Strategic Channel Management in the telco industry

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Short university lecture about how mobile Telco operators can improve their profitability leveraging a strategic and value based approach to Channel Management

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Strategic Channel Management in the telco industry

  1. 1. 0 Strategic approach to Channel Management Mobile industry case
  2. 2. 1 Lecture’s objective • Share a “hands on” approach to strategic Channel Management… • …applied to the Mobile Telecommunication industry
  3. 3. 2 § Introduction § Strategic approach to Channel Management § Conclusions Content
  4. 4. 3 After market valuations, segment identification, proposition development and pricing, sales channels are needed to reach potential customers Market valuation Market segmentation Proposition development Pricing Go/no go regulator Value to operator Value to customer Value to share holder Universe of services Winning offer Selection Best practise Creative ideas Go/no go regulator Value to operator Value to customer Value to share holder Universe of services Winning offer Selection Best practise Creative ideas BestBest SegmentationSegmentation SolutionSolution ManagerialDecisionManagerial Decision Segment SizeSegment Size Cluster Analysis Output: “Christmas Trees” Cluster Analysis Output: “Christmas Trees” Needs ProfilesNeeds Profiles Cluster Analysis Outputs:Cluster Analysis Outputs: Classification ErrorClassification Error Stability TestsStability Tests Robustness TestsRobustness Tests Benefits Deficiency AnalysisBenefits Deficiency Analysis 2. Are segments equally supported by sample data (statistically valid)? 3. Are segments useful and actionable? 4. Are segments descriptive and interpretable?5. Are segments statistically distinct? 6. Are the segments accurate enough for future slotting? 7. Do the segments disintegrate? Is the solution stable? 8. Is segment membership stable? Is the solution robust? 9. Do segments offer actionable opportunities? • 2-D Plots Quantitative Qualitative BestBest SegmentationSegmentation SolutionSolution ManagerialDecisionManagerial Decision Segment SizeSegment Size Cluster Analysis Output: “Christmas Trees” Cluster Analysis Output: “Christmas Trees” Needs ProfilesNeeds Profiles Cluster Analysis Outputs:Cluster Analysis Outputs: Classification ErrorClassification Error Stability TestsStability Tests Robustness TestsRobustness Tests Benefits Deficiency AnalysisBenefits Deficiency Analysis 2. Are segments equally supported by sample data (statistically valid)? 3. Are segments useful and actionable? 4. Are segments descriptive and interpretable?5. Are segments statistically distinct? 6. Are the segments accurate enough for future slotting? 7. Do the segments disintegrate? Is the solution stable? 8. Is segment membership stable? Is the solution robust? 9. Do segments offer actionable opportunities? • 2-D Plots Quantitative Qualitative Base Operator 1 Base Operator 4 Gross Additions Market (Hunting Pool) Base Operator 2 Base Operator 3 NewcomersChurn Churn-% Churn-% C hurn-% C hurn-% e.g. penetration increase, youth, etc. Definite churnTotal market Addre ssable market Base Operator 1 Base Operator 4 Gross Additions Market (Hunting Pool) Base Operator 2 Base Operator 3 NewcomersChurn Churn-% Churn-% C hurn-% C hurn-% e.g. penetration increase, youth, etc. Definite churnTotal market Addre ssable market Customer Channels are needed to get in touch with the client: Transactions / Sales Information / Communication Service / promotions
  5. 5. 4 Mobile operators serve their customers through a large set of distribution channels Master Dealers Indepen dent dealers Consumer Customers Internet Call Centre GDOFlagship stores Key Account managers Corporate Customers . . . . Agents Business Customers One to One Direct channels Indirect channels MOBILE OPERATORS MAIN DISTRIBUTION CHANNELS Additional channels may be used to distribute pre-paid cards (i.e. tobacco shops) Branded stores (Franchisee) Main channels (Italian case)
  6. 6. 5 What do Mobile operator sell? § Handsets? § SIM cards? § Traffic? Mobile operator want to sell Traffic, ie, minutes of mobile voice or data communications Handsets are a mean to acquire new clients / abilitate new services Understanding this is key to make sensible channel decisions
  7. 7. 6 Key questions to be answered for Operator’s channel strategy What is the optimum mix of channels and capacity utilisation (direct vs. indirect, generalist vs. specialist)? What channels should be grown vs. milked vs. divested? How can we improve performance and profitability of channels? How can channel incentives be structured to fit with Operator’s strategy? What is the role of each channel and in particular of the Operator stores? How can we minimise channel conflict? What product mix should be distributed through each channel (pre vs. post- paid and voice service vs. data products)? Therefore, channel strategy aims at delivering answers to a broad set of critical questions
  8. 8. 7 § Introduction § Strategic approach to Channel Management § Conclusions Content
  9. 9. 8 Channel Strategy The strategic approach to sales channel strategy is based on three pillars § How to calculate the value of the customer? § What are the preferred channels for valuable customers? § How to calculate channel profitability? § How to identify the most profitable channels? § How to improve channel profitability by optimizing the compensation scheme? § What to take into consideration in channel mix? § How to optimize the channel mix? 1 Understand who are the profitable customers, and how to define profitability 2 Understand what are the highest performing channels, and how to manage them at best 3Understand how to optimize the channel mix Approach Customer Value Channel PerformanceChannel Mix
  10. 10. 9 Customer value
  11. 11. 10 Customer revenue vs. margin § Customer value differs notably depending whether revenue or margin is used – In terms of margin 100EUR on-net call revenue ≠ 100EUR off-net revenue – Additionally, the cost elements (such as handsets subsidy costs) might vary Understanding customers’ value (CV) is the first step of a solid channel strategy…once a clear CV understanding is reached Ultra High Value High Value Medium Value Low Value % Customers % Revenue % Contribution margin Loss By using Average Revenue Per User (ARPU) as a proxy for customer value the notion of unprofitable customers is disabled. Customer value Life time value Disconnect Margin Tenure TodayAcquisition Acquisition cost Handset upgrade
  12. 12. 11 Margin based calculations gives a different view from customer’s breakdown charts and provides an analytical base to select channels Contribution margin should include only costs attributable directly to the customer, as cost allocation will distort the results. 4% 19% 33% 22% 1% -2% -6% 6% 32% 18% 37% 14% 11% 10% 100% 100% Customers Contributionmargin 10% of customer base 51% of Contribution margin 50% 50% Example: Postpaid consumer base Pareto analysis based on Contribution margin 21% of customer base -8% of Contribution margin
  13. 13. 12 Channel performances
  14. 14. 13 Acquisition costs can strongly diverge among channels and over time, driven by the different commercial frameworks agreed Channel 1 Channel 2 Channel 3 Channel 4 Channel 5 Channel 6 Channel 7 Contribution excl SAC and retention 205% difference in the acquisition cost of the same customer Example: The cost of acquiring the same customer on the same tariff with same usage across channels Higher compensation can be justified, if the channel takes part of the churn risk and/or provides more profitable customers Some channels prefer to get the whole compensation upfront Time EUR Upfront SAC Revenue share Loyalty payment for a channel varies in • The acquisition costs vary widely across channels • The perception of the value of the client for a channel varies in function of the time horizon applied.
  15. 15. 14 Channel performance measured by Sales, SAC and ARPU (European Operator) Traditional measures of channel performance often give conflicting channel priorities 0 4 000 8 000 12 000 16 000 200 300 400 Q1 Sales SAC Sales-illustrative SACpersales 0 20 40 60 80 MonthlyRevenueperUser § The Specialist channel is the best performing channel according to sales volume § In terms of acquisition costs, Own Stores are the cheapest way to buy a subscriber due to lowest SAC § However, neither of these channels make it into the top three in terms of revenue generation and ARPU – Own stores are 3rd lowest – Internet is last Examples of conflicting priorities
  16. 16. 15 Differences in SAV Across ChannelsWhat is SAV Sales Acquisition Value (SAV) is a superior measure to understand channel value § Definition: Lifetime value of a subscriber contract net of all the sales acquisition and channel specific costs 0 50 100 150 200 250 300 350 R etail Specialists Independents Distribution Internet Ow n Stores M ass M kt SAVperuser-€ Highest sales Most expensive SAC SAV per user - European operator Note: Measuring channel value is largely dependent on data availability / data comparability and level of sophistication
  17. 17. 16 Channel mix
  18. 18. 17 Combining the Customer value with Channel profitability enables to evaluate profitability across the channel mix Channel profitability Customer value across channels Ultra High Value High Value Medium Value Low Value Loss Customer value % Customers % Revenue % Contribution margin EUR Time Electronic retailers / Multiples Operator stores Low Value Medium Value High Value Ultra High Value Web Independent retailers Telecom specialists Direct Indirect SAV per channels and customer segments SAV mix Customersegmentmixmix
  19. 19. 18 The AS IS situation is compared to the client’s strategic objectives in order to identify the key changes to implement… AS IS Channel value vs. volume Profit growth Volume growth Golden corner Value Client’s sales Volume High High Low Low Acquisition can be steered to channels that deliver both value and volume, or to ones that are strong on a strategically important segment. Over-represented Under-represented No significant difference Ownshops Web Retailer1 Retailer2 Retailer3 Retailer4 Retailer5 Prepaid Segment 1 Prepaid Segment 2 Postpaid Segment 1 Postpaid Segment 2 Postpaid Segment 3 SME Segment AS IS versus TO BE Channel customer mix Channel 1 Channel 2 Channel 3 Channel 4 Channel 5 Channel 6
  20. 20. 19 …considering that the competitive environment will dictate the growth opportunities and the investment required within a channel Market distribution by channel by operator Electronic retailers / Multiples Operator stores Web Independent retailers Telecom specialists Direct Indirect Operator 1 Operator 2 Operator 3 Drivers: § Size of competitors acquisition payments § Customer mix required (prepaid consumer, postpaid consumer, business) § Complimentarily to own physical footprint
  21. 21. 20 In order to limit costs and maximize effectiveness, financial and qualitative tools have to be managed in a coordinated way § Yearly agreements with channels § Bonuses • Volume related • Value related • Net base related • Churn related § Commissions • Acquisition related • Retention related • Up-sell • Cross-sell (e.g. VAS) § Co-advertising • An operator will pay an amount (e.g. Per new subscriber) to the channel which can be used by the channel to finance communication efforts (e.g. folder) § Lump sum fees § Incentives for shop personnel § Point of Sales material • Promotion materials § Account managers • SPOC for channel with operator • Supports channels and optimize relation with operator § Sales promoters • Support on shop level § Dealer helpdesk § Exclusiveness deals • Sometimes with 3rd party supplier § Be a reliable business partner • Pay commission in time Indirect Channel Management Qualitative toolsFinancial tools
  22. 22. 21 § Introduction § Strategic approach to Channel Management § Conclusions Content
  23. 23. 22 Conclusions • Mobile operators continuously assess and develop channel strategy to proactively control distribution of sales budget, new products and services and target certain segments • Channel strategy benefits are increased profitability and / or customer growth ― New products / services must be pushed through specific channels ― Gross adds per segment must be proactively steered to maximise customer value / CLV ― ROI of sales budget can be significantly improved through optimisation of CTC and increased lifetime • Large operators, i.e. Vodafone and Orange, are expanding direct sales in order to decrease cost to connect and increase control over customer relationship • Emerging channels can dramatically change the market ― Internet drastically reduces acquisition cost ― Customer care costs and expectations are dramatically changed ― Discount market will drastically reduce prices and commoditise consumer market

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