Opportunities for Action in Technology and Communications. Creating Value in Mobile Telecom: Beyond ARPU

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1 Opportunities for Action in Technology and Communications Creating Value in Mobile Telecom: Beyond ARPU

2 Creating Value in Mobile Telecom: Beyond ARPU After investing huge sums of money in recent years to build market share among wireless customers, mobile telecom operators are now shifting gears. As the market begins to mature, many operators are scrambling to find ways to increase average revenue per user (ARPU) and to reduce customer churn. Unfortunately, some of the efforts that companies are making to generate new revenue contribute little or nothing to value creation. ARPU, by definition, is based on top-line revenue. As such, it does not reflect what it costs to acquire and support a customer. And high customer churn, while potentially expensive, is not always bad. In fact, some mobile customers, given their specific usage patterns, will cost far more to maintain than they would cost to lose. To develop winning and sustainable customer strategies, mobile telecom executives need to develop a clearer picture of the core economics of their business and what it takes to create value. In an environment where increasing revenue is only part of what investors want, executives must figure out which customers can deliver the most profit and which ones are too expensive to serve. Indeed, the ability to know who the best customers are and how to maximize their value will be a critical differentiator between the leading mobile players and their competitors. After the Land Grab During the land-grab phase, mobile operators in many countries spent dearly to acquire and retain

3 new customers, hoping that the revenues these new subscribers generated would eventually make up for their costs. Yet by emphasizing market share (and, in some markets, by promoting service plans with free minutes), many operators have created a time bomb. They have burdened themselves with too many customers who consume a disproportionate share of the total resources. The fact is that a mobile network has limited capacity, and it is one of an operator s biggest costs. What s more, it is an asset that, because of accounting conventions, is difficult to understand. Unlike fixed-line bandwidth, which has been expanding exponentially in recent years and has become increasingly inexpensive, today s mobile network capacity is still constrained by the available spectrum. Unless an operator adds capacity, the mobile network can accommodate only a certain amount of call traffic at any given time. In densely populated areas, the cost of expanding the network can be exorbitant: doubling peak capacity can mean doubling the capital expenditure and hence the operating expenses. As networks become data-enabled, the issues will become more complex. With voice and data services sharing the same capacity, operators will need to decide which calls and services get priority. In the context of network scarcity, the relative value of different types of customers takes on a new light. Customers who make significant demands on network resources at peak times (and require higher incremental investment) can be less desirable than those who make few. Indeed, a customer who makes many peak-time calls and has a monthly bill of $75 may actually be less profitable to an operator than a customer who spends far less but uses the network only occasionally during peak periods. (See Exhibit 1.) According to our research, customers who make few demands on the network (Segment A in the exhibit)

4 effectively generate almost $12 per minute of peaktime usage, compared with less than $2 per minute for those who make many demands (Segment B). This reality has tremendous implications for mobile operators. Capitalizing on High-Value Customers Rather than continuing to treat all users alike or segmenting users on the basis of crude demographics, operators have to develop more sophisticated ways to improve profitability and future value. To meet this challenge, executives will need to understand the complex relationships between capital costs, sales costs, revenues, and operating expenses. Exhibit 1. Heavy Peak-Time Users Are Less Profitable Minutes of peaktime usage Segment B Segment C Segment A Average monthly bill (U.S.$) SOURCE: BCG analysis.

5 The travel industry, of course, has become quite skillful at making the most of its limited resources. Airlines, for example, charge higher fares for improved levels of service to take advantage of price elasticity and to leverage capacity. Moreover, most airlines extend special privileges to their most valuable customers. Such strategies have typically allowed them to boost revenues by 3 to 4 percent an amount that flows directly to the bottom line. Mobile operators have an opportunity to do likewise. Although the upside could be significant for big players, it could amount to hundreds of millions of dollars of additional profit per year realizing the potential will be tricky. Unlike air travelers, who reserve flights in advance, mobile customers initiate their calls on impulse and expect service to be available on the spot. Capacity deployment, therefore, is more difficult to adjust, and pricing must play an even greater role. Mobile operators will have to develop the capability to analyze the value of their customers and manage the yield of their assets more aggressively. To understand how their overall resources are being used, both in general terms and on a customer-specific basis, they should focus on the following: Analyzing network usage. One of the first things operators need to do is record and analyze network usage patterns by time of day and by customer. Even companies that collect this information already do very little to mine it. By studying the data, operators can form a good picture of how different types of customers contribute to economic value. Segmenting customers by contribution. Once operators have an overview, they can start to segment customers by the contributions they make. That means

6 looking at how much revenue net of allocated cost each customer is producing. This segmentation can help operators create powerful customer-acquisition and retention strategies. Their findings will show that some customers are worth pursuing and investing in to retain; others are not. Instead of continuing to acquire low-value customers at high cost, operators can focus on selectively managing their current customers for the best financial yield. Setting limits on service. Rather than developing service plans to appeal to every type of user, operators must limit the offerings for current and prospective customers who are not and may never be profitable. This will entail leaving low-value customers to competitors that either don t understand their cost structures or can provide service at a lower cost. Developing New Mobile Offerings Such an analysis will push mobile operators to reevaluate how they configure and price their service offerings to optimize network usage and improve retention of valuable customers. In formulating products and new classes of service, they will need to become more alert to their actual costs. In particular, we see opportunities for operators to innovate and differentiate their offerings on the basis of several important variables. (See Exhibit 2.) These include connection speeds service lag times the level of network access they provide during busy times roaming privileges

7 Indeed, we expect that some players will succeed at migrating existing customers to new services. They will begin to charge first class customers premiums for service enhancements such as priority access during peak-use periods, increased bandwidth allocations, better voice quality, and upgraded customer service. The introduction of faster, packetized 3G networks will open up more possibilities for customer and product segmentation than operators currently have. However, the most aggressive players won t wait they are beginning to gain experience now. * * * The rush to sign up mobile customers for the sake of additional market share has largely come and gone in the more advanced markets. Developing value-based Exhibit 2. New Levers for Mobile Operators Lever Potential action Adaptable capacity Pricing Service quality Transfer capability Access priority SOURCE: BCG analysis. Use mobile stations to handle extreme traffic loads (for example, at ski resorts or special events) Adjust prices according to network load (by time of day or call origination point) or level of customer support provided Downgrade the quality of service in case of network overload (resulting in lower voice quality or slower data delivery) Create roaming agreements with other operators and enforce call hand-overs between adjacent cells Manage access priority during periods of overload (deactivating selected services for some customer segments as needed)

8 strategies to move beyond ARPU will require mobile operators to swim against the industry tide. Rather than measuring their success in terms of numbers of customers or total revenues, mobile telecom executives will need to define it by how well they can identify and serve the customers who can generate the highest value. In the next era of mobile communications, this new capability will be an essential source of competitive advantage. Olivier Tardy Anders Fahlander Olivier Tardy is a senior vice president in the Paris office of The Boston Consulting Group and head of the firm s European Technology and Communications practice. Anders Fahlander is a vice president in BCG s San Francisco office. You may contact the authors by at: [email protected] [email protected] The Boston Consulting Group, Inc All rights reserved.

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