Telco economics: The price of loyalty

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Achieving greater customer loyalty is important for telecoms operators, but often difficult to realise. We look at operators that have proved successful in achieving low levels of customer churn including O2, Telstra and TELUS, and identify practices that have played a key part in their success.

Introduction

Customer churn continues to present a significant and costly challenge to the mobile industry. Churn rates for MNOs can range from less than 0.75% per month (c. 9% pa) to over 5% per month (80% pa). Postpay rates of churn are usually lower and typically lie between 0.75% and 3% per month (c. 9–43% pa), whereas prepay churn typically lies between 3% and 5% (30–80%pa), although it can be as low as 1% in some circumstances, for example when number portability is not permitted.

The costs of churn are felt in several ways. The major costs come from lost revenues from customers churning away and the costs of acquiring new customers to replace them. During periods of high growth operators can also lose significant market share, and hence revenues and profit, if much of their expenditure on acquiring new customers is devoted to replacing customers that have churned away, rather than on growing their subscriber base.

Analysis of data published by operators shows that average costs of acquisition (CoA) are about four times average monthly ARPU, and it will therefore typically take over four months’ revenue to repay the SAC incurred. The figure is slightly higher on average for postpay customers at about 4½, whereas prepay CoA is on average between 1½ and 1¾ times ARPU.

We estimate that the industry average EBITDA is around 25%, so for an individual postpay subscriber it will take on average 17 months to repay the investment from EBITDA. With typical contract lengths of 24 months, this does not leave much time to generate a positive margin.

These costs mean that it is important for operators to find ways of minimising churn and of maintaining it at a low level.

Some level of churn is inevitable, since customers may move to a new region or country, die, or perhaps acquire a new phone and subscription from their employers as part of their job. Other forms of churn are largely voluntary, and operators have to focus their efforts on these if they are to contain their costs of doing business.

In doing so, operators can find it worthwhile to take into account the different characteristics of their customers. Some people show a much greater propensity to churn and are always seeking improved tariffs or a better deal, but many others remain loyal. If the latter churn, they are more likely to do so for other reasons, such as poor quality of service.

In an attempt to find an effective means of reducing churn, mobile operators have adopted a variety of strategies to reduce it. These include:

  • Offering financial or other incentives to customers who are about to churn, such as discounted handsets or tariff bundles.
  • Monitoring usage and using data analytics to predict which customers are likely to churn in the near future and offering them incentives and improved service bundles.
  • Using more flexible contracts to allow early upgrades or other changes.
  • Giving bonuses (e.g. extra minutes or increased data allowances) or other rewards for loyalty.
  • Offering multiple services, such as quad play, to increase the stickiness of their service.
  • Offering additional and popular services, such as Spotify or Netflix, at attractive rates or bundled with basic services, or discounted entry to events.
  • Improving overall customer experience and service quality to reduce the triggers for churn. This can include significant organisational and cultural changes and efficiency improvements including increased automation. Changes include transfer of customer support functions to marketing, and the introduction of chatbots and apps to speed up and improve handling of routine customer enquiries.

This report reviews the causes of churn and the characteristics of customers that are most likely to churn. It draws on examples from operators’ experiences to illustrate different strategies used by operators to reduce churn and to establish which approaches have proved most successful in delivering reductions in the level of churn or in maintaining low levels that have already been achieved. It also looks at the costs associated with churn and their impact on revenues and profitability. Operators discussed include TELUS, O2 and Telstra, which provide examples of MNOs that have achieved low levels of churn, and Globe, which provides useful insight into the different customer behaviours found in a predominately prepay and multi-SIM market and an example of the relationship between churn and SAC.

Contents:

  • Executive Summary
  • Actions of successful operators
  • Financial implications of churn
  • Benchmarks
  • Introduction
  • Causes and costs of churn and remedies
  • Customer behaviours
  • Costs of churn
  • Common approaches to reducing churn
  • Case studies and results
  • TELUS: churn fell over five years
  • O2 outsourcing: changing approach to customer experience
  • Telstra: analytics and customer experience
  • Globe Telecom: costs of churn
  • Cricket: reducing churn in low-cost prepay
  • Adjacent and complementary services
  • Conclusions
  • Customer behaviours
  • Costs of churn
  • Actions of successful operators
  • Benchmarks
  • Resulting organisational and financial issues faced by operators
  • Recommendations

Figures:

  • Figure 1: Share of TELUS revenues taken by SAC and SRC
  • Figure 2: Costs of churn when CoA = 50% annual ARPU
  • Figure 3: Examples of reasons/triggers for customer churn
  • Figure 4: Mobile customer characteristics
  • Figure 5: Customer average lifetime versus lifetime value
  • Figure 6: Relative proportions of customer types in mature markets
  • Figure 7: Costs of churn when CoA = 50% annual ARPU
  • Figure 8: Costs of churn when CoA = 80% annual ARPU
  • Figure 9: Costs of churn when CoA = 10% annual ARPU
  • Figure 10: TELUS monthly churn
  • Figure 11: TELUS EBITDA
  • Figure 12: TELUS monthly ARPU 2007–2016
  • Figure 13: TELUS SAC and SRC % of revenues
  • Figure 14: TELUS costs of acquisition and ARPU
  • Figure 15: TELUS SAC, SRC and EBITDA
  • Figure 16: UK MNOs blended churn
  • Figure 17: O2 customer satisfaction
  • Figure 18: Telstra annual postpay churn 2012–2017
  • Figure 19: Telstra revenues by service
  • Figure 20: Telstra ARPU
  • Figure 21: Telstra EBITDA
  • Figure 22: Globe prepay customers 2011–2017
  • Figure 23: Globe postpay customers 2012–2017
  • Figure 24: Globe revenues 2012–2017
  • Figure 25: Globe and TM prepay and postpay monthly churn
  • Figure 26: Inverse relationship between Globe’s postpay SAC and churn
  • Figure 27: Examples of costs of churn and CoA