Reducing churn means millions for mobile operators

A mobile operator such as Orange UK could gain over GBP110 million per year by reducing subscriber churn by just 10%. Many other operators could also benefit from improving their customer retention, and may need to re-think the way they manage churn.

In Western Europe, growth in mobile is slowing down as a result of market saturation, and operators need to find ways to consolidate their revenues and protect their subscriber base. Voice revenues are declining under intensifying competitive pressure, and alternative sources of revenue such as mobile data services and mobile entertainment have yet to pick up in any significant way. At the same time, attracting and retaining customers remains very expensive: Orange UK, for example, reports that in Q4 2007 it spent GBP98 to attract each new customer and GBP136 to keep each postpaid subscriber. In addition, subscriber churn is high, not only in predominantly prepaid markets such as North Africa (where an annual churn of 50% is not uncommon), but also in Western Europe (see Figure 1).

Figure 1: Annual subscriber churn for European mobile operators in Q3 2007 [Source: Vodafone, WCIS (for T-Mobile), Orange]

Strategies to minimise churn can be categorised into one-off retention actions that are taken at points when customers are likely to switch, and loyalty programmes which reward clients over a period of time. The former either provide customers with incentives to redeem accumulated points (making it significantly more interesting financially to stay than to switch), or offer gifts or discounts on an ad-hoc basis. The latter have historically been based on accumulating loyalty points, but have now broadened their action to reward subscribers for each favourable purchasing decision taken. Other initiatives have also been trialled, such as Vodacom RSA's up-front annual payments. 

One-off retention actions are often reserved for postpaid subscribers (as the end of a customer's contract period is a strong indication of possible churn) and are handled by customer service. The renewal of a contract can be sweetened by the redemption of points against a new handset, discounts (free minutes or SMSs) or other gifts (e.g. Vodafone Egypt gives discounts on Apple products). High-value customers are proactively contacted by call centre representatives to encourage them to renew their contract. These retention campaigns are expensive, however, and could become less important if recurrent reward schemes were successfully implemented.

Loyalty programmes, particularly those that reward customers for each purchasing decision, have become smarter. Point systems based on spend are now complemented by immediate discount schemes. The former are useful in encouraging a longer-term mindset (as redemption of points can be delayed or withheld), while immediate discount schemes help to win new customers.  These programmes may take into account regularity of spend (e.g. Tesco UK gives 10% discount for automatic top-ups), timing (e.g. Cell-C in South Africa gives unlimited on-net calls during weekends for Friday top-ups), volume of spend (e.g. the right to enter prize draws at Glo in Nigeria, or the right to be a Gold customer at T-Mobile USA), or total usage (e.g. O2 UK gives 10% of top-ups back to customers after three months have elapsed). Such programmes also encourage customers to upgrade their phone or accounts (e.g. Orange UK gives back 15% of six-month's worth of credit in six instalments when a new phone is purchased).

If Orange UK managed to decrease its contract churn by 10% (from 21.2% as reported in December 2007 down to 19.1%), it would save more than GBP15 million per year in retention costs alone, and the retained customers would bring in GBP90 million in additional revenues per year.

 

More savings would come from a better retention of prepaid customers: this represents close to 10% of the company's annual gross operating margin.

Churn management strategies must be tailored to specific markets and customer expectations: it pays to get it right.

David Eurin, Senior Consultant, Analysys Consulting

Analysys Consulting works in Western Europe as well as all the key emerging markets, and has advised local and international mobile operators on their strategies to increase ARPU and decrease churn. Analysys has a strong reputation for robust quantitative analysis, and has also developed robust qualitative frameworks to understand and manage customer churn.

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