The Delta Perspective October 2009
Customer Value Development: A fresh perspective on emerging markets’ telecom economics Authors
Rogier van Driessche – Partner Maurício França – Partner Christophe Costers – Manager Adriana Salabert – Head of CVD unit
Customer Value Development improves commercial practices and generates benefits regardless of the operator’s level of sophistication: 5-15% EBITDA improvement, with immediate payback Introduction Until very recently, telecom operators in emerging markets had a clear, single strategy: customer acquisition. Relatively low penetration in most markets and benign competitive environments meant that all players were focused on the expansion of their networks and the capture of market share as fast as possible. Today however, the situation has changed dramatically. Many emerging markets are reaching saturation, competition is fierce and ARPU is under pressure. Creating returns on significant investments in network deployment seems more difficult than ever. Increasingly, operators have realised that they do not sufficiently understand the real drivers of value creation – “Are my new acquisitions profitable?”, “How does churn affect company value?”, “How do different segments contribute?” and “What is the
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KEY HIGHLIGHTS • “Customer Value Development” (CVD) is a process that puts rigorous customer data analytics at the basis of all major management decisions in a Telecom Operator • It is an essential capability that helps operators in emerging markets to deal with the challenges of today’s market reality: declining growth, ARPU pressure due to multi-SIM behaviour and rotational churn. • CVD develops a new set of KPIs and operational metrics that fundamentally alter the way operators go about their business • It further helps to optimise marketing and sales practices and puts in place the foundation for the definition of micro-segmented marketing campaigns • To fully unlock CVD’s potential, specific capabilities need to be built in the network, IT and marketing functions • The benefits of CVD are accessible to all operators, regardless of their current level of sophistication: Several operators have reached EBITDA improvements of 5-15%, with immediate payback.
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true bottom line impact of marketing and sales tactics?” are questions often heard.
of the pyramid are being addressed, the concentration of value contribution in a few “high value segments” becomes increasingly clear. This means operators
These questions reveal the reality of a structural lack of well organised and insightful management reporting that is present in many operators and also the uncertainty that comes with a change in paradigm. Two industry trends require operators to shift their approach to ensure success under this changed paradigm: First, operators have gradually realised that they no longer have an accurate picture of what was once called “the subscriber”. Clients have lost their exclusive loyalty to the operator, and use multiple SIM cards or more than one network operator simultaneously. This means that they take advantage of arbitrage on pricing schemes, or they benefit from the best offers by switching from promotion to promotion. As a result, operators should shift their focus: from mainly acquisition and sometimes retaining “subscribers” to retaining and maximising ‘share of wallet’.
should adopt a highly segmented and targeted commercial approach to ensure return on investment and positive bottom-line impact. To adapt to these changing rules of the game, operators have two main challenges: • New KPIs are required. These are more complex and present the need for greater analytical sophistication than the ones operators used to apply. A key question is how to organise and process data in order to produce insightful metrics? • Newly acquired insights need to translate into effective actions. Here the main challenge is how to revise previous practices in both commercial and technical areas of operation. Customer Value Development is our answer to these new challenges. In this paper we will try to illustrate what CVD
Second, as current market maturity means that the segments at the bottom
is all about and how it can impact the way operators conduct their business.
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What is Customer Value Development? “Customer Value Development” introduces a new set of KPIs and operational indicators based on rigorous customer data analytics. It fundamentally alters an operator’s outlook on the economics of the business, which facilitates improvement on ongoing commercial practices immediately At the core of CVD is the idea of leveraging customer data to drive better business decisions. As such, CVD aims to optimise three core value drivers (see Exhibit 1) for telco operators: churn reduction, ARPU stimulation and cost efficiency/ROI improvements. The drivers are not new, but the context of each of them has changed significantly in emerging markets over the last year:
this sense. However, more than this, the ‘A’ in ARPU (which stands for ‘average’) hints at the greatest driver of ARPU stimulation: more effective acquisition and retention of high value customers in the base, in order to skew the customer mix towards the high end. Lastly, ARPU stimulation is about share of wallet optimisation. • Cost efficiencies are no longer
• Churn is no longer just concentrated on counting disconnections. Firstly, it is difficult to define a disconnection due to the high percentage of prepaid users. An inactive line may be a sign of a customer that changed to the competition, or just a lost SIM-card that was replaced in the market (i.e. rotational churn). In addition, churn may also mean partial value loss – as customers shift part of their traffic to another provider. As a result, churn reporting is now focused on understanding value loss and driving targeted actions that remedy this loss at the source.
about the generic benchmarking of OPEX. There is now a requirement for a greater focus on below the EBITDA line. ROI is the new area of emphasis and analysis of the customer profiles and revenues generated by specific investments (e.g. BTS level) will provide insights into the type of profitability path operators are on. Customer Value Development provides the analytical underpinnings to dissect all of these drivers. It provides new ways of measuring and observing these trends, on a customer by customer basis. It introduces new
• ARPU stimulation is also no longer about just cross-selling and upselling. This remains of course a key challenge, and especially new revenue streams like data or VAS provide excellent opportunities in
dashboards and reports that provide fact based and enhanced insights as to how value in the customer base is developing. This generates immediate commercial improvements in two ways: 3
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1.
It offers a better understanding of the relationship between a whole range of commercial actions and the value they create (or actually destroy). This indicates how to optimise commercial tactics.
2.
It provides highly granular insights into the customer base and how different segments contribute value. This allows the design of micro-segmented campaigns that are highly effective and costefficient.
At the start of the CVD implementation, the operator embarks on a journey of capability building, which is not completed overnight. Understanding the requirements is key. The main challenge however is to develop these capabilities while at the same time reaping the benefits of CVD as early as possible. The subsequent sections will further illustrate both of these areas, as well as the capabilities required to effect them.
EXHIBIT 1: HOW CUSTOMER VALUE DEVELOPMENT CREATES VALUE
Source: Delta Partners analysis
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Optimise commercial tactics based on fact-based insights CVD focuses on different types of analyses that consistently produce valuable, actionable information to improve commercial tactics. Both the analyses and resulting actions span a wide range, including price plans, commission schemes, customer care models, network deployment adjustments, regional go-to-market strategies, loyalty programs and commercial KPIs. The section below provides some illustrative examples of how CVD has brought new insights that changed the way operators approach the market.
1. Update of churn and retention tactics after understanding the true value-impact of churn CVD reports allow for a detailed profile of churners. After segmenting churners by value and lifetime, operators better understand the difference between true churners (clients with a long relationship with the operator that leave) and so called “rotational� churn. 5
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In many emerging markets, up to 70% of all churn is generated by customers that either “leave” the operators, just to buy another SIM of the same operator, or buy SIM-cards that were fraudulently activated. Once such an understanding is established, the focus of the operator on churn reduction changes dramatically. Reducing churn in this context is not only related to customer satisfaction, pricing or brand, but very much linked to the optimisation of certain processes and the termination of dealer fraud.
2. Increased localisation of marketing efforts after BTS based customer analysis Through the use of CVD analysis, operators obtain a far better understanding of the geographical distribution of their segments. While operators previously turned to BTS utilisation to drive regional marketing and sales efforts, CVD mines the CDR based data to actually pinpoint the location of a customer and profile customer segments on a BTS level. This allows “broad-stroke” regional marketing and a highly segmented local approach with offers and communication messages specifically tuned to the customers in the target area. Thus, greater segmentation means more relevance and more effective adoption of the marketing message.
(unique for a SIM) over a period of time and per BTS generates insights in handset sharing patterns. For example, in an African operator, this analysis allowed the company to identify geographical areas characterised by high ratios of full-time handset sharers. This information was used to target these areas for the sale of Ultra Low Cost Handsets, which drove an increase in local ARPU.
4. Turn around a value destructive marketing campaign as a result of more accurate value impact measurement An operator was running a top-up campaign in an attempt to exploit the elasticity in the market. The campaign stimulated customers to top up: ‘Topup for Y and get 20% free credit’. But instead of generating additional revenues, CVD analysis found that the campaign had destroyed value. To make things worse, the campaign had inspired competition to launch similar campaigns, which lead to overall value destruction in the market. As these examples show, CVD is a powerful tool to optimise commercial tactics. The implementation of CVD
3. Adjustment of an operator’s handset strategy after assessment of IMEI data
is an eye-opener for many operators. This is often the first time that they are presented with empirical evidence that certain tactics destroy value and should be discontinued, while other evidence
Analysis of links between IMEI number (unique for a handset) and MSISDN
indicates initiatives that can create instant value.
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Launch highly effective micro-segmented marketing campaigns through enhanced customer base understanding Another common use of CVD is the
are easily identified.
development of micro-segmented
In an emerging market context,
marketing campaigns. The type of
however, the biggest use of micro-
dashboards and reports that CVD
segmented campaigns is to increase
develops allows operators to easily spot
share of wallet of multi-SIM segments,
opportunities for up-selling or cross-
which often represent up to 70% of an
selling or for the reduction of client
operator’s customer base. Understanding
inactivity.
the usage patterns and reasons for the use of multiple SIMs (which can vary
Micro-segmented marketing campaigns
significantly between segments) can
focus on small target segments.
create immediate value. CVD helps to
Therefore, they allow for more relevant
develop relevant, targeted offers for
marketing messages and offers, while
these different segments in order to
minimising communication cost and
stimulate usage.
potential cannibalisation effects. As a result, these campaigns are highly
The way CVD driven campaigns are
effective and cost-efficient.
designed and executed differs from typical marketing campaigns in several
CVD dashboards and reports provide the
aspects and follow a six step cycle as
necessary understanding to successfully
indicated in Exhibit 2:
design these micro-segmented marketing campaigns. They offer highly
• Campaign Hypothesis: CVD
granular insights into the customer
campaign ideas are based on
base and the manner in which different
analysis and hypotheses derived
segments contribute value. As a result,
from real/factual data. CVD does
opportunities for up-selling, cross-selling
not base campaign ideas on market
or for the reduction of client inactivity
practices or management intuition. 7
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• Offer: CVD offers are microsegmented instead of generic and valid for all customers. Operators that initiate CVD normally start with larger segments (representing 1530% of their total customer base), while more advanced operators use smaller segments (2-3% of their total customer base per segment). • Testing: CVD campaigns are always tested and value impact is measured before roll-out. This is done via small ‘test groups’ whose behaviour is always compared to that of so called ‘control groups’ to ensure deviations can be attributed to the campaign that was tested.
the avoidance of an initiation of competitive reactions. In advanced operators, campaign execution can be automated through dynamic mechanisms that identify the “best” offers for a given subscriber at any particular point in time • Monitoring: Campaign results are tracked through simple comparison of test groups with control groups - whereas this is typically very difficult in ATL (Above the Line) and / or non-segmented campaigns • Learning: The ability to monitor results and test different
• Execution: Communication is usually below the line to ensure proper targeting, cost savings and
approaches ensures that the marketing team learns and evolves over time.
EXHIBIT 2: MICRO-SEGMENTED MARKETING CAMPAIGNS
Source: Delta Partners analysis
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Essential Customer Value Development capabilities Customer value management requires certain capabilities for full execution, although measurable results can be obtained from the very beginning, regardless of an operator’s starting point What does an operator need in order to deploy CVD? There are four types of capabilities needed for CVD as indicated in Exhibit 3. Operators may have different levels of maturity and a first step is to understand where each operator is in terms of these capabilities:
• Processes Capabilities: Are the Customer Value Development processes in place? How well are they known and executed by the team responsible for CVD? • Customer Understanding Capabilities: Which primary research
• People and Organisational Capabilities: Which team within the organisation is responsible for Customer Value Development? Is there a dedicated retention and campaign management team, trained in the CVD methodology? Are there dedicated MIS resources with specialised analysis capabilities? Which skills are present and which are lacking? Does the team have adequate analytical and data analysis skills?
capabilities exist in-house? Which segmentations studies do exist? Does the operator know of the main complaints from customers and their expectations from the company? Once an operator understands where it is positioned in terms of these four capabilities, it should benchmark itself with its desired outcome, taking into account the nature of the competition in the market and the level of sophistication of other players.
• Systems Capabilities: Do the IN and billing systems have the minimum reporting requirements? Is the operation using separate “wallets / dedicated accounts” in IN to manage different promotions? Which SMS broadcasting capabilities are available?
In emerging markets in particular, special attention should be paid to People and Organisational Capabilities – lack of talent is usually the main cause for lack of results in Customer Value Development.
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The key for success is a pragmatic approach, focusing on the critical aspects first and ensuring that CVD starts producing tangible results as soon as possible. Leveraging on our experience in the region, we have identified three key success factors for successful Customer Value Development: • Focus on obtaining results quickly: Too many CVD efforts get abandoned because they fail to deliver results quickly. A focus on pragmatism and results is crucial. Targeted campaigns are a good way to show short term impact, although it is important that CVD doesn’t stop there. An experienced team typically helps to gain quick results as it can leverage experience from similar situations to evaluate ideas and improve commercial tactics and targeted marketing campaigns. • Set up a multidisciplinary team to kick-start CVD: It is important to involve various functional areas from the start. The appropriate availability of resources from all involved departments (mainly IT, network and marketing) is key. • Ensure management support. This is crucial to encourage the vital cross-functional operation. It can be done very simply through providing enough management attention, visibility and credits from all functional areas. Our experience with CVD in emerging markets has proven very positive. The results vary from client to client, but as indicated earlier (Exhibit 2) the improvement initiatives and marketing campaigns were responsible for EBITDA improvements between 5 and 15%.
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Conclusion Operators in emerging markets today deal with major challenges related to declining growth, ARPU pressure (due to multi SIM behavior) and rotational churn. Customer Value Development deals with these challenges via leveraging an operator’s most unique assets – the data it owns about its customer base. Detailed analysis of these data generates the insight required to optimise various commercial tactics and roll-out
Delta Partners’ experience in Customer Value Development Delta Partners has ample experience in Customer Value Development in emerging markets, having worked with several operators on this topic. Delta Partners can support operators that need to start or revise their Customer Value Development practices, providing:
highly effective micro-segmented marketing campaigns. Obviously, a range of specific capabilities should be developed to fully unlock the potential of CVD. But this does not mean that CVD’s benefits are immediately accessible to all operators, regardless of their current degree of sophistication: experience has proven that CVD can generate 5-15% EBITDA improvement with immediate payback in emerging markets.
campaign management (for more developed operators) • An automated “customer base scan” that has been utilised and proven in a multitude of market situations, allowing a quick run of over 50 standardised analyses that provide insights in value development of customer segments
• A dedicated CVD unit, with analytical experts specialised in telecom customer analysis • A highly experienced team, with real experience in the region and a track record of constantly creating 5-15% EBITDA improvement in over 20 operations in emerging markets • An extensive and proven library of campaigns that can be implemented quickly (for less advanced operators) and tools to improve and automate
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