Studies indicate the mobile phone industry may be in for more alarming churn figures as increased competition threatens to erode carriers’ customer bases.
Richard Siber, associate partner with Andersen Consulting in Boston, expects the industry’s churn rate to average between 33 percent and 36 percent by the end of 1998 compared with 32 percent in 1997. The industry already is at epidemic levels, he said, adding that for most carriers, churn has risen 10 percent this year, while other carriers have churn rates as low as 1 percent per month.
Consulting firm The Strategis Group, Washington, D.C., found that monthly churn among all wireless phone users at mid-year 1998 amounted to 31.2 percent annually, or 2.6 percent monthly.
Many personal communications services carriers are reporting higher churn rates than their cellular counterparts. PCS carriers’ aggressive strategies in acquiring customers resulted in them disconnecting several non-paying customers. Aerial Communications Inc. reported a 5.3-percent churn rate for the third quarter, while Powertel Inc.’s rate was 4.5 percent.
“The company expects that ongoing PCS churn rates could be higher than historical churn rates for cellular carriers as more competitors and competitive services continue to enter the marketplace,” Powertel said in its Securities and Exchange Commission filing for the third quarter.
While monthly churn rates for cellular carriers have remained relatively steady-around 2 percent since 1993-a recent survey from Strategis indicates that about 8 percent of today’s customers planned to change carriers within three months, a steady increase from 5.7 percent in 1997. And the majority of subscribers who intend to switch are subscribers who have higher-than-average monthly bills and longer lengths of service-carriers’ highly valued customers.
What are carriers to do?
At an average acquisition cost of $400 per subscriber, churn costs the industry nearly $6.3 billion per year, said Strategis. Factoring in the loss in monthly revenue from subscribers who discontinue service, the total annual loss because of churn in 1998 amounts to nearly $9.6 billion.
Siber said a 1-percent decrease in churn can result in $150 million increase in shareholder value.
“There are certain mid-sized regional companies where a one-tenth of one percent reduction is putting $8 [million] to $10 million on the bottom line,” he said. “Grossing that up, a 1-percent savings equates to $80 million to $100 million impact on shareholder value. Even for smaller companies, churn management can have an enormous positive impact on your bottom line.”
“What continues to happen is that the success of a company is measured by the number of subscribers,” said Renu Kapoor, manager with Deloitte & Touche Consulting in San Francisco.
“We’re finding that subscriber growth is increasing for the industry as a whole, but ARPU is decreasing. Revenue is important, but it doesn’t capture profitability. What you have to do is put initiatives such that you’re now able to reward your customers based on their value to the business.”
“We’re striving to reach customer loyalty that we haven’t seen in the industry yet,” said Siber.
For most carriers, price is the primary way they are differentiating themselves in the market, and price is the number-one reason customers churn to other carriers. Industry experts are beginning to see a parallel between the mobile phone market and the long-distance telephone market, which once hinged its entire value proposition on price. This resulted in customers switching carriers whenever they were offered a better deal.
“We have to be careful to avoid the same process,” said Mike Palmeiri, director of customer operations with BellSouth Cellular Corp. in Atlanta. “The best thing we can do is do a better job with the customers we have today.”
“You can’t hinge your whole value proposition around price. You have to build loyalty,” said Kapoor. “Long-distance companies learned this long ago. Everyone was playing the game, and no one was making money. Customers began to expect good prices in the long-distance company but wanted something more.”
Though price remains the primary reason why customers switch to another carrier, Kapoor said customers now are churning less because of price and more because of poor customer service.
As pricing plans become more simple, like AT&T Wireless Services Inc.’s One Rate plan that eliminates roaming and long-distance charges, customers will begin wanting something else, she said.
“Carriers need to treat churn as a symptom of a much larger problem,” said Siber. “They need to figure whether there are network quality issues, call completion, customer-care issues and so on.”
Kapoor said many carriers are using statistical modeling and surveys to understand how profitable a given customer segment is and which characteristics are important to those customers. For instance, the high-end-user segment will desire call quality and good customer care, while the emergency-use customer will want adequate coverage.
Carriers also are deploying software programs that mathematically determine which customers are churn risks by evaluating data ranging from call duration to customer-service complaints.
“We’re definitely seeing a strong increase over the last several months in carriers’ interest in this,” said John Andrews, senior account manager with Chicago-based SLP InfoWare.
Industry experts agree that churn must be tackled from several angles, including predictive modeling, loyalty programs and simply building a rapport with customers.
“Predictive modeling is just one thing,” said Andrews. “There’s a laundry list of things carriers need to do.”
Siber said the mobile phone industry has much to learn about brand loyalty from other markets like the airline, consumer product and financial industries. Many of those companies have learned how to compete at the mass-market level by offering a premium service, he said.
“All have segmented the market with various levels of product and customer care to match the segment they are targeting,” said Siber.
“It will not be unusual to be a `platinum’ wireless user in the future if you are a premium customer today.”
