optimization project, practitioners should:

• Select the preferred optimization model, determine the desired outputs and understand the required inputs;
• Collect historical data including product volumes, the company’s prices and promotions, competitors prices, economic conditions, product availability, and seasonal conditions as well as fixed and variable cost details;
• Clarify the business’ value proposition and set strategic rules to guide the modelling process;
• Load, run and revise the model;
• Establish decision processes that incorporate modelling results without alienating key decision makers;
• Monitor results and upgrade data input to continuously improve modelling accuracy.

Common Uses

Price Optimization Models are used to determine initial pricing, promotional pricing and markdown (or discount) pricing.

• Initial price optimization is well-suited to businesses that have a fairly stable base of products with long life cycles, such as grocery, chain drug, and office-supply stores, and manufacturers of commodities like packaging and tools.
• Promotional price optimization helps businesses set temporary prices to spur sales of items with long life cycles, such as newly introduced products, products bundled together in special promotions and loss leaders.
• Markdown optimization is well-suited to businesses that sell short life-cycle products that are subject to fashion trends and seasonality, (apart from telecom). Examples include service businesses like airlines and hotels, and certain kinds of speciality retailers, such as apparel retailers, mass merchants and big-box stores.

Case you have any comment, feel free to post. Enjoy the reading.

CVA, Flying from Cairo to Madrid

Some years ago, I received a call from a top officer working for the International Group of a major US operator.  The reason of the call was to know if the consulting services firm I was partner at that time, was able to help them in some of their existing Latin American operations to develop a profitable model to serve the segment known as “The Bottom of the Pyramid” or BOP.

One of the drivers of such request was by that time, the recent publishing of a book named precisely “The Fortune at The Bottom of the Pyramid”, written by an author called C.K. Prahalad, which stressed the economic relevance of such segment.

This book defined the BOP segment as comprised by the 4 billion people living on less than US$2 per day.  Prahalad proposes that businesses, governments, and donor agencies stop thinking of the poor as victims and instead start seeing them as resilient and creative entrepreneurs as well as value-demanding consumers. He proposes that there are tremendous benefits to multi-national companies who choose to serve these markets in ways responsive to their needs. After all the poor of today is the middle-class of tomorrow. There are also poverty reducing benefits if multi-nationals work with civil society organizations and local governments to create new local business models.

Coming back to our case, it is important to say that the client knew us through several projects we had developed for them in other operations in the region related to the re-engineering of their Prepaid Business. Those projects had resulted in a boost of revenues and profitability in all cases. Obviously, attacking the BOP would mean an extra twist on the Prepaid line of business. We immediately accepted the challenge, and quickly launched the project, deploying a team to visit the two operations in question.

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Mobile service providers have traditionally focused bulk of their churn management and retention efforts on the post-paid customer segment. Prepaid has at best been an afterthought from a customer perspective. However, mobile operators now need to re-assess their prepaid strategies as the prepaid segment is the fastest growing segment worldwide, and churn in this segment, especially of high-value customers will hurt profitability.

As published before in this blog and based in our experience, an effective prepaid management program can increase prepaid revenue by 3 to 5 percent and/or reduce prepaid churn by 5 to 8 percent.

Fran has just come back from a central European country to discuss this topic. He met the CCO of a triple play operator and explained our prepaid management framework and how do we think we can support them in defining a successful prepaid strategy. A 2 hours meeting can be summarized in the following slide:

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I’m blogging just after participating in an important workshop in an African mobile operator where we are supporting them to redifine the pricing strategy towards acquisition & ARPU stimulation in the prepaid segment.

One of the topics discussed was the importante that my client gives to acquisition as one the main drivers of growth, considering that the maret average ARPU has been declining to less than 40% the levels we had in the previous year.

Falling ARPU does not tell us that there is no growth. In fact, ARPU is falling because there is growth. Much of the pessimism in the market is due to misinterpretation of ARPU. Instead, we are suggesting to start looking at real users and what they really spend.

In countries where mobile market is mature the financial markets normally interpret falling arpu as another sign that the sector is stuck in a dull ex-growth phase, unable to build returns on its investment in next-generation networks. The negativity comes from the fact that penetration is over 100 percent and growing only slowly and arpu was relatively stable but is now dropping. But before we all give up and go home, let’s scratch beneath the surface…

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We have recently completed a handset strategy redefinition for a major western-europe telecom operator and main findings related to handset subsidy made me ask several times this question: Are clients worth enough to incurr in so high SACs (subscriber acqusition costs) ?

Let me start with the following facts: A) 945 million mobile handsets were sold in 2006 and preliminary calculations put the figure for 2007 higher than 1000 million units; B)  Replacement handsets are slowing down in mature markets such as Western Europe and North America (yearly annual growth of
3-6%)… C)  …although worldwide handset sales are expected to continue growing at a 8.2% CAGR until 2010

Now you an imagine how much money is spent yearly in handset subsidy in Europe, where in mature markets handset replacement renew 40% of the handset base on a yearly basis. Now the question is: Am I, a mature operator in the mobile market, capable of finetuning the huge amount of millions € I regurlarly invest in subsidies? The question is clearly yes, but only if I can measure the HLTV (Handset lifetime value) of my base and check what is the impact of handset migrations in my main KPIs, that is, revenues, churn, ARPU and why not, cost.

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I’m actually conducting a prepaid ARPU stimulation and re-pricing definition project in Africa for the 3rd mobile entrant in one of the biggest countries in the continent (nice people, nice country). Just to let you understand what we are actually facing in this market, let me suggest this article coming from one of my top favourite publications. There’s a whole world there out of the postpaid market. Nice reading.

CVA.

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Getting more from prepaid mobile services.

Most companies offering prepaid mobile services destroy value by ignoring customer life-cycle management, an approach used successfully in many other service industries. Instead of tailoring marketing strategies to the behavior and probable lifetime value of specific customer groups, these mobile operators often deploy blanket promotions that give away value needlessly through discounts or free services.

While a lack of data makes customer life-cycle management particularly hard to implement in prepaid mobile services, innovative companies have mined usage patterns to create microsegments: homogenous groups of as few as 100,000 prepaid customers. They use this segmentation to launch customized marketing campaigns that encourage these groups to spend more.

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