The popularity of prepaid wireless services has skyrocketed in the United States, but carriers are experiencing a not-so-pleasant side effect- high churn-and many are challenged by the need to expand prepaid offerings without exposing themselves to this phenomenon.
Prepaid wireless service has become an important tool for operators looking to push their services into another market segment and lower their costs associated with acquiring customers. For many personal communications services operators, prepaid subscribers account for about 50 percent of their subscriber base.
Still, prepaid growth in regions such as Europe, Latin America and Asia far outpaces growth in the United States. U.S. carriers remain reluctant to expand service offerings that target other customers besides the credit-challenged because of the threat of high churn. In an industry where churn among postpaid customers is reaching epidemic levels, prepaid churn already is running more than double that each month.
“Everyone is afraid to go beyond 20 percent of the product mix because they are susceptible to having their churn rate double for the year, which is catastrophic,” said Richard Siber, associate partner with Andersen Consulting in Boston.
Prepaid subscriber churn averages about 9 percent each month for U.S. carriers, said Siber. Washington, D.C.-based Strategis Group says compared with a postpaid customer, a prepaid customer is twice as likely to churn. A recent study the consulting group commissioned found that all prepaid wireless customers surveyed said they would switch or disconnect service within three months-translating into an annual churn rate of 140 percent, or 11 percent per month, said Kent Olson, wireless analyst with The Strategis Group.
It’s not surprising to analysts that churn among prepaid customers is higher. Customers are not locked into a long-term contract, and ending service simply means not replenishing airtime. High prepaid churn is not necessarily devastating to a carrier’s financial results as long as acquisition costs are kept low, but ways carriers report prepaid results and the hodgepodge of pricing and marketing efforts continue to create uncertainty for the financial community.
“There is no industry standard to measure prepaid churn, and that throws off numbers,” said David Berndt, associate director with The Yankee Group. “Some suggest wireless carriers treat it like post-pay. Others don’t like that and say after three months, a guy has churned.”
Omnipoint Communications Inc. says customers churn off its network when they don’t replenish their minutes within 110 days. Powertel Inc. counts churned customers as those that aren’t active within 60 days.
“A lot of people don’t have a set policy on when customers churn,” said Kevin Inda, vice president of investor relations with Powertel. “A lot of people are playing with the numbers to get a better churn rate.”
Analysts suspected Omnipoint did just that in the fourth quarter 1998, when, after suffering from high prepaid churn the previous quarter, the company had unusually low prepaid churn levels the next quarter. Analysts wondered if the numbers were artificially low in the fourth quarter because of the extensive purging of low-use prepaid subscribers late in the third quarter.
Industry experts say the benefits of prepaid offerings-lower acquisition and customer-care costs, greater penetration and higher brand awareness-should offset higher churn if the service is priced and marketed correctly.
“The trick on the prepaid side is to have a very small cost of acquisition by not subsidizing the phone or using a distribution channel where you pay lower commissions to get the phone out that way,” said Jeffrey Hines, wireless analyst with Deutsche Banc Alex.Brown. “Then you can suffer higher churn or lower revenues from these customers. It’s an area that has to be closely monitored.”
Analysts regard Powertel as one of the more successful prepaid carriers in the United States. The company’s average revenue per user on the prepaid side for the first quarter was nearly $13 higher than ARPU for post-pay customers, and more than half of its customer additions were prepaid customers. Powertel does not reveal churn rates for prepaid customers because it doesn’t feel the figure is relevant to its financial health.
“Churn becomes relevant when you have a subsidy on the customer,” said Inda. “We recoup the marketing costs. Some other carriers don’t. The minimum cash outlay is $150. The cost to acquire the customer is $200 or below.”
On the other side, Aerial Communications Inc. suffered in the second quarter from high prepaid churn rates, which ran about 10 percent per month, resulting in a combined churn rate of about 4.8 percent per month. The carrier offered only one prepaid denomination with one replenishment date. To combat the loss of acquisition costs, Aerial in June began charging prepaid customers $99 for a starter kit in addition to purchasing a handset. Aerial hopes this, in addition to offering several denominations of prepaid cards, will recover any incremental acquisition costs and encourage more frequent use.
Churn is churn
Even with the proper marketing and cost structures in place, prepaid churn should always be a concern for carriers, warn analysts.
“Churn is a four-letter word no matter what type of subscriber it is,” said The Strategis Group’s Olson. “Prepaid has a subtle margin impact. If prepaid subscribers’ user experience is poor, the likelihood of attracting these customers to a post-pay base is minimal.”
And as carriers begin to branch the service out to target other markets besides the credit-challenged, the pressure to offer more attractive prices and handset subsidies grows, making them susceptible to churn that will affect the bottom line. The key for operators will be to stimulate prepaid airtime use while keeping churn low.
“Churn is a huge factor in terms of determining the value of a wireless subscriber because it has a big impact on recurring monthly revenues,” said Hines.
Prepaid customers accounted for 70 percent of Canadian operator Microcell Telecommunications Inc.’s net new additions in the first quarter, but prepaid customers on average used only 25 percent of the airtime minutes postpaid subscribers used. Although the costs to acquire prepaid customers are lower, these users “generate less than half the average monthly revenue compared to postpaid subscribers,” wrote Moody’s Investors Service Inc. in New York.
AirTouch Cellular cut its prepaid prices to as low as 35 cents per minute and is hoping the move will reduce churn and stimulate use.
“The major cause of high prepaid churn was that the cost of prepaid airtime was too high. That’s why we slashed them as low as we did this spring,” said Jonathan Marshall, spokesman for Vodafone AirTouch plc. “That was a very strong signal that we intended to offer great value and make it worth their while … This should have a significant impact on churn rates.”
Powertel attributes its high ARPU and replenishment rates among prepaid customers to competitive pricing and extended coverage for prepaid customers. Subscribers can use their prepaid service throughout a 12-state region and in the rest of the United States at an incremental roaming cost, said Inda.
Many operators today limit prepaid customers from using their handsets outside their service areas and charge a high rate per minute for prepaid service.
“Prepaid minutes are higher, and it’s ridiculous because carriers don’t pay as much for the prepaid customer,” said Berndt. “Most carriers have the perception that these people are credit-challenged, and they don’t have other options so we can gauge them.”
Siber points out that the U.S. wireless market has much to learn from prepaid offerings in Europe and other areas of the world. Telecom Italia Mobile,
whose subscriber base is near 16 million, reported in May that prepaid customers accounted for 78 percent
of its customer base. Yet prepaid churn is less than the average churn rate for postpaid customers in the United States, said Siber.
“Using prepaid in Europe is like breathing air, where in the U.S. there still is a stigma attached to it by many carriers and distribution channels,” said Siber. “It’s a must if you are going to be competitive.”
While some of the differences in Europe are explained by culture (i.e. customers are accustomed to using smart cards), most are explained by having sound business plans and strong loyalty programs, said Siber. For instance, prepaid customers in Europe have easy access to replenishment centers located at automated teller machines, and operators know their customers.
In the United States, carriers don’t know anything about their prepaid customers, said Berndt.
“The market profile on the prepaid customer base is unknown,” said Berndt. “Carriers don’t know where they live, how much money they make. They don’t know any social demographics on these people. How do you market, upsell, cross sell and ensure to replenish the phone? All these are big mysteries.
“It’s going to take hearing more success stories from Europe, Latin America and Asia, hopefully.”
