268-The Mobile Phone Industry and Customer Retention
The mobile phone industry’s growth has slowed. It is now operating more like a stable, moderate to slow growth market. This is particularly true in Europe. To face the challenge of slower growth in the industry, European mobile operators are turning to customer retention, but they are careful of the customers they seek to retain.
The Europeans have observed that less than 20% of an operator’s customers generate to 80% of the operator’s total revenue. This pattern repeats itself in many industries. When we have seen these patterns in other industries, we have also noted that less than 10% of the total customers generate an astounding 50% of total revenues. These are the really important customers in an industry. See HERE and HERE for an explanation.
A company must retain its key customers. In the mobile phone industry, as in most industries, the largest 20% of the industry’s customers are likely to be what we would call Core customers for the industry’s larger competitors. A Core customer allows supplier company to earn at least the cost of capital through a business cycle. The retention of these core customers is of paramount importance to long term company success. It costs a great deal more to find a new customer than to retain and build the relationship with a customer you already have. In the European mobile phone industry, carriers have found that it costs ten times more to acquire a customer than to retain one.
The industry has found another important phenomenon associated with customer defection. Recent research has told it that defection is a social phenomenon. If defecting customers leave an operator, they usually are not quiet about it. They tell their friends. In turn, some of their friends defect as well. So, the loss of a Core customer to an operator will often bring with it the loss of several other Core customers.
The mobile phone operators in Europe are working on retention by focusing particularly on those Core customers most likely to defect. These operators have analyzed the value of their customers and have assigned a rating to each customer. When a customer calls a call center, the information about the customer, including his rating, is readily displayed on the service representative’s screen. This customer specific information enables the service representative to respond with different value offers, depending on the importance of the customer. Most of these offers reflect lower prices for a potential defector.
But the industry is responding to potential defections with more than simple price reductions. Some companies are developing personal calling rates and plans tailored to individual Core customer habits. One European company instituted this individual approach and cut its percentage of customers defecting each year in half, from 20% to 10%.
Customer retention is an important, strategic management imperative, even in fast growing markets.
29 June 2011
The broader telecommunications industry in the US suffers from a relatively high churn rate compared to other industries. The churn rate refers to the percentage of customers who defect monthly from one provider to another. Most of this broader industry is still developing, with varying offers and prices in the market.
This is not true in the US postpaid mobile telecom market. The US mobile telecom business has consolidated effectively to three major competitors, all of whom are sensitive to the reduction of churn rates and have worked to reduce them. T-Mobile is an example. It reduced its churn rate from 2.5% to .83% per over the last 10 years. Verizon has the highest churn rate at 1.1%. AT&T’s churn rate at .79% is like that of T-Mobile. Churn rate should remain relatively low in the industry in the coming years since the number of alternatives available to customers is low and the likelihood of substantial price discounts is even lower. The industry has reached end-stage in its evolution out of hostility. See HERE for more explanation.
The mobile telecom industry learned several lessons over the years that are applicable to other industries facing difficult markets. First, the reason for customer churn. While price can always be a factor, the primary reason for churn in telecom is poor customer service, a Reliability failure. Churning customers felt ill-treated when seeking support and had little hope that things would improve. In most hostile industries, the failure of a supplier causes more share change than does superior performance of an alternative supplier. See HERE for an explanation. Second, post failure efforts to retain the customer show poor results. Customers may be offered a lower price and an apology, but they tend to leave anyway. Customers see these efforts as too little too late. Third, defecting customers cause other potential or existing customers to leave as well. The loss of these potential customers is what we term Hidden Volatility. See HERE for an explanation. These defecting customers share their experiences and frustrations with their friends, family and colleagues. Many also post their negative feelings in social media. Churn with customers the company would like to keep causes more damage than most suspect.
HOW CAN THESE BLOGS HELP ME?
If you face a competitive marketplace, read these blogs. We wrote them to help you make better decisions on segments, products, prices and costs based on the experience of companies in over 85 competitive industries. Much of the world suffered a severe recession from 2008 to 2011. During that time, we wrote more than 270 blogs using publicly available information and our Strategystreet system to project what would happen in various companies and industries who were living in those hostile environments. In 2022, we updated each of these blogs to describe what later took place. You can use these updated blogs to see how the Strategystreet system works and how it can lead you to better decisions.