A fifth of telco customers are blood-sucking leeches

Operators need to overhaul their customer acquisition and retention strategies to stem a loss of earnings.

This is according to data analytics firm Sagacity, which on Tuesday published statistics claiming that 20 percent of telco customers are responsible for up to a 40 percent drag on profitability. Meanwhile, the top quartile of customers account for more than 65 percent of profit.

It suggests that operators are struggling with customer lifetime value (CLV), and are focusing too heavily on winning new subscribers with tempting offers that completely obliterate their margin. Of course, it also suggests that competition in its current form is unsustainable and that maybe some consolidation would help to ease the pressure. But given that regulators are generally uncomfortable with that sort of thing, perhaps for the time being it is best for telcos to try and compete more profitably.

“Vanity figures, such as new volume customer acquisitions, or average revenue per user (ARPU), are flawed because they make the assumption that all customers are the same, which they patently are not,” said Harry Dougall, co-founder and CFO of Sagacity.

It would be inaccurate to suggest telcos don’t segment their customers. Quarterly KPIs typically discriminate between prepaid and postpaid customers and their respective ARPU and churn rates. From that, it is fairly easy to infer which are the more valuable customers, and how many a telco has of each. And this is just the data that telcos are prepared to share publicly. Sagacity’s argument, however, is that a little more granularity would go a long way.

“The telecoms market is saturated and there is fierce competition for customers,” he said. “In response, many drop prices and offer increasingly enticing bundles and offers to net new customers. However, there is very little understanding of the impact such actions will have on profits. It’s not always worth undercutting a competitor if the customer is going to have a high cost-to-serve, or to increase the cost of acquisition only for customers to churn in 12-18 months.”

Sagacity segments telco customers into four categories. At the bottom of the pile are what it calls ‘value-destroyers’, which are costly to acquire and serve, and are out the door again as soon as their contract expires. Just above them are ‘plodders’, which have a lower churn rate and don’t cost much to serve, but they don’t spend much either, and aren’t interested in any added extras. Next up are ‘swingers’, which are prepared to spend a bit extra if they are happy with their service, but are also prepared to churn if they’re not happy or something better comes along. At the top are ‘money-makers’. These are loyal customers on high-end contracts, who are fond of upgrades and bundled extras.

Clearly this is the segment telcos should nurture. In order to identify them and increase their number, Sagacity said operators must get to grips with CLV by looking at total cost to serve, cost of acquisition, tenure, contract value, and propensity to churn. This data can be used as the basis for models that predict future lifetime value, and recommend actions to take to retain and upsell the right customers, and lower the cost of serving the unprofitable ones.

However, getting to this point requires a single repository for customer information, which is a challenge due to the perennial telco problem of disparate data silos. Telcos also need AI/ML skills to develop these predictive recommendation engines. Conveniently enough, this is right up Sagacity’s street.

“By taking a value-based approach, telecoms companies can increase their number of money makers, while doing away with the value destroyers, creating a windfall worth millions,” Dougall claimed. “With the right expertise, it will be possible to not only understand profitability, but also make decisions about new customers, forecast demand for new services, and be an overall more resilient, proactive business.”