How to define a prepaid management framework in telecom?

Just came out of a workshop session with one of our clients, a mobile operator in the caribbean, where we are supporting them to redefine the distribution strategy while optimizing subscriber acquisition costs (SAC) and acquiring higher valuable clients. We got an interesting discussion related to prepaid subsidy in this market, as my client’s current practice is not showing good results and unveils room for clear improvement. Some questions raised in my mind while trying to explain our subsidy pay-back analysis to my client showing that the prepaid pack subsidy has no business sense at all: Is there a way to build a feasible handset subsidy case for prepaid? Can I update mmC’s prepaid management framework with such a case?

A brief Caribbean market update: Rapid subscriber growth, small populations and increased competition are leading Caribbean mobile markets to reach saturation levels faster than their counterparts elsewhere in the Americas. This presents potential difficulties for those mobile operators that are depending on continuous subscriber growth as the main route to increase revenue and penetrate the lower segments of the economy. New entrants in the market are more often than not the operators following this trend.

Caribbean (and most any prepaid) mobile operators need to understand that growing their subscriber base will not permit them to survive profitably in an environment characterized by increased competition, high prepaid service penetration, limited service differentiation and a pool of potential new subscribers with limited disposable income and low purchasing power.

It is correct that a growing prepaid subscriber base characterized by lower usage rates has a direct impact on ARPU – which seems to be the main statistical metric of interest for investors still even today. But making the generalized statement that prepaid users are always less profitable than contract subscribers is not accurate. Prepaid offers incredible advantages for mobile operators that learn how to leverage this segment of their subscriber base while decreasing SAC. This latter issue – mostly defined by how much an operator subsidizes the handsets it sells – is the key factor in determining a customer’s profitability as these costs must be recouped before a customer can be considered profitable. This has been the “topic of the week” in today’s workshop.

What I was said: Historically, Caribbean mobile operators have implemented heavy handset subsidies indiscriminately to both prepaid and postpaid services. Operators hoped that ramping up their subscriber base quickly, regardless of the costs of the strategy, would put them in a better position when they start offering enhanced value added services through 2.5G and 3G networks.

But the realities of the Caribbean markets – based on my brief 6 months experience: slow uptake of enhanced data services, the continuous decrease in voice telephony rates, increased competition among operators, low handset replacements rates (a key variable to determine subscriber migration patterns) and high churn rates – are forcing operators to review this strategy.

In most markets, operators are slowly phasing out handset subsidies for prepaid customers. This has given the prepaid segment better prospects for profitability, since a small decrease in handset subsides has a significant impact on the profitability of a customer. Decreasing handset subsidies may discourage new customers to some extent, but this has become less of an issue since manufacturers are now selling less expensive handsets for each of the three major technologies present in the region: TDMA, CDMA and GSM.

The supply of cheaper handsets is also multiplying through other sources, such as the parallel market and refurbished handset providers. With the costs of handsets coming down, operators can offer lower subsidies and still offer lower prices to their customers. Once SAC is brought to a manageable level, churn is the next major challenge for wireless operators. The loss of a customer not only impacts subscriber figures but also bottom-line profitability. The immense costs involved in acquiring new customers leads operators to invest huge amounts of time and money into developing strategies designed to tackle and dissuade churn.

When dealing with the prepaid sector, the problem of churn is magnified by the ease with which it can occur. In many cases the end-user has no ties with the prepaid operator other than through the service that is delivered upon voluntary payments by the customer. Most operators offer aggressive subsidies on prepaid handsets and no subsidies on calling rates: in most cases prepaid tariffs are higher than postpaid.

This makes any reduction in price by a competing prepaid operator extremely attractive to a prepaid user and provides a high potential for that customer to churn. As a result of these market factors, the prepaid operator must compete on quality of service. Since any operator, regardless of size, can compete on a relatively level playing field when it comes to quality of service, this has made for an even more competitive market.

I will soon publish the amazing experiences we are having here. Until then, please find next a brief presentation on mmc’s prepaid management framework. This framework has been the base for our prepaid churn and S&D turn around projects. Our client is appreciating the approach, and I’m sure any working in prepaid will do too.

Best regards, CVA. Flying to Madrid from the Caribbean.