UK: What Makes a Mobile Customer Loyal?

Last Updated: 5 August 2003
Article by Clive Keyte

Mobile operators are suffering from one of the largest customer churn rates in any industry to date. At anything from 15% to 30% customer losses per year, the cost of maintaining let alone growing the customer base is huge.

Why stay with one operator?

In a consumer market place, what causes an individual to stay with one mobile service provider over another? At the moment there are two reasons; the first is cost and the second is fashion. As long as calls are cheap and the handset makes the right kind of fashion statement, there is little motivation for any customer to move to a new service provider. However, when a handset provider brings to market a new device then movement occurs.

The primary driver for the movement is the handset and the secondary driver is the service. If a consumer can find the desired handset free as part of new service provider deal and does not have to pay a penalty to leave the existing service (most networks only tie customers in for one year), then the move will take place; this behaviour will be escalated when true number portability is possible. The customer is satisfied; there is no question of being loyal to the existing service provider as there is no reason to be so, other than price.

Using price as the only element in a campaign to keep customers is not sustainable; there will always be someone else who can do it cheaper. The churn rate for most mobile operators is hovering around the 15%-30% range and acquisition costs are more than £200 per customer. Keeping profitable customers from leaving has to be one of the key critical success factors for an operator. A recent study by Bain & Company in conjunction with the Harvard Business School in which costs and revenues derived from Service customers were analysed, showed that by increasing customer loyalty by just 5% profitability could increase from 25% to 95%. Keeping the subscription rates level, let alone growing the customer base, is costing the operators a great deal. It may seem obvious, but clearly there is a need to keep existing valuable customers while identifying loss making or high risk customers.

It is confusing

There would appear to be very little today, other than price and fashion, that ties customers to a particular network operator. One might argue that new technology has a place in this mix, however, although there are a number of ‘early adopters’ who absolutely need to have the latest technological marvel, these are not the people who will generate vast revenues or profit. That is not to say they are unimportant, the early adopter is the person that will ultimately give the thumbs up or down to the usefulness of any new technology before it becomes mainstream. The operators need to fully appreciate the value of this segment of their user population. It is also interesting to note that this particular group are not usually concerned with price, their motivation is technology and being first to use the technology. On the whole an early adopter will usually pay a premium price. For the majority, however, a good price provides a very compelling reason to buy a service. The operators have become very creative when it comes to customer pricing, one might argue that they have become too creative. Pricing plans have become overly complex and confusing. It is almost impossible to compare one plan with another. It is interesting to see that a whole new industry has been born on the Internet where third party web sites are attempting to help would-be customers make economic mobile purchase decisions.

Why trust a network operator?

Some operators provide helpful calculators to assess personal requirements and then provide the best plan to suit a particular lifestyle. This is a bit of the cart before the horse. Why should a customer trust an operator to give the best price when the customer is new and has had no experience of the service provided? Indeed, why should the operator give the best price to a new customer, when they know nothing about that individual? Of course, the operator should provide differentiation in pricing; one price does not fit all. The operators have gone a long way in providing the best (lowest) price deal to suit an individual’s needs; this has come out of competitive necessity. The result is that everyone is paying less for their calls… regardless of whether or not they want to.

Yes, there are people who would be happy to pay more, as long as they receive benefits in other ways. For example, in the motor insurance industry people are prepared to pay a little more for motor vehicle insurance provided they are convinced that should they have an accident, the claim will be settled quickly and painlessly. By throwing in a courtesy car, the insurance company can quickly cement a deal. To enable this to happen, the insurance company has to project a set of brand values to capture customers and keep them loyal. In this instance there is a combination of trust (they will fix the problem painlessly) with the incentive of value for money (the courtesy car is ‘free’). The equivalent for a mobile user might be a replacement or loan device if a handset is lost or stolen, as part of the service. These privileges are not earned; they come as part of the initial transaction. However, let us take the motor insurance analogy a little further: If a customer stays with an insurance company then privileges accrue if accidents do not occur (discounts as part of a no-claims bonus) and further privileges accrue due to longevity of contract, for instance, travel related discounts and information services. These privileges are earned. In the same way, as the car owner has to remain with an insurance company to obtain a no claims bonus, a mobile phone user should remain with an operator before a free handset replacement is granted. The advantage of this type of customer focused marketing is that it rewards and encourages the most profitable group of customers.

Profitable behaviour

Many studies have demonstrated the simple premise that good behaviour follows reward. In commerce this goes further, rewarding profitable buying behaviour stimulates repeat buying and leads to loyalty. Identifying the most profitable customers and targeting them has been proven time and time again to increase profitability. Instead of wasting time and money on special deals for all, with a small amount of information and a little analysis different offers can be made to different target groups depending on their purchase history and demographic. In the retail food industry over the past few years, larger profit gains have been achieved through a switch in emphasis from item pricing to pricing based on total purchases. A simple example of this is a discount for bulk buying or discounts on ‘total basket cost’ thus encouraging the shopper to spend more per shop. With the use of a loyalty card to track buying behaviour over a period of time, further ‘stealth’ incentives can be offered. The consumer believes these to be based on the ‘points’ score, but this is only partially true; the retailer has far more information available on which to base an incentive offer. For example, a shopper who has a track record of purchasing fine French wines and cheeses may well be interested redeeming ‘points’ for a fine food hamper including a selection of French wines. The shopper has an ‘aspiration’ incentive to collect points for the reward that suits his or her lifestyle. The retailer has a happy, loyal customer who is spending to save.

Points based loyalty

In the mobile phone environment there are not so many behavioural variables to collect so the task is a little more difficult. To effectively segment a customer population there is a need to understand more than how much has been spent in a given timeframe, which has tended to be the traditional segmentation criteria used by operators to date. So an alternate means to gather accurate customer information is required. Customer segmentation becomes increasingly more accurate when associated with some form of ‘points’ collection system. When a ‘points’ system is introduced, the mobile operator has an opportunity to collect the first level of information through registration. In practice, if more than the name, address and e-mail are asked for then very few people will register. However, once registered, the mobile operators have a huge advantage compared to other industries; they have an open communication channel to a known user. If used carefully, this channel can be utilised to gather more and more personal information over a long period of time. Indeed, the incentive programme itself can be used to ‘buy’ information through such things as ‘points’ for questions answered. By combining the information extracted with basic call data and knowledge of the money spent by the customer an information repository can produced. In the retail consumer environment, many sophisticated techniques have been employed to enhance data collection with alternate sources of information and with behavioural theories thus enabling the marketer to very accurately predict future spending patterns. These techniques can equally be applied in the mobile operator (or fixed line) environment. For instance, one US operator has used social security numbers (which indicate the location an individual was born) in combination with the individual’s current address. Those who are living away from their birthplace are targeted as candidates for a long-distance plan. This collection, transformation and analysis of data should lead to a repository providing the backbone of a highly effective loyalty system that can enable a much more detailed understanding of customer behaviour.

Brand values

Other than providing incentives to customers, loyalty systems have another extremely important quality. They give the operator the ability to reinforce its brand values. This is highly significant. Mobile operators suffer in the brand market because they come behind the handset. Even with heavy advertising and sponsorship creating good brand recognition, the handset is considered first before the service. The handset is the fashion accessory, not the service and therefore is one of the main drivers (after price) leading to a purchase. However, as noted previously, after purchase the operator has a huge advantage, that is, an ongoing relationship. The handset is a commodity aimed at consumers who choose and buy. The service should provide a lasting customer relationship with a continued dialogue at least through a monthly bill or more frequently, provided there is something of value to communicate. Everything that is communicated must reinforce the company’s brand values, loyalty schemes must be conceived as an integral part of the overall company strategy. Although it may seem simplistic, a loyalty programme should reflect the same values, beliefs and core business benefits on which the company has been founded. By following these principles, a loyalty system will have the potential to change a customer’s perception of what is important. The customer will identify with the operators brand, and with others who use the same brand. By providing a point collections system, the operator can set points goals for its customers and categorise based on the number of points earned. In much the same way that air travellers move from Silver to Gold to Platinum card status through the collection of air miles, a mobile service customer can do the same through the purchase of call minutes. A Gold or Platinum mobile customer has gained a certain kudos that cannot be obtained through the purchase of a handset. As a member of a very exclusive club, he or she will want to remain in that club.

Incentives to stay

Participation in a points based loyalty system can reveal all sorts of information that was previously unknown to the operator. Small amounts of information can allow an operator to target its existing customers with specific incentives. For example, often each member of a family may have a mobile phone, but with different service providers. Frequently, it is the chief wage earner who pays all of the bills. Knowing this information, the operator can target this wage earner with incentives to ensure that the whole family takes services from the same operator. The operators also deal with their customers in different ways. Most operators have corporate customers and retail customers. However, the end user may well be the same customer. With this knowledge, it would be entirely reasonable for the operator to connect a corporate scheme (for an individual) to a consumer scheme (for the same individual) and offer incentives that result in increased business share, for example discounts for family members and friends. The incentives for any scheme need not be financial. For instance, parents are concerned about the welfare of the family, a simple scheme that would allow a certain number of calls between family members, even if their credit has run out, might make the difference. If the scheme included ‘aspiration’ incentives for younger family members like handset upgrades, the bill payer would then be under family pressure to remain with the current provider… and so it goes on. A long list of incentives for customers to stay with the same operator can be produced and most of them have nothing to do with a price plan.

Transfer of knowledge

Loyalty systems can provide a good solution to the problem of customer churn but ultimately, the mobile operator has to look at the cost of implementation and management versus potential gains. This is a marketing initiative and, as such, needs to be evaluated together with the many other marketing initiatives already in place. Furthermore, the information produced by the loyalty system will only have real value if it is integrated into the existing business processes and IT services. Experience to date in the consumer retail, motor insurance and air travel sectors demonstrate that huge competitive advantage can be gained. The mobile operators can take advantage of the past successes in other industries and apply the great wealth of learning to the future mobile service sector. Industries may well change or be very different. Customers however, will more often than not, respond in the same way to any incentive based stimulation.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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