prepaid strategies and mini mi sing churn

8/2/2019 Prepaid Strategies and Mini Mi Sing Churn

1/27

Prepaid Strategies and

Minimising Churnby Jos F.Otero

2nd

in a 6-part series

Caribbean Telecoms Briefing

www.informatm.com www.telecoms.com


2/27

C a r i b b e a n T e l e c o m s B r i e f i n g

Jose F. Otero is the founder and president of Signals Telecom Consulting, a multinationaltelecommunications consultancy focused on the Latin American and Caribbean markets. Mr. Otero

has conducted work for IGI Consulting, Chile-based Proteus, the Inter-American

Telecommunications Commission of the Organization of American States (CITEL), the Consortium

for Telecommunications Research at Mexico City-based Centro de Investigacin y Docencia

Econmica (CIDE), The Strategis Consulting Group and others. He frequently speaks at industry

events and has provided market insight to the World Bank, the Caribbean Association of National

Telecommunication Organizations (CANTO), the US Department of Commerce, the Federal

Communications Commission (FCC), Colombias Center for Telecommunications Research

(CINTEL), the US National Information and Telecommunications Administration (NTIA), and the

US White House.

Mr. Otero has lived in the Caribbean for many years and has traveled extensively throughout the

region. He has authored numerous reports about Latin America & the Caribbeans

telecommunications industry including Mobile Opportunities in the Caribbean,Puerto Ricos

Mobile Market, The Caribbean Role in the Path Towards Consolidation and Latin Americas Mobile

Trends & Forecasts. He is frequently cited in industry publications such as Business News Americas,

Tele-Semana, LatinFinance, Latin America Telecom Advisor and LatinCom, among others. He can

be reached at [email protected].

About t he author

Br iefing staff

Editor

Leslie Hillman (Miami)

[email protected]

Managing Editor

Olivia Gibney (London)

[email protected]

Production Editor

Marta Almansa (London)

Web Site

www.telecoms.com

Marketing Manager

Jo Cura

T: (44) 20 7017 5256

F: (44) 20 7017 5071

[email protected]

Publisher

Mark Newman

37-41 Mortimer Street

London w1T 3JH

UKT: (44) 20 7017 5000

F: (44) 20 7017 4288

Miami Editorial Office

1602 Alton Road

PMB# 588

Miami Beach

FL33139

USA

T: (1) 305 695 0634

F: (1) 305 695 3965

Subscriber Service

Todd A McKellarOne Research Drive

Westborough

MA 01581

USA

T: (1) 508 614 1665

F: (1) 508 614 3765

[email protected]

Distributed 6 times a year

ISSN no. 1745-9559

No part of this publication may be

copied, photocopied or duplicated

without prior written permission from

the publishers.

2005 Informa Telecoms & Media


3/27

C a r i b b e a n T e l e c o m s B r i e f i n gC a r i b b e a n T e l e c o m s B r i e f i n g

E X E C U T I V E S U M M A R Y 1

P R E P A I D S T R A T E G I E S 3

Prepaid drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Economic conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Leveraging the mass market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Achieving critical mass . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Prepaid is still a valuable proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Subscriber acquisition costs (SAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Prepaid and data services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Prepaid technological challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Legacy infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Solution provider/vendor approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

Figure 1.1: Vendor approach within convergent mobile service matrix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Prepaid recharge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11

Figure 1.2: Cable & Wireless TopUp advertisements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

C H U R N A N D C U S T O M E R R E T E N T I O N 15

Churn and prepaid services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Tackling prepaid churn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Table 2.1: Cost-benefit analysis of churn software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Advanced prepaid customer analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Case study: churn management at Verizon Dominicana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Figure 2.1: Verizon Dominicana mobile churn growth rate, 2001 vs. 2004. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

C O N C L U S I O N S 23

Contents


4/27

C A R I B B E A N TELECOMS BRIEFING 1

Executive summaryExec

utiveSummary

Prepaid Strategies and Minimising Churn

Rapid subscriber growth, small populations and increased competition are leading

Caribbean mobile markets to reach saturation levels faster than their counterparts

elsewhere in the Americas. This presents potential difficulties for those mobile operators

that are depending on continuous subscriber growth as the main route to increase revenue

and penetrate the lower segments of the economy. New entrants in the market, such as

Dominican Republic-based operator Orange Dominicana, are more often than not the

operators following this trend.

Caribbean mobile operators need to understand that growing their subscriber base will not

permit them to survive profitably in an environment characterized by increasedcompetition, high prepaid service penetration, limited service differentiation and a pool of

potential new subscribers with limited disposable income and low purchasing power.

It is correct that a growing prepaid subscriber base characterized by lower usage rates has a

direct impact on ARPU which seems to be the main statistical metric of interest for

investors still even today. But making the generalized statement that prepaid users are

always less profitable than contract subscribers is not accurate. Prepaid offers incredible

advantages for mobile operators that learn how to leverage this segment of their subscriber

base while decreasing subscriber acquisition costs (SAC). This latter issue mostly defined

by how much an operator subsidizes the handsets it sells is the key factor in determining

a customers profitability as these costs must be recouped before a customer can be

considered profitable.

Historically, Caribbean mobile operators have implemented heavy handset subsidies

indiscriminately to both prepaid and postpaid services. Operators hoped that ramping up

their subscriber base quickly, regardless of the costs of the strategy, would put them in a

better position when they start offering enhanced value added services through 2.5G

networks. But the realities of the Caribbean markets slow uptake of enhanced data

services, the continuous decrease in voice telephony rates, increased competition among

operators, low handset replacements rates (a key variable to determine subscriber

migration patterns) and high churn rates are forcing operators to review this strategy. Inmost markets, operators are slowly phasing out handset subsidies for prepaid customers.

This has given the prepaid segment better prospects for profitability, since a small decrease

in handset subsides has a significant impact on the profitability of a customer. Decreasing

handset subsidies may discourage new customers to some extent , but this has become less

of an issue since manufacturers are now selling less expensive handsets for each of the three

major technologies present in the region: TDMA, CDMA and GSM. The supply of


5/27


C A R I B B E A N TELECOMS BRIEFING2

cheaper handsets is also multiplying through other sources, such as the parallel market and

refurbished handset providers. With the costs of handsets coming down, operators can

offer lower subsidies and still offer lower prices to their customers.

Once SAC is brought to a manageable level, churn is the next major challenge for wireless

operators. The loss of a customer not only impacts subscriber figures but also bottom-line

profitability. The immense costs involved in acquiring new customers leads operators to

invest huge amounts of time and money into developing strategies designed to tackle and

dissuade churn. When dealing with the prepaid sector, the problem of churn is magnified

by the ease with which it can occur. In many cases the end-user has no ties with the prepaid

operator other than through the service that is delivered upon voluntary payments by the

customer. Most operators offer aggressive subsidies on prepaid handsets and no subsidies

on calling rates: in most cases prepaid tariffs are higher than postpaid. This makes any

reduction in price by a competing prepaid operator extremely attractive to a prepaid user

and provides a high potential for that customer to churn. As a result of these market

factors, the prepaid operator must compete on quality of service. Since any operator,

regardless of size, can compete on a relatively level playing field when it comes to quality of

service, this has made for an even more competitive market.

Historically, mobile operators in the Caribbean as well as elsewhere in the world have

not been overly concerned with churn, since the extraordinary growth of wireless more

than made up for high churn rates. But those that are now looking at reducing churn use

customer relationship management (CRM) as the base for their initiatives. The software

elements used to handle the customer relationship include:

Contact centers call centers and web access sites including automated sites

Data warehouse applications incorporating analysis and customer segmentation tools

Management tools including marketing campaign tools and applications generating

promotions that are linked to customer database/profiling applications

Complaint/ enquiry management tools sometimes linked to sales and workforce

automation applications/software.

The key requirement of CRM is to be proactive as well as reactive in the facilitation of

strategic and technological monitoring of business conducted between the customer and

supplier. Although attending to the customer-supplier relationship entails a degree of

expense, it is still less than that of acquiring a new customer. H istorically, CRM and churn

reduction applications have only been utilized for postpaid accounts and have not

attempted to tackle the unique challenges and requirements of churn reduction, loyalty

and CRM within the prepaid environment.

Exec

utiveSummary


6/27


Prepaid strategiesPrepaid

Strategies

Rapid subscriber growth, small populations and increased competition are leading

Caribbean mobile markets to reach saturation levels faster than their counterparts

elsewhere in the Americas. This presents potential difficulties for those mobile operators

that are depending on continuous subscriber growth as the main route to increase revenue

and penetrate the lower segments of the economy. New entrants in the market, such as

Dominican Republic-based operator Orange Dominicana, are more often than not the

operators following this trend.

Caribbean mobile operators need to understand that growing their subscriber base will not

permit them to survive profitably in an environment characterized by increasedcompetition, high prepaid service penetration, limited service differentiation and a pool of

potential new subscribers with limited disposable income and low purchasing power.

Born during the mid-1990s in western Europe, the prepaid model has had an

unprecedented impact on subscriber growth wherever it has been introduced. In most

Caribbean markets including Jamaica, Guyana or Suriname, prepaid subscriptions make

up 90% or more of total mobile subscriptions. This unexpected growth has two main

consequences: a) it allows mobile telephony to surpass fixed-line telephony in penetration

levels, as seen in most eastern Caribbean markets, and b) it forces a decrease in fixed-line

telephony tariffs. By making the services available to and accessible by all segments of the

economy, mobile telephony moves from being a luxury item to being considered a

commodity or even a basic service. As a result, prepaid service is a key component of

mobile service providers portfolio.

Unfortunately, prepaids golden age is approaching its end. Caribbean mobile operators

cannot continue to follow a market strategy purely based on aggressive customer

acquisition to build critical mass without adopting some measures to qualify new users.

The reality in many Caribbean markets is now a shrinking pool of potential customers,

increasing operator debt levels, limited available vendor financing, an overabundant

number of mobile service providers, a decrease in voice rates, and new subscription plans

that negatively impact the operators profit margins (such as the rollover minutes featuresoffered by Cingular Wireless, Digicel and Setar of Aruba). This is forcing operators to look

for new revenue streams that could counteract the decrease in subscribers ARPU levels.

Although the rollout of 2.5G/3G networks are often mentioned as a remedy for resolving

the industrys malady of diminishing profit margins, advanced networks are for the most

part being tailored for individual contract/postpaid subscribers. Or, as seen in the 1xEV-

DO and EDGE deployments in Puerto Rico and the Cayman Islands, they are also being



7/27



targeted at enterprise customers. Mobile operators regard the new enhanced data-centric

services permitted by next-generation networks as enablers to boost their revenues. Since

traditionally prepaid voice services have been targeted to serve lower income strata, thissegment of the population has been largely ignored by the operators as potential consumers

of mobile data services beyond SMS. It is necessary for Caribbean mobile operators to

understand that only by making data-centric value-added services available to their prepaid

subscribers will they have a better chance of recouping their investments in 2.5G spectrum

and/or network buildout.

Prepaid drivers

Economic conditi ons

Mobile operators initially introduced prepaid service as a buffer against fraud and bad debt.

So it is understandable that the model really took off and prepaid use skyrocketed during

the economic crises in southeast Asia and Latin America in the late 1990s. The worsening

economic conditions forced many mobile users from developing countries to switch their

service plans to a prepaid one as they could better monitor their spending and control their

usage. For example, Latin Americas mobile service industry growth increased dramatically

with the introduction of prepaid services during the late 1990s. Countries such as

Venezuela and Mexico encountered a drastic increase in their prepaid subscriber base

during that time, posting a compound annual growth rate (CAGR) of 251.14% and

116.55% respectively during the 19962001 period. Similar growth rates were experiencedthroughout Latin America and then more recently in the post-liberalization English-

speaking Caribbean. Prepaid opened mobile services to the lower economic segments of the

regions society where lack of credit became one of the main drivers that made prepaid so

attractive and caused an explosion in customer numbers.

Leveraging the mass market

Introducing prepaid services allowed mobile operators to leverage the mass market: making

telephony accessible to the lower income strata vastly increased the size of the potential

addressable market. This point becomes crucial in Caribbean countries such as Cuba and

Haiti, where fixed-line installation rates are prohibitively expensive, putting telephony out

of reach for large segments of the population. Mobile networks and the prepaid model have

provided a cheaper alternative, which, combined with low fixed-line telephony

penetration, resulted in incredible growth rates for these services.

Prep

aid

Strategies


8/27

Achieving critical mass

Telecoms liberalization in the Caribbean has also fostered the development of prepaid

services. The increase in the number of mobile service providers has forced new entrants to

focus on their prepaid offering as a means to acquire the necessary critical mass that would

make their business viable under a competitive model. But gaining market share cannot be

the sole purpose of a mobile operator, as divergent experiences have shown.

For example, Mexican mobile operator Unefon started operations with a strategy based on

only offering prepaid services to its customers. It targeted lower income users and provided

rates that were a third of those being charged by the incumbent operators. Eventually the

company launched contract services but its low rates and heavily subsidized handsets have

made it extremely difficult for the operator to recoup its investment with its slim profit

margins. On the other hand, Virgin Mobile UK, a mobile virtual network operator(MVNO), has managed to build a large subscriber base by offering prepaid services

combined with other products/services from the Virgin Group (i.e. airline-ticket contests,

DVDs, etc.). Its success shows that prepaid customers can be just as valuable and profitable

as postpaid customers.

Prepaid is sti ll a valuable proposit ionIt is true that a growing prepaid subscriber base characterized by lower usage rates will have

a direct impact on ARPU, which is still the main statistical metric of interest for investors.

However, the generalized belief that prepaid users are always less profitable than contractsubscribers is not accurate. Prepaid offers incredible advantages for mobile operators that

learn how to leverage this segment of their subscriber base while decreasing subscriber

acquisition costs (SAC). This latter issue mostly defined by how much an operator

subsidizes the handsets it sells is the key factor in determining a customers profitability

as these costs must be recouped before a customer can be considered profitable.

Historically operators have identified prepaid users as the segments of society who do not

have access to credit or bank accounts and a smaller segment of individuals who wished to

control their expenditures. The use of prepaid for credit control is a primary driver for

mobile prepaid use and has made prepaid users resist migrating to postpaid accounts,

despite operators removing subsidies on handsets and prepaid tariffs to encourage them.

Highly saturated prepaid markets, such as Italy, have disproved the preconception that

prepaid is a low value service option upon which a successful business cannot be built.

That country has also proved an extremely successful market in terms of ARPU. The

conception of what constitutes profitability in relation to prepaid has been turned on its

head by a reappraisal of how profit is measured. Instead of merely considering ARPU, the



Prep

aid

Strategies


9/27



margins involved in provisioning and servicing different types of mobile customer are

taken into account to calculate the Average Margin Per User (AMPU) to gain a benchmark

for profitability.

This misanalysis of the prepaid user segment is characteristic of the lack of information

operators have about their prepaid users. However, operators are placing greater resource

behind developing systems and undertaking research and analysis to achieve a better

understanding of their prepaid users and the various segments that populate the prepaid

user base. Developments are ongoing in profitability analytics, predictive churn analysis

and data-mining.

Ident ification of the customer is extremely important for several reasons, not just for its

primary roles as a marketing device for improved customer servicing and to dissuade churn.

The most important driving factor behind acquiring customer data is for its use in complexbilling and rating applications to deliver content, as well as service-based billing based upon

users perceived value of content.

Prepaid has an important role in the content economy wireless revenues derived from

content and premium services due to its dominance in an important segment required to

drive forward data and content/service use into the mainstream: the youth segment.

Customers in this segment often cannot be served by postpaid contracts due to their lower

economic standing, lack of access to credit/debit cards and banking infrastructure. Yet they

consume the greatest portion of mobile entertainment services a primary driver for the

consumption of mobile data.

Subscriber acquisition costs (SAC)Subscriber acquisition costs are defined as the average cost incurred by the mobile

operator for each new-signed customer. Mobile operators that are able to decrease their

average SAC have a healthier financial outlook, as they are able to recover their

investment more rapidly and subsequently increase per-user profit margins. Most SAC

fall into four major categories: a) packaging & distribution logistics, b) promot ion &

advertising, c) commissions for distributors, and d) handset subsidies.

Historically, Caribbean mobile operators have implemented heavy handset subsidiesindiscriminately to both prepaid and postpaid services. Operators hoped that ramping up

their subscriber base quickly, regardless of the costs of the strategy, would put them in a

better position when they start offering enhanced value added services through 2.5G

networks. But the realities of the Caribbean markets are forcing operators to review this

strategy. These markets are experiencing a slow uptake of enhanced data services, a

continuous decrease in voice telephony rates, increased competition among operators, low

Prep

aid

Strategies


10/27

handset replacements rates (a key variable to determine subscriber migration patterns) and

high churn rates.

As a result, operators in most markets are slowly phasing out handset subsidies for prepaid

customers. This has given the prepaid segment better prospects for profitability, since a

small decrease in handset subsides has a significant impact on the profitability of a customer.

Decreasing handset subsidies may discourage new subscriptions to some extent, but this has

become less of an issue since manufacturers are now selling less expensive handsets for each

of the three major technologies present in the region: TDMA, CDMA and GSM. The

supply of cheaper handsets is also multiplying through other sources, such as the parallel

market and refurbished handset providers, which is an important component of the

Dominican Republic and Cuban markets. With the costs of handsets coming down,

operators can offer lower subsidies and still offer lower prices to their customers.

Therefore, it is recommended that mobile operators target handset subsidies toward

contract subscribers. Traditionally these customers have generated a higher ARPU than

prepaid users and with a contract they are less likely to switch providers, diminishing the

risk of losing the customer before the companys SAC has been covered. Also, mobile

operators can impose fines if necessary to ensure the recovery of their investment if the

subscriber decides to discontinue service before the fulfillment of the contract. Finally,

mobile operators may also reduce acquisition costs by common sense measures such as the

utilization of IVR systems for handset activation and the increase of distribution channels

for prepaid cards.

Prepaid and data servicesOperators throughout the Caribbean are diversifying their portfolio by tailoring their

services to the enterprise segment. What before was perceived to be almost an exclusive

niche for iDEN operators (such as Nextel in the US or Avantel in Colombia) is now

plagued by competition from mobile operators. For example, Verizon Wireless in Puerto

Rico is targeting enterprise customers with the introduction of services like CDMA2000

EV-DO and Push-to-Talk over Cellular (PoC). Thus, Caribbean mobile operators are

creating enterprise departments to penetrate this segment better.

It is important to stress, however, that paying greater attention to the enterprise market

will not be sufficient in itself for mobile operators to recoup the heavy investments made

on spectrum acquisition and network upgrades. Mobile operators have to commercialize

2.5G services to both contract and prepaid users, while playing the differentiator card to

increase brand loyalty. In turn, this will allow the operator to create new revenue streams

from prepaid subscribers while speeding up the ROI on the new networks.



Prep

aid

Strategies


11/27



Prepaid technological challenges

As mobile operators evolve toward next-generation services, the prepaid model facesnumerous challenges. These range from provisioning for legacy technologies and back-

office applications to developing completely new applications and solutions designed to

tackle the problems created by demands to rate, bill and mediate for new and innovative

prepaid wireless service offerings.

The major areas of technological challenge for prepaid include:

Roaming technical challenge and solution approaches

Intelligent Networks (IN) requirements and approaches

Billing for content including billing, mediation and rating.

The key challenges involve how to structure the prepaid network while considering legacy

infrastructure, billing requirements of current and future services and BSS/OSS

integration. That said, it is important to highlight that in the Caribbean both Digicel and

Cable & Wireless are already offering prepaid roaming to their subscribers.

Legacy infrastructureMuch of the technological framework of prepaid systems evolved from voice services,

which have proved effective in this role. However, as services have evolved, so have the

demands placed upon the technological systems supporting them. Factors influencing the

evolution of the prepaid market include:

The introduction of competition to the operator environment, leading to a greater need

to diversify pricing/tariff and charging structures required for market differentiation.

This has placed additional pressure on rating, billing and mediation systems, as has been

experienced by Cable & Wireless following the arrival of Digicel and Cingular in most of

its markets.

Growing demand from users for roaming, as demonstrated in Cable & Wireless and

Digicels launch of prepaid roaming

Development of next-generation network technologies

The requirement to offer VAS to users whether current or next-generation services

independent of their contract status i.e. prepaid or postpaid.

These challenges can be further distilled and categorized into three main technology-

specific areas:

Prep

aid

Strategies


12/27

Challenges at the network level, e.g. how to gather data on prepaid users from the core

network, how users are identified on the network or how credit is accrued and depleted etc.

How collected data can be converted into information that can be utilized for

marketing, development of pricing structure, overall market strategy etc.

How collected data is to be used to bill and rate for services. This process is made more

difficult by next generation billing mechanisms such as value-based billing. This form of

billing is based upon rating services by perceived value of a service. This is problematic

under the prepaid model because prepaid users are generally anonymous, which makes it

more difficult for the operator/service provider to ascertain the perceived value to these

users for a particular service.

There are various technical approaches to tackling the demands of prepaid systems, which

range from determining user capabilities and account status to data capture, transmission

and processing. Selected key approaches are summarized below.

Point solutions: these involve an adjunct piece of equipment used to provide call control,

database functions, and administrative functions and call processing. All calls must traverse

a single network element or point. An example of this is a service node-based solution.

Handset solutions: intelligent capabilities are being placed in the mobile terminal

enabling the determination of capabilities and the account status of a particular prepaid

subscriber. Within this approach, a broad demarcation can be made between SIM-based

and proprietary solutions:

SIM-based logic in SIM determines prepaid subscriber capabilities and account status.

Proprietary handset based solution for ANSI-41 networks. There are similar benefits

and disadvantages to the SIM solution. The user is identified as a prepaid customer

without the amendments required to inter-carrier roaming agreements. The user can

make calls at will limited by logic resident in the handset, which limits calling based on

customer account status.

Network Based solutions utilizes signaling networks for data capture, transmission and

processing. This category can be further broken down into ISUP non-standard, TCAP

standard and TCAP nonstandard (proprietary).

ISUP non-standard uses ISUP-loop back to mislead the switch into seeing the call as a

communication from another switch, normally required for call set up via ISUP, when

in actuality the system is performing database operations necessary to process prepaid

calls. It is similar to point solutions as all calls must go through single point.



Prep

aid

Strategies


13/27


C A R I B B E A N T E L E C O M S B R I E F I N G10

TCAP standard WIN and CAMEL enhanced. Allows roaming when the serving

operator has necessary triggers and software logic resident on the serving network (also

defined as a standards-based IN solution).

TCAP proprietary vendor specific with no resource requirements. Uses proprietary

mobile IN Mobile Switching Circuit (MSC) and Service Control Point (SCP) logic for

call processing. Roaming is complicated by the non-standard nature of the system,

requiring similar switches to be implemented in the server and home network with

comparable software logic and triggers armed. Agreements on roaming are also required

for messaging interactions between serving and home systems.

Hybrid solutions mix of various competencies, such as having SIM solution for basic

prepaid call processing with a TCAP-based IN complement for VAS.

Call Data Record (CDR) solutions near real-time tracking process. CDRs are

monitored after a call is placed. A major issue is the fact that calls are monitored after the

event allowing connection with zero account balances. A particular problem that needs

to be addressed for content services, which are typically higher priced than voice rates.

Solution provider/vendor approachesThere are four main vendor categories that offer differing approaches to the problem of

prepaid content rating, mediation and billing:

Billing vendors

Content providers

Core/IN vendors (wireless specific)

IP vendors.

Each of these vendor categories brings a core set of skills and experience to the challenge of

prepaid within next-generation networks. In Figure 1.1 the various approaches taken by

the four vendor types are overlaid with the constituent parts of the convergent mobile

service matrix. Each of the vendor types occupies its own position within the converged

model of next-generation services, which is evolving as new service and networkcapabilities emerge and the end-user migrates ever closer to the centre of this converged

service matrix.

Prepaid

Strategies


14/27

Figure 1.1: Vendor approach within convergent mobile service matrix

Source: Informa Telecoms & Media

In each case the vendor type proximity to a part of the convergent services matrix

illustrates the relative knowledge and experience the vendor type has in relation to it. For

example, the billing vendor approach is closely aligned with the payment mechanism of

the convergent service matrix due to having first-hand experience and knowledge of

developing applications/solutions in this area.

Prepaid rechargeThe process of topping up a prepaid account is a significant part of the prepaid process. It

cuts into numerous facets of the prepaid process including the transactional process

between user, operator and third parties. The top-up process also acts as a point where

operators can leverage strategies to communicate with the end-user to analyze and identify

potential churn targets and deliver marketing. Finally, the top up process can also be used

as a mechanism from which to develop the prepaid platform as a mobile commerce device.

Cable & Wireless has been aggressively promoting its Direct TopUp or eTopUp

services (see Figure 1.2). This will lead other market players to introduce these services as

well in order to offer a comparative service to their subscriber base.

Community (user) consumer,business, group

Services voice, data, multiple

services

Devices mobile, PDA, gamingdevice, laptop

Access (network) GSM, GPRS,

CDMA, UMTS, WLAN

Payment (mechanism) - prepaid,postpaid, 3rd party, Mwallet,

credit card , debit card etc.

Content provider

approach

IN/Core networkapproach

Billing vendor

approach

IP approach

C A R I B B E A N T E L E C O M S B R I E F I N G 11


Prepaid

Strategies


15/27


C A R I B B E A N T E L E C O M S B R I E F I N G12

Figure 1.2: Cable & Wireless TopUp advertisements

Source: Cable & Wireless

Now Available Here

No Cards and No PINChoose Any Amount over $5Automatic eTopUpfor Cable & WirelessPay as You Go Phones.

Prepaid

Strategies


16/27

There are numerous strategic challenges for prepaid recharge. There is a user resistance to

prepaid-postpaid migration so the operators need strategies to serve their prepaid

customers more cost-effectively. These strategies include the evolution from scratch-card/voucher-based recharge mechanisms toward fully automated/electronic recharge

mechanisms. At the moment, operators still have to support numerous recharge

mechanisms and offer recharging in a roaming environment.

The communication and interaction between operator and customer at the recharge point

allows the operator to generate information that can be used for a number of purposes,

including churn reduction, customer value analysis, marketing and balance check

mechanisms. It can also be used to support the operators strategy by revealing end-user

prepaid recharge usage patterns.

Caribbean operators are looking for more efficient ways to provide their subscribers withelectronic recharge solutions in the local market. In addition to this emulating the

experience of operators in the Philippines they are also looking at the emigrant

community as a source for additional revenue by implementing systems that allow

international recharge for relatives in the Caribbean.



Prep

aid

Strategies


17/27


CARIBB EAN TELECOMS BRIEFING14

Prep

aid

Strategies


18/27

Lowering churn or the rate at which customers switch to another operators network

has become an increasingly important consideration for operators. Their land-grab

strategies, ie gathering the greatest number of subscribers as quickly as possible, are now

evolving into strategies geared toward increasing users spend on mobile services.

Historically, mobile operators in the Caribbean, as well as elsewhere in the world, have not

been overly concerned with churn, the extraordinary growth of wireless more than made up

for high churn rates. But those that are now looking at churn use customer relationship

management (CRM) as the base for their initiatives. The software elements used to handle

the customer relationship include:

Contact centers call centers and web access sites including automated sites

Data warehouse applications incorporating analysis and customer segmentation tools

Management tools including marketing campaign tools and promotion generation

applications linked to customer database/profiling applications

Complaint/enquiry management tools sometimes linked to sales and workforce

automation applications/software.

The key requirement of CRM is to be proactive as well as reactive in the facilitation of

strategic and technological monitoring of business conducted between the customer and

supplier. Attending to the customer-supplier relationship does entail a degree of expense,

although it is less than that of acquiring a new customer. Historically CRM and churn

reduction applications have been used for postpaid accounts and as such have not

attempted to tackle the unique challenges and requirements of churn reduction, loyalty

and CRM within the prepaid environment.

In those markets where wireless penetration is approaching saturation, the cost of

identifying and acquiring new customers is high, while the ARPU potential of these

subscribers is likely to be less than existing or established subscribers with other operators.

Consequently the prepaid market is itself predisposed toward encouraging churn becausesubscriber acquisition is most cost-effective when achieved through churn from

competitors. Historically this churn has been encouraged by competition on pricing and

promotions designed to draw users away from competitors. However, to compete largely

on price leads to a particularly chaotic model of churn which damages a markets

development and stability over time.

C A R I B B E A N T E L E C O M S B R I E F I N G 15

Churn and customer retentionChur

nandCustomerRetention



19/27


C A R I B B E A N TELECOMS BRIEF ING16

Churn and prepaid services

Prepaids critical problem is the almost non-existent brand loyalty, mainly due to the lack ofinteraction between mobile operators and prepaid subscribers. Although the rollout of

prepaid WAP services provides the possibility of some interaction between operator and

consumer through registration over the Internet Caribbean mobile operators need to

increase their visibility to prepaid subscribers. Operators can implement low-cost solutions,

such as text messages offering discount vouchers or handset upgrade offers, or can launch

promotional campaigns targeting the prepaid subscriber base. The main objective of these

campaigns is to highlight the advantages and uniqueness of the prepaid service offered by

their mobile operator, which would help towards shattering the notion that all prepaid

services are identical.

Moreover, Caribbean mobile operators need to emulate their western European

counterparts efforts by shifting from being almost completely focused on customer

acquisition to a new view where customer retention becomes increasingly important.

Digicels group executives, for example, are already talking about a change in strategy and

the company is embarking on a drive to pay more attention to customer retention

although it is still not entirely clear what specific moves the company has made or will

make in this regard.

Besides the promotions or bonus points currently offered by operators, technology and

content partnerships will become a key ingredient to retaining customers and successfully

minimizing subscriber churn. For example, SMS-enabled handsets are required for theadoption of SMS, but the selection of push/pull SMS services or SMS-based commercial

transactions will depend on the number of content partnerships entered into by the

mobile operator.

Since differentiation is the ultimate goal, mobile operators should seek to increase the

amount of proprietary content and services offered to their subscriber base. Once again, it

becomes imperative for mobile operators to segment their prepaid subscriber base to allow

high-end prepaid users to obtain the same type of services offered to contract subscribers,

which could also come at a reasonable premium to serve as an incentive to migrate towards

a contract subscription service.

Competitive mobile operators outside the Caribbean such as Telefonica Moviles in

Venezuela (formerly Telcel BellSouth) also hope to foster loyalty by becoming full service

operators, offering bundled telecom services to their current subscriber base. Competitive

operators in the Caribbean could pursue the same strategy.

Chur



20/27

Tackling prepaid churn

Churn is one of the biggest challenges wireless operators face as the loss of a customer notonly impacts subscriber figures but also bottom-line profitability. The cost of acquiring

new customers is typically much higher than that needed to retain them, so operators such

as Verizon Dominicana in the Dominican Republic are investing huge amounts of time

and money into developing strategies designed to tackle and dissuade churn (see the case

study at the end of this chapter).

When dealing with the prepaid sector, the problem of churn is magnified by the ease with

which it can occur. In many cases the end-user has no ties with the prepaid operator, other

than through the service that is delivered. Because a customers participation in prepaid

services is wholly voluntary, all a customer has to do to leave an operator is stop paying for

that operators services. Most operators offer aggressive subsidies on prepaid handsets and

little subsidy on calling rates, which also makes it easy to switch providers. In most cases

prepaid tariffs are higher than postpaid. This makes any reduction in tariff price by a

competing prepaid operator extremely attractive to a prepaid user and provides a high

potential for that customer to churn.

Interestingly, as a result of these market dynamics, in competitive markets with a large

presence of prepaid accounts, the prepaid operator eventually has to compete on quality of

service. Since any operator, regardless of size, can compete on a relatively level playing field

when it comes to quality of service, this has made for an even more competitive

marketplace in those areas where this dynamic has occurred.

There is a disadvantage to deploying more advanced CRM strategies: higher costs for the

operator. As an operators subscriber base increases, CRM costs will also escalate as new data

services proliferate, and this threatens to financially cripple prepaid operators. In the current

economic environment operators are moving away from aspirations of providing the best

possible care to providing good enough levels of support as the industry undergoes an

evolution from customer care to customer management. Key developments facilitating this

development are the growth in IVR, customer care applications on websites (e-Care) and

self-care capabilities. Self-care is of particular interest to prepaid operators, since the prepaid

model already encourages users to self-recharge their own accounts.

Self-care users will produce the most profit, and operators can choose to provide those

users with more personal support such as CSR support at call-centers, but operators must

be able to justify the immense cost associated with these CRM solutions. Operators must

become increasingly skilled at defining and measuring potential customers. Under a largely

prepaid model this will include consideration of the margin of profit the user delivers,

which can be ascertained by comparing factors such as cost of acquisition, service use and

C A R I B B E A N TELECOMS BRIEF ING 17


Chur



21/27



provisioning costs. Without such analysis the prepaid operator risks any improvements in

revenue being eaten away by increases in provisioning costs, creating a negative profitability

scenario. Table 2.1 highlights the cost/benefit of churn-management software in twodifferent scenarios.

Table 2.1: Cost-benefi t analysis of churn software

Operator 1 Operator 2

Number of subscriptions 200,000 500,000

Churn rate % 20 20

Acquisition cost ($) 150 100

ARPU ($) 350 300

Revenue ($) 70,000,000 150,000,000

Value of customer loss ($) 20,000,000 40,000,000

Cost of churn sofware license 250,000 500,000Cost of staffing ($) 100,000 200,000

Cost of offers to subscribers ($) 3,500,000 7,500,000

Cost of churn management ($) 3,850,000 8,200,000

Savings from reducing churn by 5% ($) 19,000,000 38,000,000

Savings from non-effective offers ($) 2,000,000 5,000,000

Total savings from churn management ($) 21,000,000 43,000,000

Net saving ($) 17,150,000 34,800,000Source: Informa Telecoms & Media

With competition now a fact of life in many markets, operators are increasingly looking at

calculating an operators average profit margin per user (AMPU) rather than solely average

revenue per user (ARPU) and also using this concept as part of customer profiling and datamining. These applications and the approaches linked to them will proliferate in the

prepaid environment. Already several Caribbean mobile operators, including Tricom and

Verizon Dominicana, are utilizing complex tracking and profiling devices on their prepaid

subscriber bases designed to identify users displaying a propensity to behave in a manner

most likely to make them profitable, potential churners or targets for new services.

The development of automated CRM technology can alienate the end user but if

implemented effectively it can also create the perception of a better customer care

experience. The empowerment created by self-care is one example of this type of perception

enhancement, as the users may feel less frustrated by a problem if they can resolve it

themselves and quickly. Successfully designed and implemented automated CRM solutions

can be used as a market differentiator as increases in enquiries generated by next-generation

services creates greater pressure on an operators CRM. In saturated markets, even the

smallest factor can lead to churn. Low levels of customer service are one of these factors.

Chur



22/27

Other key approaches to tackling prepaid churn include:

Incentive/bonus schemes including incentive schemes targeted to specified segments

Strategic cooperation a separate grouping of incentive mechanisms using external

partnerships to increase the impact of anti-churn campaigns

Loyalty schemes with third-party partners

Sponsorship including models subsidized by advertising

FMCG (fast-moving consumer goods) branded devices and services

Infrastructure partnerships an indirect method of dissuading churn. If a user cannot

easily recharge their account but discovers that another operator does offer easy account

recharge due to a proliferation of recharge points or other options, that user will likelyswitch over to the second operator.

Advanced prepaid customer analysisDespite data on the prepaid user being limited by automated CRM and the anonymity of

prepaid distribution, attempting to collect data is important now and will become even

more important as next generation service models develop based upon data services and

premium content. Generalized approaches to customer data analysis that attempt to

profile prepaid users into broad spectrum groups segmented by categories including

monthly spend, recharge propensity, type of content used etc. have already been seen inseveral western European markets.

Primarily these forms of customer data analysis have been used to identify the most

profitable prepaid segments. Ascertaining the value of a customer helps shed light on what

potential he or she has to churn. With the value estimate already on hand, the operator is

in a stronger position to decide whether to allow target users to churn or attempt to

dissuade them, depending on their value to the operator.

As direct contact is not always possible with prepaid end-users, operators and their service

partners have approached the problem by analyzing the data that is available from prepaid

accounts and mapping this data over known behavioral patterns.



Chur



23/27



Case study: churn management at Verizon Dominicana

Prepaid operators face the challenge of supporting an ever-increasing subscriber base from atechnical and quality-of-service standpoint, while also attempting to provide greater

support to higher-ARPU users in order to keep these high-value accounts and avoid churn.

Verizon Dominicana was one of the first operators in the Caribbean to announce that it

had acquired software and data mining capabilities to help it identify its high-ARPU users.

The Dominican Republics incumbent telco and mobile operator aimed to use this

information to target the high-ARPU users proactively with special promotions meant to

encourage their continued use of Verizon services.

It is also worth noting that Verizons data-mining initiatives cross-referenced its fixed-line

customer records with those of its mobile services to determine who was spending most

with the company overall and not just on one service. This was crucial in the Dominican

Republic, since fixed and mobile competition have been in place there for many years and

Verizon faces competitors in both areas.

In Caribbean markets where fixed competition is only just opening now, however,

operators that offer both fixed and mobile services have the opportunity to integrate their

data-mining efforts, pinpoint their highest-value users and offer promotions to keep them

from switching once competition comes. Most of the Caribbeans new mobile competitors

are not offering fixed-line services and not all of the new fixed-line entrants will offer

mobile in the Caribbean. Therefore, the fixed/mobile incumbents have the advantage as

they are able to offer fixed/mobile service bundles that provide greater value to customers ifthey take both services from that one operator.

In its churn management project, Verizon Dominicana created a cross-functional Churn

Prevention Committee that would allow the company to implement a strategy consisting

of the following steps:

corporate objectives and churn performance analysis

customer value differentiation (LTV)

churners profile by customer value

churn probable reasons by customer value

churn root causes by customer value

churn forecasting and predictive modeling

design / re-design of retention and loyalty programs

execution of retention and loyalty programs

Chur



24/27

monitoring and assessment of retention and loyalty programs.

As shown in Figure 2.1, Verizon Dominicana was able to decrease both postpaid and

prepaid churn during the timeframe of the project.

Figure 2.1: Verizon Dominicana mobile churn growth rate, 2001 vs. 2004

Source: Verizon Dominicana

VZDR Mobile Churn Growth RateVZDR Mobile Churn Growth Rate

JanJan--2002001 VS. Jan1 VS. Jan --20042004

Post-paid

Pre-paid

-80.0%

-70.0%

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

%

ChurnGrow

thRate

1Q01-2Q04 -69.5% -41.3%

Post-paid Pre-paid



Chur


%

ChurnGrowth

Rate


25/27



Chur



26/27

Prepaid still has the potential to grow its subscription base as well as drive overall wireless

subscriptions by delivering access to a greater percentage of user segments than postpaid

can do. These user segments include youth, the grey market, first-time users or persons

experimenting with wireless, credit-challenged users or cash-based industry segments.

Prepaid is transforming somewhat in certain markets through the offering of prepaid-

postpaid hybrid accounts. These hybrid accounts offer a payment mechanism in their own

right to reach important data market segments (young mobile-entertainment users) and

under-subscribed demographics such as those without access to bank accounts or credit.

Prepaid is still the fastest and easiest way to acquire users in under-penetrated markets

such as Cuba and Haiti.

Revenue growth will spring from operators successful segmentation of the prepaid

subscriber base, the offering of differentiated and proprietary products, and the bundling

of various telecom services together.

Caribbean mobile operators should make sure that prepaid customers have access to all

the same services, technologies and applications postpaid accounts can use. This will

help erode the stigma of prepaid users being seen as second-class subscribers. Operators

should, however, still charge a premium for prepaid services, to encourage migration to

contracts.

Data mining in the prepaid sector should be a priority for mobile operators. Eradicating

the anonymity of the prepaid subscriber base will allow for more effective

implementation of promotions and services and more targeted marketing.

Caribbean mobile operators need to understand that only by making data-centric value

added services available to their prepaid subscribers would they be able to justify and

recoup their investments in 2.5G spectrum and/or network build out.

The implementation of churn management strategies and software can allow Caribbean

mobile operators to increase customer retention and improve their bottom line, as suchsolutions can improve an operators ROI per customer. However, operators must also be

vigilant regarding CRM costs and make sure they are not eating up those profitability gains.

CARIBB EAN TELECOMS BRIEFING 23

ConclusionsConc

lusions



27/27


Conc

lusions

prepaid strategies and mini mi sing churn

Documents