Loyalty programs and profitability – part 1: Introduction

Telecom service providers in mature markets face a sea of troubles. In wireless, the days of double-digit market growth are over, leaving competitors to fight for one another’s customers. Not surprisingly, share prices in the sector have tumbled from their highs in 2000, but even today’s depressed prices are hard to justify without much-improved margins.

Unfortunately, most industry CEOs are focusing on margin-improving techniques that are either hard to pull off (such as consolidation and truly differentiated products) or difficult to convert into a sustainable advantage (such as cost reductions). But the service providers have so far underappreciated an alternative: increasing customers’ loyalty and maximizing their new and existing lifetime value.

The value of this approach, has been proved by several leading players not only in the telecom but several different industries such as financial services, consumer goods, etc. Objective involves capturing and analyzing data about customers for the purpose of marketing to and serving them on the basis of the value they are expected to create during their “lifetime” with the company. Leading practitioners annually develop and test thousands of new offers targeted at narrowly defined customer segments and rapidly scale up only the most successful ones. Telecom carriers can secure a competitive advantage by using similar techniques to extract more value and profit from their customer base.

Although some telecom operators have already started down this path, none have embraced loyalty and customer lifetime management as a core institutional capability in the way leading financial-services providers have. Until recently, most telcos were busier expanding their customer base than increasing their existing customers’ value.

Now that times have changed, many carriers are intuitively striving to increase it, but they tend to tackle discrete opportunities one at a time, without fully appreciating the complexity of customer lifetime management or the careful execution required.

Some, for example, have tried to reduce churn by offering discount plans and other incentives—but ended up retaining customers they would have been better off losing and making formerly marginal customers unprofitable. Others have tried to contain the surge in unpaid bills by tightening credit limits on new applicants but are now turning away many customers who would have been profitable.

Companies that implement a loyalty program have to eschew this piecemeal approach and follow a set of basic principles. First, they must tailor the way they view and treat the customer. Second, they must follow a rigorously quantitative approach to determine each customer’s value and to test initiatives that might increase it. Third, they must embrace customer lifetime management as a core institutional capability requiring a new mind-set and new incentives, processes, and tools. In return, companies will find that a single well-planned loyalty  program can replace the myriad unrelated projects currently overwhelming management’s agenda.

Adopting a loyalty program is undoubtedly a challenge, requiring nothing less than a transformation in the way carriers think about and approach consumers. The carriers must balance their efforts to acquire new customers with efforts to maximize the value of existing ones. They must replace “gut-feel” decision making with decisions based on quantitative facts. And throughout the organization, they must develop the skills and mentality required to treat customers by value.

A wireless provider implementing customer lifetime management projects through  effectively would generate a 4 to 5 percent EBITDA margin increase within just 24 months.

But the potential payoff from a loyalty program should put it at the top of any senior-management group’s agenda. Our analysis of best-in-class practitioners of customer lifetime management suggests that a typical wireless-service provider implementing it effectively would generate a 4 to 5 percent margin increase in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 18 to 24 months. Loyalty’s advantage over them is that it is very much under the senior-management team’s control and, done well, likely to provide a sustainable edge.