Because most telcos now understand churn and have customer retention strategies in place, churn analysis alone can no longer deliver a major advantage as it did in the past. Profitability analysis is the way to retain competitive edge," says Bruce Jones, sales manager for the Commercial Sector at SAS Institute SA, leaders in business intelligence (BI).
According to Jones, in the past, telcos measured customer value in terms of revenue. This measure was appropriate then, but profit margins are reducing it become even more vital. Today, telcos can lose money despite having customers that yield high revenues. Profitability or long term value - and not revenue - should be the measure.
"It is not uncommon for telcos to be able to halve their churn rates using business intelligence solutions. MTN, for example, has reduced churn by 45 percent on pre-paid contracts using our solutions," he says.
The next step for telcos is to understand customer profitability so that they can segment their customers, and determine how to treat each group.
According to Mark Spracklen of CVA, a SAS partner, there are three major ingredients needed to determine customer lifetime value. These are financial management; product analysis; customer analysis and segmentation. These areas correspond with three distinct groups within any telco, which often have very little understanding of each other's area of expertise.
"The finance people focus on reducing costs, but typically have limited knowledge of the company's product and customers," says Spracklen, who was recently in SA to share information with SAS customers about the latest telco trends, his experience in Europe, and new developments in the industry.
"The product people have a different focus. Engineers focus on running the network as effectively as possible, but generally have a limited understanding of customers, while product managers focus on their products, and are often unaware of their impact on the network," he says.
"Finally, marketing and strategy people focus on understanding the market and the customer, but typically have limited understanding of the costs."
Customer lifetime value is the view that can pull all these disparate departments together, and get communication going across the organisation..
"Many telcos have been talking about customer lifetime value projects, but very few are actually doing them," he says. "Profitability cannot be estimated precisely, but companies can get approximations good enough to have a major impact on the business. This has been proved time and again in Europe."
Often profitability exercises are not conducted because of two departments - finance and IT. Finance does who tend to focus on to much detail, and IT would prefer to do profitability analysis itself, by building huge data warehouses.
"Profitability analysis does not require complex, big bang IT projects," says Spracklen. "Well chosen business intelligence solutions will yield the information far more effectively."
To be of any use, however, the analysis must be visible, flexible and auditable, so that the results are trusted by the business. In addition, the intelligence produced must be actionable.
"The information must lead to more focused marketing campaigns, the introduction of yield management as well as more focused acquisition and retention efforts," he says.
Marketing campaigns should be designed to focus on more valuable customers, and not simply be based on ARPU (Annual Revenue Per User).
Acquisition and retention efforts and costs should be directed where they can be most effective. There are massive costs associated with acquiring and retaining customers, so efforts should focus on the more valuable ones.
Jones notes that understanding the profitability of customers is even more vital when a new competitor enters the telco market.
"If the telco can identify its profitable customers prior to the new entry, then it has a better chance of retaining them, while encouraging its non-profitable customers to move to the new competitor," he says.
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