Mobile Churn The impact of churn on mobile subscriber profitability. Industry briefing
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1 Mobile Churn The impact of churn on mobile subscriber profitability Industry briefing This year, mobile operators will spend billions of dollars replacing lost subscribers. The ability to retain subscribers, and reduce acquisition costs, has therefore become a key measure of operator success. But what is the real impact of churn on profitability and why do subscribers churn anyway?
2 WDS Industry Briefing Contents CHURN: A KEY PERFORMANCE MEASURE p3. UNDERSTANDING THE IMPACT OF CHURN p4. Gross Additions, Net Additions and the Cost of Churn p4. How much does it cost to acquire a new subscriber? p5. WHAT INFLUENCES CHURN p6. Customer Experience and churn p6. Environmental & Purchase History and churn p7. Customer Lifetime Value p8. Is loyalty the same as retention? p8. STRATEGIES FOR CHURN REDUCTION p10. CONCLUSION p11. ABOUT WDS p12. APPENDIX p13. WDS is the trading name of Wireless Data Services Ltd. registered in England and Wales (company number ). Registered address Wireless Data Services Ltd., Alder Hills Park, 16 Alder Hills, Poole, Dorset, BH12 4AR, UK. VAT number GB While every care has been taken to ensure that the information in this document is correct, WDS cannot accept (and hereby disclaims) any responsibility for loss or damage caused by errors or omissions. All rights reserved. No part of this document may be reproduced without the prior permission of WDS. Copyright: WDS
3 Churn: A key performance measure The wireless industry is at an inflection point; marked by saturation, competition, stagnant revenue growth and increasing customer care and subscriber acquisition costs. As such, the ability to retain an existing customer has become critical to recapturing some of the revenue and margin sacrificed by customer acquisition programs and price promotions. Of course, focusing marketing dollars on customer retention rather than customer acquisition is far from breaking news. Across most mature wireless markets, mobile operators have long appreciated that the cost of acquiring a new customer is incrementally greater than the cost of retaining an existing one. Today this has never been truer. As an example, assume a mobile operator with 1.5 million net additions in the year, Average Revenue Per User of US$39 and a 3.5% quarterly churn rate. Decreasing that churn by 50 base points to 3% would deliver an additional $40m of revenue and $22m profit (from the original collective of net additions) in just 36 months i. With such figures at stake, churn data, alongside subscriber acquisition costs, has become a key measure used by industry analysts and financial commentators to determine mobile operator performance. Yet despite its prevalence as a reporting measure it s not an immediately transparent figure to benchmark, analyze or predict. Churn rates vary enormously. In Europe, the blended churn rate for a Tier One mobile operator is double that of an equivalent US operator. This isn t to suggest that European subscribers are any less loyal, or that US operators provide a better service. Instead it reflects the relative unpredictability of churn as a science, and the external influences that make some groups more susceptible to defection than others. This paper provides an overview of how churn impacts mobile operator performance, how it is measured and why (and when) consumers leave a network. 3
4 Understanding the impact of churn ARPU (Average Revenue Per User) has long been a standard measure for operator performance. However it makes no reference to profitability and is of limited value when assessing performance and customer value in today s highly competitive mobile markets. APPU (Average Profit Per User) instead factors in the cost of managing the subscriber within the network, in addition to the original acquisition costs. This provides a more accurate and representative view of subscriber value. Fig 1. shows how a fluctuation in churn impacts the predicted subscriber margin by amortizing costs, including CPGA (Cost Per Gross Addition), over a longer average customer life expectancy. Quarterly Churn Average Customer Lifetime (months) Blended APPU 2.5% 150 $ % 3% 100 $ % 3.5% 86 $ % 4% 75 $ % 4.5% 67 $ % 5% 60 $ % Extended Subscriber Margin Fig 1. Assumes 1.5m net additions on a 20m subscriber base. $50 ARPU, $160 CPGA, $18.50 CPU. Gross Additions, Net Additions and the Cost of Churn To understand the cost of churn (the financial burden put onto remaining customers to replace a churned customer with a new customer), it s important to understand how the industry measures new additions within the network. All mobile operators report Start of Period (SoP) Subscribers 18,500,000 Gross Additions 4,090,000 Lost customers in period (at 3.5% -2,590,000 quarterly churn) Net Additions 1,500,000 End of Period (EoP) Subscribers 20,000,000 Gross Addition:Net Addition Ration 2.73 Cost of Churn (at CPGA $250) $8.75 Fig 2. Calculating Gross Additions and the Cost of Churn. Net Additions; the increase in the total subscriber count from the start of the period to the end of the period. However, Net Additions is not the total number of new subscribers connected to the network (Gross Additions). Instead it represents Gross Additions, minus lost (churned) customers over the period. While Net Additions is useful in assessing a network s overall growth, further analysis of Gross Additions allows a more granular view of Gross Losses, the Gross Addition vs Net Addition Ratio and the Cost of Churn. In this example (Fig 2), a 3.5% quarterly churn rate means it takes 2.73 Gross Additions to achieve 1 Net Addition. This variance also allows us to calculate the Cost of Churn, this is the cost that is borne by the remaining subscribers to replace a churned subscriber with a new subscriber. Cost of Churn provides a useful performance measurement from which to analyze the indirect cost burden of churn and the cost of subsidizing new devices for new customers (Fig 3). The calculation is expressed as CPGA x Churn $11.22 $12.05 Leap T-Mobile US$ 9 6 $4.49 $5.30 $6.10 $7.53 Sprint MetroPCS Verizon Wireless 3 at&t 0 Fig 3. Cost of Churn analysis. The cost burden on existing subscribers to replace a churned subscriber. (Source: MetroPCS Q Financial Report). 4
5 How much does it cost to acquire a new subscriber? The cost of acquiring customers has increased incrementally in line with more advanced (and costly) smartphone equipment. Often reported as CPGA (Cost Per Gross Addition), acquisition costs include retail, administration, marketing and handset subsidy costs. While efficiencies in retail, such as driving customers through online channels, have helped to cut acquisition costs, the average cost of subsidizing equipment has grown. CPGA now averages $250, and is far higher for smartphone connections. Apple iphone subsidies are, for example, notoriously high. Industry analysts estimate that Verizon Wireless will spend between US$3-5b in 2011 subsidizing the iphone at a cost of $ per customer ii. Subsidizing equipment in this way has become a key promotional tactic to attract new customers or retain existing customers within a network. However, to recoup their investment it has become imperative to extend the average customer lifetime. Coupled with the continued costs associated with maintaining a customer (customer care, network maintenance etc), it s not uncommon for mobile operators to have to wait +12 months to breakeven on a customer; extending the average customer lifetime therefore has a notable impact on subscriber margins. Q1 09 Q2 09 Q3 09 Q4 09 Q1 09 Q2 09 Q3 10 Nokia (SP) $248 $254 $277 $265 $210 $174 $183 HTC $364 $358 $348 $348 $339 $340 $342 Apple $600 $600 $600 $620 $600 $595 $610 RIM $357 $345 $320 $311 $299 $304 $300 Samsung (all) $122 $124 $120 $169 $192 $185 $210 Sony Ericsson $162 $170 $166 $171 $182 $195 $207 (all) Motorola (all) $123 $124 $124 $169 $192 $207 $223 Fig 4. Mobile device Average Selling Price (as sold by manufacturer to the operator, before any subsidy is applied. (Source: WDS 2010) Subsidizing handsets for new and existing subscribers remains one of the industry s most extensively used promotional tools. In a study by Informa Telecoms & Media iii, 57% of interviewed operators subsidized equipment for new customers with only a quarter agreeing that their subsidy costs had decreased for the period 2009 to
6 What influences churn? A number of factors influence churn (see fig 5), some are regulatory or technological and innately control churn. Others are more personal, and importantly, controllable. Native Factors Age Income Profession Employer Family & Friends on Same Network Credit Score Purchase History Factors Retail Channel Used PrePaid vs PostPaid Business Contract Number of additional subscriptions Termination Fee Contract Duration Hero-Handset Time as a customer Additional services Environmental Factors Mobile Termination Rates Number Portability Numbering Spectrum Allocation National Coverage Competition PrePay Availability Handset Bundling Customer Experience Factors Data Speeds Call Quality Support Requirements (type of call / number of calls) Retail Experience Device Quality Firmware / Software Fig 5. Examples of factors that influence propensity to churn. In addition, propensity to churn can be amplified by Churn Gates. These describe notable milestones in the customer journey where subscribers will exhibit a higher rate of churn. Examples include: 1. End of contract period: In the weeks preceding the expiration of a contract, subscribers will begin looking for more advantageous deals or for a plan that includes a desired device. 2. Start of contract period: The first 30 days of device ownership are critical to setting long-term usage trends and, subsequently, profitability. Poor retail practice or a poor out of the box experience can produce instances of buyer s remorse (where the device or service does not meet expectations) and drive product returns. 3. Launch of a Hero Handset: The availability of a Hero Handset on a particular network may promote Gross Additions at the expense of other networks. AT&T s US exclusivity on the iphone (until 2011) was considered a key driver for acquiring new subscribers and keeping them. 4. Buggy device: Device launch cycles are shortening as manufacturers look to gain a competitive edge through first-to-market advantage. However, instances of buggy devices being released have increased as a result. These typically take the form of firmware issues limiting device functionality. Resulting device recalls or over-the-air patches can damage subscriber confidence. 5. Network failure: Poor network performance, such as low voice quality or slow data speeds can frustrate subscribers. Data congestion in high-density population areas is increasingly common and has been cited as a driver for churn. Customer Experience and Churn There are multiple innate factors that make a subscriber more susceptible to churn. Age, for example, can have an extreme impact with some studies iv citing blended youth churn in the US at 31.5% against a national average of 3%. However, there are many factors directly controllable by the mobile operator; these are categorized as Customer Experience Factors. 6
7 For many mobile players, the customer experience has become a key differentiator. Parity across price plans, hardware and services means consumers increasingly see little measurable difference between brands; certainly not enough to build loyalty. Instead, the customer experience has emerged as a means for players in this highly competitive market to differentiate their brands and build loyal, and profitable, customer bases. Churn? USE Fig 6. Key stages of the mobile consumer journey. CONSIDER While a positive customer experience has a positive effect on customer acquisition (loyal customers are more likely to recommend a product or service to friends), its value is largely in the retention of existing customers. In a September 2010 survey by the Telemanagement Forum, 60% of companies surveyed cited Improve Customer Retention as a key driver for customer experience programs. 25% cited customer acquisition as a driver. BUY Mobile Consumer Journey EVALUATE It s easy to assume customer experience begins and ends at customer care. The reality is that the customer experience is the sum of all the experiences a consumer has with a service provider; from awareness, discovery, purchase, use and advocacy. For today s players, driving value from the Customer Experience is about aligning the many discrete user experiences, processes and touch-points that today s mobile consumers interact with. These may include an interaction with a retailer, a support channel, the network, the device or a service. Environmental and Purchase History Factors and Churn The US stands almost alone in its low churn rate and Tier One operators such as Verizon Wireless routinely post quarterly churn rates below 2%. There are several key environmental and purchase history factors that make this so. Coverage: As a purchase criteria in Europe, coverage is barely considered. However, the ubiquitous coverage enjoyed in Europe does not exist for many US consumers, particularly those looking for highspeed data services. Coverage footprint therefore remains a key purchase criteria and motivator to remain within a network. PostPay Dominance: Across many mature wireless markets, prepay plans continue to represent a significant share of net additions (typically ~50% for a Tier One operator). Such plans offer the consumer immediate benefits and flexibility, but while prepay plans have a low cost of entry they are also easy to leave and so attract some of the industry s highest churn rates as price sensitive consumers shop for the best deals. In the US, Prepay services represent only a small percentage of total subscriptions (typically less than 10% of a Tier One operator s total subscribers). Indeed, in 2010 both T-Mobile US and Verizon Wireless saw net losses on their Prepay subscriber base. Number Portability: Although mandated by the FCC in the US since 2003, number portability is discreetly marketed and not actively understood or leveraged by consumers. Handset Control: Mobile operators (either through direct or indirect channels) remain the dominant force in device distribution. Devices are closely locked to the network and the supply of SIM-unlocked third party devices is limited. This is a natural churn prevention. 7
8 Customer Lifetime Value Understanding if certain groups of subscribers are more susceptible to churn than others requires detailed modeling and segmentation. Not all subscribers have equal value and operators must look carefully at strategies to retain their high-value and loyal customers. Customer Lifetime Value (CLV) models provide a useful way to apportion a dollar value to a subscriber (or subscriber group) based on cumulative cash flow from a subscriber relationship and the benefits of loyalty and advocacy that increase over time. They provide marketing teams with a means to gauge the effectiveness of their acquisition costs and retention strategies. CLV modeling may also be used with the goal of changing the behavior of different customer segments to consequently change their lifetime value. The following table (Fig 7) provides a series of segmented CLV scenarios. Contract Type Post-Paid Pre-Paid Pre-Paid Post-Paid Post-Paid Age Range Usage Summary Smartphone, heavy data user. Light pre-paid minute usage (off-peak). No data usage. Heavy prepaid minutes usage. Heavy text use. Smartphone, limited data use. Uses all monthly voice minutes. Usgae Summary $350 $10 $10 $350 $400 ARPU $50.00 $15 $8 $50.00 $50 Cost p/user $20 $10 8% $15 $20 Churn 3% 4% $ % 3% 1 year $110 $50 $429 $170 $60 2 years $479 $119 $812 $ years $880 $202 $1373 $ years $1316 $300 $1373 $ Fig 7. Customer Lifetime Value scenarios Smartphone, heavy data user. Cancels after 12 months. Understanding a segment s susceptibility to churn, and their CLV, is crucial to both acquisition and retention strategies. Typically, a subscriber base comprises multiple segments, each with varying profitability characteristics. Some may represent a higher cost-to-serve through above-average customer care use, others may have a low cost-to-serve but add significant load to the data network through intensive usage. Whatever the characteristics, their churn and profitability patterns will vary. For operators deploying a churn reduction strategy, identification of high value customers must always be a priority. While all churn is arguably bad, the loss of low-value customers will inherently be less damaging than the loss of once loyal, high value subscribers. For example, in 2010 T-Mobile US suffered negative industry attention because of a net loss of 33,000 subscribers. However, closer analysis reveals losses largely came from the lower prepaid segment (-218,000), while the more lucrative post-pay contracts saw a 185,000 net gain. A net loss will always be a negative, but better they be from lower-value customers whose departure won t significantly dent overall margins and profitability. 8
9 Is Loyalty the Same as Retention? Loyalty and retention are often terms used interchangeably. While they both impact churn they are very different and should not be confused. Loyalty relates to an emotional bond between service provider and consumer and typically goes beyond simple price and product promotions. As a result, loyal customers often become brand advocates and deliver enormous value through word-of-mouth recommendations. Unfortunately, despite such value the results of a loyalty program are often long-term and difficult to accurately identify. Retention strategies are instead highly visible and deliver immediate results. Such programs relate to stopping a consumer from leaving a network at a point of churn. Typically they are driven by price and/or product promotions. A retained customer therefore, may not necessarily be a loyal one. By the same token, although churn can reflect poor customer satisfaction it does not directly show the degree of satisfaction within a subscriber base. When a customer churns because of poor customer satisfaction it s typically too late to perform a recovery. To counter this, operators should use a collection of measures to better predict churn, including Net Promoter Scores, Customer Lifetime Value and CSAT scores. 9
10 Strategies for churn reduction There are a myriad of programs deployed by mobile operators around the world to reduce churn. Fig 8. provides an overview of key churn mitigation program types and their influence on either loyalty or retention. Type Description Example Retention Loyalty Handset Exclusive availability of AT&T s four year Exclusivity key handset models in a exclusivity on the Apple defined market. iphone. Service Additional free Many operators offer Rewards minutes, data or texts. additional credit for regular prepaid top-ups. Converged Bundling multiple home Virgin Mobile (Broadband, TV and Phone Offers entertainment and connectivity services. bundles) Community Privilege Handset Subsidy Value-Added Services (Business) Value-Added Services (Consumer) Complimentary services aligned to target audience. Over-and- Above Contract Privilege Reward Points Beneficial access to events for subscribers. Discounted devices Complimentary services aligned to target audience. Unexpected services that go over and above the industry norm. Improved contractual terms after a set period Subscriber earns points to spend on a selection of products / services. Orange Wednesdays (free cinema tickets). O2 Blueroom (tickets to concerts available before general sale). Common across 70% of global operators. Vodafone Spain provides hosted IPBX service and Business Apps. Telstra MySync delivers contact back-up service US Cellular Battery Swap and Handset Replacement service. US Cellular One & Done contract, offers no contract period after initial two years. Orange Barclaycard earn Orange Credit Card points to redeem for vouchers. Fig 8. Examples of churn reduction strategies and their benefit to retention and loyalty. 10
11 Conclusion Churn will remain a key challenge for mobile operators and may in fact rise as the wireless value chain becomes increasingly decentralized. The explosion of connected devices and the increasing influence of over-the-top (OTT) players will force greater fluidity in how consumers interact with mobile products and services. Mobile operators once fixed position at the center of the mobile experience is being challenged by these, and other disruptive forces, forcing them to look at new and innovative ways to drive long-term loyalty and stem immediate churn. In planning loyalty and retention programs, mobile operators remain heavily reliant on BSS integration of CRM and billing platforms. However, research v shows that CRM systems are often used more for operational tasks (order management for example) than churn prediction or other proactive loyalty planning. In reality, a combination of tools and systems need to be aligned and deployed; from subscriber profiling and competitor monitoring to network monitoring and marketing campaign management. There must also be an appreciation that a subscriber s decision to churn may be the result of several smaller customer experience failures. Aligning the customer journey and delivering a consistent experience as subscribers pass through the retail and usage stages of the journey will be key to building loyalty and long-term advocacy. During these mini-experiences it will also be vital to capture data, and share that knowledge centrally to build a more holistic view of the subscriber and his likely propensity to churn. For example, consider a consumer who engages with a retail channel with the express purpose of purchasing an messaging device. A month later, the same consumer has not sent a single from his new device and the device management platform reveals no attempt has been made to configure it. By aligning all of the network nodes, tools and touchpoints that the subscriber has interacted with, key business intelligence can be extracted and used against predictive churn models. Different regions will also need very different churn strategies. For some the goal will be churn management rather than churn reduction. For example, reducing churn any lower than 2% is a difficult task. In such environments, focus may be put on ensuring churn does not increase, rather than finding ways to further reduce it. In other regions, where churn is +30% the immediate goal will be improved segmentation and marketing strategies to identify key fault points and stem the flow. Regardless of the region and the operator, churn will remain at the forefront of operator challenges and as a key measure of success for the foreseeable future. 11
12 About WDS WDS: Enlightened Thinking As the industry s only provider of specialist managed services dedicated to optimizing the customer experience across the wireless value chain, WDS works alongside some of the industry s best-known brands, spanning mobile operators, handset manufacturers, OS vendors, retailers and service providers. WDS uniquely understands how people use wireless products and services. We use this understanding to enlighten our customers, helping them to assure the customer experience, improve future products and services and build profitable, long-term relationships with end-users. To us, continued cost efficiency and revenue gains do not have to come at the expense of the customer experience; they should be a direct result of it. Through a single platform, deployed across our customers businesses, we align critical processes, gather intelligence and deliver actionable insight that drives real end-user value. With offices across five continents, and interactions with millions of end-users every month, no one has a more global view of the customer experience and the wireless value chain. To learn more please visit ww.wds.co or tim.deluca.smith@wds.co 12
13 Appendix REFERENCES i. Assumes 1.5m net additions. $38.69 ARPU and a quarterly churn rate of 3.5%. 49% margin per subscriber. ii. iii.informa Telecoms & Media 2010, Cutting the churn: best practice loyalty strategies from around the world iv. v. Informa Telecoms & Media 2010, Cutting the churn: best practice loyalty strategies from around the world DEFINITIONS ARPU: Average Revemue Per User describes the gross revenue contribution per user, per month. APPU: Average Profit Per User describes the monthly profit per user after all costs have been factored. Churn: The measure used to describe subscribers leaving a network for a competitor. EoP Subscribers: End of Period subscribers, the amount of subscribers in a network at the start of a measurement period. SoP Subscribers: Start of Period subscribers, the amount of subscribers in a network at the end of a measurement period. Cost of Churn: A calculation to measure the cost burden on remaining subscribers of churned subscribers. The calculation is expressed as CPGA x Churn. It can also be shown through the following calculation: (Lost customers in quarter x CPGA)/SoP Subscribers. 13
14 WDS is the trading name of Wireless Data Services Ltd. registered in England and Wales (company number ). Registered address - Wireless Data Services Ltd., Alder Hills Park, 16 Alder Hills, Poole, Dorset, BH12 4AR, UK. VAT number GB While every care has been taken to ensure that the information in this document is correct, WDS cannot accept (and hereby disclaims) any responsibility for loss or damage caused by errors or omissions. All rights reserved. No part of this document may be reproduced without the prior permission of WDS. Copyright: WDS 2011
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