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

1. 0
Strategic approach to Channel Management
Mobile industry case

2. 1
Lecture’s objective
• Share a “hands on” approach to strategic
Channel Management…
• …applied to the Mobile Telecommunication
industry

3. 2
§ Introduction
§ Strategic approach to Channel Management
§ Conclusions
Content

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. 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. 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. 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. 7
§ Introduction
§ Strategic approach to Channel Management
§ Conclusions
Content

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. 9
Customer value

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. 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. 12
Channel performances

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. 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. 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. 16
Channel mix

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. 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. 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. 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. 21
§ Introduction
§ Strategic approach to Channel Management
§ Conclusions
Content

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