By Kieran Kilmartin, EMEA marketing director at Pitney Bowes Business Insight
The telecommunications industry is well-versed in offering customers highly differentiated product packages in a saturated and fiercely competitive market. Yet very few currently possess the single view of the customer that is necessary to ensure investment into individual users is kept at appropriate levels.
Like any company, an operator’s user base consists of both profitable and unprofitable customers. The former are the engine that drives net income and must be rewarded and targeted, while the latter are destroying it. However, the majority of customer promotions make no differentiation between the two groups.
Orange Wednesdays – the weekly promotion from the UK mobile operator offering two-for-one cinema tickets – has succeeded in raising the profile of the brand, reduced churn and driven revenue. But it provides all customers with the exact same offer, regardless of how many services they are subscribed to or their level of monthly expenditure.
In isolation, it could encourage the most valuable customers to flock to a rival who rewards their custom through a higher level of investment, while leaving the company over-investing in its least valuable users.
The major hurdle to identifying profitable and unprofitable customers tends to be that strategies, operating models and measurements have been designed around products, not customers – effectively working in business silos.
Each product team will have its own sales, marketing and service departments whose success is judged by the performance of their division. As a result, they will have little knowledge of the customer’s positive or negative relationships with the wider organisation.
Operators need to switch to a more customer-centric approach if they are to begin making truly strategic decisions on customer investment, resource allocation and cross-channel treatment. This means employing more advanced customer segmentation and moving away from traditional metrics such as product revenue (ARPU) towards a model of lifetime value.
In its simplest form, customer lifetime value is the present value of a customer based on future cash flows attributed to the relationship, for which you need to know customer profit patterns and their churn rate.
Essentially, the figure represents the amount a company should spend acquiring and keeping a keeping a particular profile of customer. Incidentally, it also produces a monetary value associated with decreasing churn or increasing ARPU.
With this information organisations can then use a technique called uplift modelling, to segment customers into the following groups:
• Sure things – loyal users who plan to buy whether or not they are offered an incentive.
• Persuadables – those open to renewing or purchasing additional services as a result of marketing outreach but who wouldn’t have done so without being contacted.
• Lost causes - customers that will never buy additional services or who have already made the decision to switch supplier, regardless of what offer is made to them.
• Sleeping dogs – customers that don’t wish to be disturbed and may actually be driven to a competitor as a result of marketing outreach.
Significant investment into the sure things and lost causes is a waste of resources while directing it towards the sleeping dogs is counter-intuitive. Therefore, operators can cut campaign costs while doing less marketing by focussing all of its efforts on the persuadables – those with the greatest profit contribution or greatest revenue growth potential.
Operators then need the correct back office systems to gain insight into existing customers’ preferences – in order to deliver the right offer, via the right channel at the right time.
Without a line of sight into customer profitability across all product and service offerings it’s impossible to make strategic decisions on customer investment, resource allocation and cross channel treatment. Consequently, it is easy to be caught out under-investing in the most valuable customers that competitors are keen to poach.
Greater customer-centricity, achieved through applying segmentation to keep investment per user at appropriate levels is the key to enabling profitable lifetime relationships.