Prepaid is still a valid proposition in mature markets!

It is true that a growing prepaid subscriber base characterized by lower usage rates will have a direct impact on ARPU, which is still the main statistical metric of interest for investors. However, the generalized belief 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 subscriber acquisition costs (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.

Historically operators have identified prepaid users as the segments of society who do not have access to credit or bank accounts and a smaller segment of individuals who wished to control their expenditures. The use of prepaid for credit control is a primary driver for mobile prepaid use and has made prepaid users resist migrating to postpaid accounts, despite operators removing subsidies on handsets and prepaid tariffs to encourage them.

Highly saturated prepaid markets, such as Italy, have disproved the preconception that prepaid is a low value service option upon which a successful business cannot be built. That country has also proved an extremely successful market in terms of ARPU. The conception of what constitutes profitability in relation to prepaid has been turned on its head by a reappraisal of how profit is measured. Instead of merely considering ARPU, themargins involved in provisioning and servicing different types of mobile customer are taken into account to calculate the Average Margin Per User (AMPU) to gain a benchmark for profitability.

This misanalysis of the prepaid user segment is characteristic of the lack of information operators have about their prepaid users. However, operators are placing greater resource behind developing systems and undertaking research and analysis to achieve a better understanding of their prepaid users and the various segments that populate the prepaid user base. Developments are ongoing in profitability analytics, predictive churn analysis and data-mining.

Identification of the valuable customer is extremely important for several reasons, not just for its primary roles as a marketing device for improved customer servicing and to dissuade churn. The most important driving factor behind acquiring customer data is for its use in complex billing and rating applications to deliver content, as well as service-based billing based upon users’ perceived value of content.

Last, but not least, prepaid has an important role in the content economy – wireless revenues derived from content and premium services – due to its dominance in an important segment required to drive forward data and content/service use into the mainstream: the youth segment. Customers in this segment often cannot be served by postpaid contracts due to their lower economic standing, lack of access to credit/debit cards and banking infrastructure. Yet they consume the greatest portion of mobile entertainment services – a primary driver for the consumption of mobile data.

These, and some other insights, were part of the output we recently got in a prepaid workshop in an European mobile operator. Please find some of the sanitized slides in the presentation bellow.

Enjoy the reading! CVA