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Longevity is not equal to loyalty

Longevity is not equal to loyalty
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First Published: Thu, Dec 09 2010. 12 10 AM IST
Updated: Thu, Dec 09 2010. 12 10 AM IST
By pursuing customer longevity rather than loyalty, mobile operators in India have put themselves in a bind. Their sales and marketing are geared towards making mobile communications the ultimate convenience product. This has unleashed unprecedented subscriber growth, making operators eligible for additional spectrum and until recently driving their enterprise valuations.
Yet, their economics remain predicated on an annuity of recurring revenue, forcing operators to dole out promotional offers to extend the lifetime of increasingly fickle subscribers and eke out a few more weeks of income from them. This growing dichotomy between a transaction-based sales model and a relationship-based revenue model needs to be resolved for the industry to return to a path of profitable growth.
The ubiquity of mobile phones in India today owes much to the ingenuity of mobile operators. This was made possible through a series of innovations—some marked, others imperceptible. The most significant changes have been in how mobile operators acquire and serve their customers. The bedrock was the advent of the prepaid service. For consumers, this at once meant they were not locked into a minimum monthly outgo and had more control over when and how they chose to spend. Operators were able to strip out many costs related to billing and customer service. They ceded several activities to partners to unleash higher cost efficiency. Technology advances were harnessed and vendor agreements recast to better align cost with value.
These cost advantages were passed on to customers through lower tariffs. The prepaid product also lent itself to hassle-free over-the-counter sales, allowing service providers to expand their distribution reach manifold by riding on the well-developed and extensive sales networks of fast- moving consumer goods, spurring availability and sales growth.
The fundamental revenue model for mobile services, on the other hand, has remained largely intact. Operators incur a sizeable customer acquisition cost that they hope to recover through recurring revenues over the lifetime of the customer. This long-tail economic model has held sway since the inception of this industry, even as the absolute cost and revenue comprising each element has shrunk.
More recently, major shifts are taking place in customers’ usage behaviour, which challenge this enduring economic premise. The rise of multi-SIM subscribers means that while operators incur the entire customer acquisition cost, they partake in only a share of the ensuing revenue stream. Rotational churners shift back and forth between operators every few weeks for the best bargain available.
Taken together, these factors have eroded profitability and exposed the predicament the industry now finds itself in. Mobile communication is no longer the high-growth relationship business it once was. It is now a mature convenience business. New SIM cards are available at every street corner. Customers will take a detour of no more than a few metres from their beaten track to pick up a recharge for their prepaid phones. The average lifespan of a customer with a service provider is a few months rather than several years. Mobile services are now bought in much the same way as calling cards—use and throw.
Where can the industry turn to for inspiration as it seeks to change course? There are no ready answers, but the following three steps could help uncover new approaches.
First, the economic discourse has to acknowledge the new reality. A candid measurement of how much of the value in each “transaction”—whether it is a new activation, a new tariff plan, or a recharge—lies in its terminal value would bring into sharp focus the need and opportunity to shorten payback periods. Current product design, for example, incentivizes many customers to perpetually remain new subscribers even if they choose to stay with the same service provider. Thus, they surrender and rejoin their service at each opportunity rather than renew it, resulting in a recurring customer acquisition cost for the operator.
Second, operators need to invest in understanding the multi-SIM and rotational churning behaviours of their customers. Credit card companies have learnt that merely stuffing their plastic alongside others’ into the customers’ wallet does not translate into usage. Mobile operators are realizing the same, but still lack the tools to identify and attract the most profitable spending to their SIM card over their competitors’.
Finally, and tautologically, the antidote to infidelity lies in cementing loyalty. And even a transactional business has ample opportunity to do so. Airlines and some other services companies have refined the art of designing effective loyalty programmes. But the lesson they offer is that piecemeal interventions are never enough. Mobile operators will need to assess, refine and synchronize the experience they offer at every touch point in order to engender loyalty.
As mobile operators assess the changes needed, there might be instructive examples in other industries. Fujifilm and Kodak pioneered a new revolution in still photography with disposable cameras. Gillette did the same with disposable shaving razors. They sensed a growing consumer need for convenience, went back to the drawing board and challenged deep-seated beliefs about their business and economics. They dissected each element of their business, redesigned it and put it together again. The “new way” helped them simultaneously expand the market and fortify their leadership. Is telecommunications in India poised for the next leap to disposable mobility?
Arvind Subramanian is partner and director, The Boston Consulting Group.
Comments are welcome at theirview@livemint.com
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First Published: Thu, Dec 09 2010. 12 10 AM IST