Vous êtes sur la page 1sur 76



Channel Management

RECALL No 5 Channel Management

Welcome ...
In the early days of our industry, channels were the driving force behind penetration. But as the industry matures, so must the role of its channels. In todays market, most operators rely on their channels to steer acquisition, drive retention, and play various service functions. These demands require unprecedented efficiency, and at the same time they offer the potential for significant channel-driven value. Welcome to another edition of Recall, McKinseys regular marketing in telecoms publication for senior executives. Together well explore key learnings in channel management, starting with the changing role of channels in a maturing industry and then moving into an approach to identify channel potential. Well specifically show how leading operators manage to optimize their online portals and get more out of their call centers through more active and direct contact with their customers. Well also take a look at two distinct target groups, SME and prepaid customers, and the channel strategies optimized specifically for each. This takes us into a perspective on channel tuning using your channels to manage subscriber-related costs followed by a view on emerging market channels that describes some of the very innovative solutions that have been successfully implemented in markets that may be younger but for whom maturity is still on the not-so-distant horizon. We conclude this round of insights by giving the final words to Jaime Pfretzchner of The Carphone Warehouse and Dr. Jens Gerhardt of freenet as they share their views on the future of channel marketing in telecoms. The editors would like to thank Duarte Braga for leading the content and story lining of this issue. Our hope as always is that you will find these insights useful for your work. Your comments on this issue and thoughts regarding issues to come are very much welcome.

Jrgen Meffert European Leader of McKinseys Telecommunications Practice

Boris Maurer Leader of McKinseys Telecommunications Extranet

Pedro Mendona Leader of McKinseys Marketing in Telecommunications Practice

Thomas Barta Leader of European Telecoms Branding/ROI, Editor Recall

RECALL No 5 Channel Management

01 02 03 04 05 06 07 08 09 10 Telecoms Distribution 2.0: Adapting to a Brave New World ChannelMatics: Getting the Most out of Consumer Channels Missed Call: Capturing Telco Online Channel Sales Call Center Excellence and a Bigger Bottom Line Small Business, Big Payoff: Cracking the SMB Segment Seeing the Forest and the Trees: Micro-market Channel Management Channel Tuning: Managing Subscriber Costs Cashing in on Emerging Market Mobile Distribution The Phone House Keeping Operators and Customers Happy Under One Roof Channel (R)evolution Branding, Technology, and the Reinvention of Retail 7 15 23 29 35 41 49 55 63 69 73


RECALL No 5 Channel Management Telecoms Distribution 2.0: Adapting to a Brave New World

01 Telecoms Distribution 2.0:

Adapting to a Brave New World

Mobile market saturation is leading many operators to question the modern relevance of distribution. While it doesnt play the role it once did, there is good reason to put distribution back in the spotlight. Distribution was for a long time during the wireline incumbency days a natural extension of the telecoms service operations. The intent of the industry was that it would be a means to reach the customer, but in practice it was not always in line with customer needs. During the 80s and 90s, however, this paradigm started changing around the world, primarily because of the gradual increase in competition in wireline and the need to treat customers accordingly but also because of the advent of mobile. The introduction of the mobile phone to the telecoms industry revolutionized the way operators approached their channel strategies. Suddenly, telecom operators started acquiring high street fronts all over the world and competing to offer the most fashionable handsets. During the 90s and early 2000s, distribution became a key component for the mobile world, where customer acquisition was the name of the game. Customers were joining the fray by the millions and, with customer lifetime values typically overestimated, distribution costs and commissions logically seemed a small price to pay. Quickly most mobile operators, whatever their size or profitability, developed national footprints using multiple types of distributors, from flagship stores down to small village electrical appliance stores. At the same time, the wireline world started to shift gears again, amassing Internet-based products and

working to bring the old fixed subscription service to life. They began pushing their traditional direct sales channels even further, opened their own wireline stores, and leveraged shelf space in wireless stores and other high-traffic distributors in the wake of mobile phones. In the past few years, however, as penetration of mobile reached impressively high levels in the West (see Exhibit 1) and as broadband penetration begins showing early signs of saturation, operators are re-examining the role of distribution. As the number of new clients entering the market subsides again, as in the old days of wireline, and with no new revolutionary service in sight resembling the invention of mobile, more and more operators are asking key questions: Do we need to maintain the high cost levels of a full-blown retail distribution? Are there ways to optimize this presence? Today this issue is at the forefront of the minds of many CEOs, especially in the US and Europe, where penetration has reached exceptionally high levels. But the matter is of growing importance in most emerging markets as well, where historical growth is expected to start slowing down. Our experience in supporting operators as they adapt their distribution systems to this brave new world reveals a number of major tendencies: (1) a shift of priorities away from pure acquisition in a context where new adds into the market subside and distributors have to focus increasingly on up- and cross-selling and retention/churn management; (2) the growing importance of channel productivity and retail excellence as a means to ensure


Telecoms markets are showing traces of saturation, both in mobile and broadband

cost adequacy in tighter markets; (3) the push for channel innovation in emerging markets with lower income customer bases; and (4) the increasing relevance of distribution as a lever for strategic differentiation, as some operators promote the exclusive concept while others push for optimal footprint efficiency with multiple formats.

Shifting priorities for distributors

As the wave of new clients to the market subsides, distributions focus is moving from acquisition to management. Up-selling and retention/churn management are levers that can also be influenced by distribution. Operators today have in their distributors, more than a simple push channel. Distributors are counterparts who want to play a greater role in the long-term client interface and who, to some extent, have increasing influence over consumer decisions regarding operator selection. As such, distributors are reinventing themselves to improve their ability to track customer behaviors and maintain a stronger lifetime link that enables them to identify and capture these opportunities. At the same time, operators understand this opportunity and are emphasizing cross-/up-selling and retention

in their commissioning schemes at the expense of fixed remuneration and acquisition commission. This is a tricky business, however, as we see that, despite the reduction of new adds, gross adds in the market are actually still on the high side due to the effect of intercarrier churn. As such, distribution is now becoming more than merely a cost directly related to growth, where each dollar invested would guarantee 4 or 5 in growth. These effects are compounded further by industry consolidation (in many countries) and the continuous effort from operators to improve their loyalty programs for high-value clients. Evidence shows that in the recent past the churner profile has become progressively less attractive than the average customer, putting further pressure on the acquisition business for distributors.

Increasing importance of channel productivity

In a competitive environment in which fewer customers are new to the category, fewer are switching operators, and service-related traffic is increasing, channel productivity is more important than ever. The need to increase channel productivity comes, however, at a time when product complexity and the assisted sale is also becoming more important. At the same time

RECALL No 5 Channel Management Telecoms Distribution 2.0: Adapting to a Brave New World


As churn becomes mostly rotational, a premium goes to channels retaining/ up-selling high-value customers

that the complexity of the sale is increasing, post-paid customers are becoming less patient with long waits and extended transaction times. Carriers, therefore, must reduce transaction time through process and systems simplification, increase the use of online activation (even in post-paid), and use the time that they buy back to strengthen their efforts in activities that drive channel productivity: cross-sell, up-sell, and customer education (Exhibit 2). How important are up-sell and customer education to increasing channel productivity? McKinseys Customer Lifecycle Management survey reveals that in-store education increases the likelihood of data product usage in the future by 2 to 3 times. Customer education combined with strong up-sell is absolutely critical in a world in which 40% of customers believe their phone doesnt have Internet capability when in reality 90% of the phones owned by these customers are Web-enabled. Executing in this increasingly complex world, however, requires excellence in every aspect of retail and achieving retail excellence is not easy. If as the old saying goes retail is detail, then telecoms retail is double detail. Many small, fast-moving parts (staffing, scheduling, recruiting, reporting, merchandising, inventory, etc.) make diagnosing the problem easy.

Optimizing, on the other hand, is a bigger challenge. Telecoms retail is a small-box environment (typically 5 to 15 employees) that requires a skilled labor force to execute a high-touch sale that can last up to 60 minutes for new activations. Many operators are now applying lean manufacturing principles to frontline operations in telecoms retail in order to improve productivity by reducing variability, eliminating waste, and reducing inflexibility in the system, while at the same time delivering a better and more profitable customer experience. The winners in the competitive world of wireless retail will be leaner, more efficient, and more productive than their competitors.

Channel innovation in lower income markets

Emerging markets have very different characteristics for telecoms operators as compared to mature markets, with important implications for distribution (Exhibit 3). The typical subscriber in most emerging markets represents a lower ARPU (average revenue per user), has significantly lower disposable income, and is a prepaid service customer. As a consequence, new customer acquisition is affected by the resulting economics (e.g., 1- to 3-minute FMCG-like sales transactions with little to no explanation vs. post-paids 15- to 30-minute



Emerging markets have very distinct distribution realities vs. more developed markets

high-touch aided sale) as well as billing relationships (e.g., purchase of recharge scratch cards or over-the-air electronic recharge vs. a monthly bill). As such, success in distribution has been strongly dependent on the ability to deploy SIM cards (more than phones) as well as the existence of recharge or reload facilities capillarity of distribution is even more critical than in developed markets. Most emerging market operators are either still engaged in the land grab for subscribers or just emerging from this phase. This has meant that most operators focus on extending distribution by the fastest means possible, resulting in classic multi-tiered distribution structures, with multiple types of retail stores in a context where management control is significantly more difficult than in developed markets. More sophisticated operators are implementing tools and processes to enhance performance-based management of the distribution system, including increasing transparency into the different distribution layers and designing targeted incentives. Given the need for capillarity and economic restrictions, distribution is typically represented by cashconstrained mom and pop stores. The needs of these small retailers are different from those of cash-rich

telecoms chains in more mature markets. With this in mind, the best operators actively manage the frequency at which stock is replenished and develop smart options to extend credit to these small retailers and, at the same time, mitigating the credit risk they face.

Distribution as a strategic lever

During the early days of the race for shelf space, operators typically used a push all channels approach, where all players would incentivize both exclusive and nonexclusive retailers to reach potential clients more quickly and let the most effective format win. As we now see in many mature markets, the success of the format is dependent on the market. Exclusive stores seem to find success in operator-driven markets, such as Spain, while non-exclusive stores have achieved channel preeminence in retail-driven markets, such as the UK (Exhibit 4). These differences have brought to the forefront the discussions on channel control and channel efficiency (Exhibit 5). We observe that, in countries such as the UK, independent distributors tend to have significantly more power over the customer and, subsequently, over the operators. As a result, we see more aggressiveness in price discounts, campaigns, and promotions from

RECALL No 5 Channel Management Telecoms Distribution 2.0: Adapting to a Brave New World



Distribution markets in Europe have evolved in different directions, raising different priorities for each

independent players as well as more pressure for these to mediate the relationship with the customer, an internalizing of CRM, and retention and up-selling responsibilities. At the same time, operators that manage exclusive chains with a national footprint are increasingly questioning the viability of lower productivity exclusive store models in areas with insufficient volumes. Smaller operators, increasingly under pressure to cut distribution costs in a context of progressively lower volumes, are considering the re-focus on non-exclusive distributors as a way of maintaining a national footprint while reducing fixed costs. In the US, in particular, retail channels are being used as a lever to drive growth in different market segments. While the exclusive store remains the main channel for higher value post-paid customers, more than 50% of prepaid acquisitions today come through non-exclusive mass retail. This channel is increasingly being used by operators as well as a multitude of independent prepaid brands, carrier flanker brands, and mobile virtual network operators (MVNOs) to penetrate the low-end part of the market spectrum. As a consequence of these trends, we see many operators facing a dilemma on how to best weight their

strategy exclusive vs. non-exclusive retail. The answer depends on the type of market structure and the type of operator. Regardless of the market or operator type, there is value in pushing to the extent possible the performance of remote channels that benefit both from operator control and lower costs. *** This edition of Recall offers a comprehensive view on the multiple dimensions of distribution for telecoms operators, from understanding consumer preferences to optimizing the various components of the channel mix. We believe that distribution strategy will be one of the critical components for the industry to further push its privileged relationship with customers and will be an indispensible tool for operators to battle their way through greater competitive challenges.



Distribution is emerging as a lever for strategic differentiation

Duarte Braga is a Principal in McKinseys Lisbon office. duarte_braga@mckinsey.com

Nimal Manuel is an Associate Principal in McKinseys Kuala Lumpur office. nimal_manuel@mckinsey.com

Steve Rudolph is a Principal in McKinseys Boston office. steve_rudolph@mckinsey.com

RECALL No 5 Channel Management ChannelMatics: Getting the Most out of Consumer Channels


02 ChannelMatics

: Getting the Most out of Consumer Channels

As consumer needs grow, so does the number of channels through which these needs are being met. Successful operators manage this increasing complexity by systematically gauging the improvement potential of their sales channels and then optimizing the channels structures accordingly. Blister packs at discount markets; mobile phones in fashion stores; music, videos, and no-frills offers over the Internet the telecoms sales landscape has become more sprawling and complex than ever before, and not every move has been a winner. Where in the past operators sold products through one or at most two channels, today they often use six or seven as they attempt to meet the increasingly differentiated needs of smaller and smaller customer segments. Diverging customer needs tend to squeeze players focused on the large midsection of the market in between low-end, no-frills offerings on the one hand and high-value products and services on the other. This polarization of consumer needs and proliferation of channels introduces significant new challenges for telecoms players seeking profitable growth. Developing sales activities as part of a multichannel strategy, while inevitable, nonetheless represents an enormous challenge because operators must master all passive and active customer interactions at a variety of touchpoints e.g., retail stores, Internet, and call centers. Only a few companies currently handle this challenge successfully. Furthermore, the continued blurring of the line separating marketing communications and distribution makes matters even more complicated. Media such as the Internet no longer

serve purely as communications instruments, but have evolved into sales channels as well, and more companies rely on distribution channels more frequently to promote brand awareness. Brand-building flagship stores formerly known only in the design and fashion industries or as special showrooms in the automotive industry continue to proliferate in telecommunications. Every contact the product and the company have with customers, whether to build image or explicitly to generate sales, contributes to brand awareness. As a result, mastering all customer interactions, while obviously a sales policy challenge, also becomes a brand policy mandate. In this new, highly complex sales environment, telcos must identify economically feasible strategies that meet customer demands strategies that indicate, for example, when to establish a new channel, boost its performance, or close it down; and strategies that enable active multichannel management and help to keep costs under control through the use of a common, lean backbone (Exhibit 1). McKinsey ChannelMatics provides a structured approach that makes it possible for a companys sales leadership to identify and realize improvement potential supported by a comprehensive fact base. Our approach features three key steps: first, it creates transparency regarding the companys interactions with the customer. Extensive qualitative and quantitative market research can reveal how efficient a companys sales system currently is compared to that of its most important competitors, and where interactions do not yet meet customer needs. Second, based on that transparency,



Key trends in telecoms pose a number of challenges for the channel landscape

managers redesign the sales channel architecture to reach customers more effectively and efficiently in the future. Third, telcos optimize touchpoints by making them more customer oriented, thereby improving sales results. Establishing a management cockpit can help managers to monitor and steer multichannel activities.

Creating channel transparency

Managers use ChannelMatics to create transparency (i.e., What do we have and what do we need?), which is a key prerequisite of a successful sales strategy. This requires companies to undertake a rigorous analysis of the current performance of the individual sales channels. Furthermore, managers need to gain a clear understanding of how customers would prefer interactions to be, what needs and requirements they place on the purchasing process, what information they desire, and what specific services they expect. ChannelMatics meets these needs by analyzing the sales situation through extensive qualitative and quantitative market research. Managers begin the process by tracking the customers paths through the purchasing process, from their initial awareness of the product to whether they will consider purchasing it to the actual purchase itself and the services

that follow (Exhibit 2). By benchmarking purchasing process performance against competitors, marketers can identify gaps in the purchasing process and thus assess sales effectiveness. The approach asks questions such as: Are we able to motivate enough potential buyers to actually buy a product, or do we have a problem with customer loyalty? If managers identify clear weak nesses in one phase of the purchasing process, they must also determine whether the roots of these weaknesses are located in the sales system. To proceed, they first analyze channel usage to gain a thorough understanding of the current sales situation. They need to discover when and how intensely customers use individual channels, and in what phases of the interaction that is, before, during, or after the sale? For example, many customers find it convenient to compare hardware products or prices over the Internet during the information phase. When it comes to buying, however, the good, old-fashioned bricks and mortar shop remains the most important sales channel, as shown in Exhibit 2. By analyzing what channels the companys customers use compared to those of key competitors, a telco can derive its potential weaknesses. For example, managers may observe that customers visit the companys

RECALL No 5 Channel Management ChannelMatics: Getting the Most out of Consumer Channels



While various channels play a role, shops still account for the majority of purchases

Internet page frequently, implying that shoppers often consider but do not purchase the firms products. While unattractive products could be responsible, the issue might be that the sales system has set the wrong priorities. The majority of the relevant target group of buyers may prefer a sales format that the company does not provide or provides only very poorly. For example, Exhibit 3 reveals that one telcos shops clearly underperformed competitors in all sales-related phases. To answer the fundamental question concerning whether the telcos sales and services currently meet customer needs, managers need to assess the firms channel satisfaction levels (Exhibit 4). This involves measuring the companys performance in every channel call center, shop, or Internet from the customers perspective and comparing it to the most important competitors performance. Understanding customer satisfaction in specific purchase phases yields even deeper insights. This type of analysis makes it possible for companies to determine how well they meet the most important customer interaction needs. The ChannelMatics modules help marketers create a fact base built on market research, enabling them to assess their own sales performance and their customers demands. Managers can customize the approach to also

address issues in branding, marketing mix, or customer typology.

Optimizing sales channel architecture

ChannelMatics analyses provide two types of clarity: they tell marketers precisely which sales channels customers or potential customers prefer during which phases of the purchasing process and at the same time reveal the companys own specif ic weaknesses. Managers frequently use this knowledge as the foundation for a new sales channel architecture. It allows them to answer core strategic questions such as whether they should develop new channels, which channels they should further enhance, and what channels they may need to terminate. These deci sions have two main parameters: customer needs and customer behavior, both of which are based on ChannelMatics analyses and channel profitability. Depending on the market and the individual sales situation, companies can use various techniques to improve channel architecture. In one complex example, our three-step approach helped a firm to overcome a mix of legacy product offerings and channels that no longer made sense. First, the company introduced a customer segmentation that accounted for the



Channel usage: lack of physical contact is not compensated for in remote channels

different types of interactions, and then it developed channel offers for the segments targeted to meet customers interaction needs. This involved evaluating existing and also new direct or indirect sales channels. Finally, the company developed an offering portfolio that it allocated to channels based on profitability. Marketers placed high-margin products only in the more expensive shops, for example, and sold lowerend products that required little explanation over the Internet. In another situation, the key issue involved customer churn. The companys analysis of its sales processes revealed the varying degrees of difficulty salespeople could have in turning one-time customers into loyal customers. As a result, the company tested its current channels to see whether they were able to satisfy the interaction needs identified, or whether other channels needed to be strengthened or perhaps even new channels developed. In a third example, a telco learned that its customers were frequently reluctant to embrace new sales formats. The target groups only responded positively to very few new sales concepts, such as retail stores in selected locations or having a sales advisor come personally to the home. It also became obvious that under certain

circumstances the telco should close channels that did not meet current customer demands adequately, or when managers identified them as being unprofitable after taking all variables and fixed costs into consideration.

Optimizing customer touchpoints

An appropriate channel architecture will be a solid platform that defines sustainable sales channels and matches them with individual customer segments. But achieving strong sales also requires that touchpoints such as call centers, retail shops, or Internet portals provide customers with the service they desire. Telcos will find two questions to be especially relevant. The first regards when customers use the channel: Do they use it more during the early phases of the purchasing process to become familiar with the product, or more in a later phase, when they actually purchase the product? A second question deals with the demands placed on the interaction: Do customers want specific information quickly and without complications, or do they seek high-touch interactions with company representatives? ChannelMatics can provide precise information in both cases. Once it becomes clear when telcos should use specific channels and what demands the customer places on

RECALL No 5 Channel Management ChannelMatics: Getting the Most out of Consumer Channels



Channel satisfaction: room for improvement, particularly in shop performance

the interaction, managers should concretely adapt the individual channels based on this information. Assume, for example, that a company identifies the call center as an important channel for building customer loyalty and that customers want individualized information and offers. Then operators should take tangible steps in this direction, such as switching to improved call center software or individually coaching call center agents. A mobile sales force and retail shops offer completely different opportunities to optimize customer contact. But all channels have one thing in common: in order to improve customer contact noticeably, companies must make comprehensive efforts. This affects the employees, the processes in question, and the systems used. Whether in call centers, in shops, or on the Internet, ChannelMatics provides concrete indications of how channels can be developed to optimally satisfy customer needs. This not only leads to optimized sales results but also helps the company improve its awareness of its customers and the market.

*** Effective sales channel management can overcome market complexity if companies know their customers. A firm that knows its customers and their needs will have a clear advantage when it comes to optimizing its sales structure and shaping customer touchpoints. To be successful in the long run, the company will need to institutionalize the transparency once it is created. This transparency is crucial for management to be able to quickly take action when the situation in a region, a product line, or a sales channel becomes critical. Establishing a ChannelMatics cockpit can help here. It calls for regular collection, evaluation, and synthesis of comprehensive information about customer requirements, channel utilization, and sales performance at the individual touchpoints. It thus regularly provides managers with the most important performance indicators at a glance, enabling them to steer sales to success in the future as well.


Christoph D. Erbenich is a Principal in McKinseys Frankfurt office. christoph_erbenich@mckinsey.com

Holger Feist is an Associate Principal in McKinseys Munich office. holger_feist@mckinsey.com

Rene Langen is a Principal in McKinseys Athens office. rene_langen@mckinsey.com

RECALL No 5 Channel Management Missed Call: Capturing Telco Online Channel Sales


03 Missed Call: Capturing Telco Online

Channel Sales

Too many telcos needlessly continue to miss lucrative online channel sales opportunities. A refined operational strategy can help operators capture cash and customers online. Why dont more telecommunications players exploit the online sales channel more effectively? While doing so appears to be a natural fit for this industry, many online opportunities remain uncaptured. Across Western European markets, surveys reveal that while nearly half of all Internet users age 14 and older use the Web to learn about telecommunications products, only about one-third of those have purchased such products online (see Exhibit 1 for results from Germany). Thats less than half the rate of people buying books online and lower than purchases of airline and train tickets, event tickets, computer hardware and software, or DVDs. Our analysis of the proportion of total gross subscriber additions (gross adds) generated online revealed a range of just 3 to 6 percent in North America, and 2 to 8 percent in Western Europe (with a few significant outliers). While many telcos today fail to exploit the online opportunity, the handful that have provide dramatic evidence of its potential. More than one West European mobile network operator (MNO) already captures 25 percent of its sales via online channels, and online-only mobile discounters across geographies are thriving, in Germany alone seeing their subscriber ranks grow nearly fivefold in 2006. The advantages of selling online can be significant. The channel represents a first touchpoint for a large share of telco consumers. It can generate a strong

positive effect on brand perception, serve both information seekers who end up buying offline and online buyers, and enable telcos to present product information to consumers at low cost, and at the level of detail they desire. Online sales can be lucrative for both operators and resellers, frequently providing MNOs at least average or even higher margins on a per-gross-subscriber-addition basis in both the prepaid and post-paid categories. A mobile operator discovered its online channels offered significant cost-reduction potential that resulted in direct bottom-line impact. For example, by selling online it saved up to 88 percent on activation costs, while cost savings from online sales and service boosted its ARPU (average revenue per user) margins by up to 18 percent. And such sales no longer represent the black hole they once did in terms of track record: companies such as Dell in the PC market, for example, have fully demonstrated how firms can generate considerable amounts of differentiated value from the interactivity inherent in the online purchasing process. Several examples of telco online mass customization exist that leverage the interactive power of the Internet. Deutsche Telekoms discount mobile brand congstar, for example, allows customers to choose from a broad range of flat-rate options and change them online on a monthly basis, while Finlands Sonera has introduced Minun Sonera, which allows subscribers to choose a variety of custom options, including handset choice, minute and text package size, and additional mobile data options. Portuguese MNO TMN launched UZO, a mobile virtual network operator (MVNO) that allows users to manage their accounts and analyze their usage in real time.



Almost half of all telco customers use the Web for pre-purchase research today

Beyond its cost-effectiveness, a good online channel also plays the role of a valuable subscriber retention tool. One European MNO successfully improved its online customer satisfaction levels in terms of ease of use, Web site organization, and time to respond, which resulted in significant reductions in churn (i.e., the percentage of customers leaving one service for another).

and some online-only offers. While these offers are typically provided by telcos through dedicated units or even separate, arms-length companies, they often require the telco to provide non-discriminatory wholesale offerings to any other interested party. 3. Multibrand supermarket. A network-independent store selling a large number of bundled offers from different operators and manufacturers side-by-side, with an emphasis on choice, and hardware that carries fixed-fee discounts. These players typically address hardware deal seekers with a regular telco product range that carries limited tariffs but offers heavy hardware discounts, depending on the product. Large independent retailers of wholesalers that serve multiple telcos often operate multibrand supermarkets. 4. Brand store. The equivalent of a branded high-street store, offering the full range of products from a single operator with regular pricing or limited online discounts. Brand stores offer the regular telco product lines but seek to capture premium pricing based on their brand power. The brand attracts a variety of customer segments, including conservative offline shoppers, offline shoppers with online potential, and online-savvy up-market customers. The brand store most often can be found at the telcos Web site address.

The range of online channel types

We have identified five basic types of telco online channels that differ in terms of their pricing and product portfolios, and that address different online customer segments. 1. No-frills discount. A simple, efficient online outlet for a single product (e.g., prepaid SIM cards), focused on ease of use and price. No-frills discounters offer selected, simple products carrying heavy tariff discounts to deal-seeking customers and are typically addressed by telcos via wholesale. 2. Lean second brand. The online presence of a telcos second brand with a lean but differentiated range of products, with an emphasis on value, quality, and simplicity. This channel offers tariff deal seekers simple products along with a portion of the regular telco product range, primarily carrying limited discounts

RECALL No 5 Channel Management Missed Call: Capturing Telco Online Channel Sales



Capturing the full potential of the online channels requires operational excellence in 4 specific areas

5. Brand portal. An open portal that goes beyond the brand store by providing both content and services to both customers and non-customers alike. As a channel it emphasizes audience, brand image, and/or adjacent revenue sources and either includes a brand store or links to one. The portal offers regular telco products along with complementary offerings, all at premium prices.

brand image, provide product information, and promote specific products. Well-structured, easy-to-use Web sites that offer a wide range of products and services online (e.g., Internet access, cable TV, landline and mobile phone access, and more), which customers can easily reach using only a few clicks, have become the market standard. Most include interactive advisory and configuration tools. 3) Online sales. Success requires operators to overcome fundamental sales barriers. For example, our research shows that key reasons why US consumers of mobile products did not purchase them online include the desire to touch and see an item such as a handset prior to buying it, having the item immediately and not wanting to wait for delivery, a preference for a one-on-one interaction with a salesperson, and worries about sharing personal financial information online. We also learned that cross-channel links, such as offering in-store pickup and return for online purchases, can be critical. US category killer Circuit City adopts this combination of bricks and mortar stores plus online sales and guarantees that the customers online order will be waiting at the chosen store in 24 minutes or less. Other actions an operator can take to boost online purchasing include offering special online discounts, provid ing the ability to speak with a sales agent, and guaranteed security.

Capturing online channel potential

To seize the online opportunity, telcos need to achieve operational excellence in four specific areas (Exhibit 2): 1) Traffic generation. In order to boost traffic generation, operators need to explore a variety of potential sources. For example, they can investigate external sources and seek users across different sales channels as well as via the online channel itself. Various formats of digital marketing exist, with many new additions every year. Perhaps more than any other channel, online is particularly suited for the latest forms of marketing that involve users themselves: viral marketing and alpha user marketing. 2) Brand and product promotion. Operators seek to burnish the online channels capability to foster


To manage dropouts online intenders who do not complete the sales process Germanys BASE Mobile online store presents a pop-up page that includes a toll-free hotline number, a link back to the order, and a store-finder directory. The page also includes a limited-time extra discount for completing the alreadystarted purchase process. 4) Online services. Success requires companies to define online service features or functionalities, which will likely consist of a small portfolio of core services that can cover a large share of service transactions. One telco incumbent found that its top three Web services (e.g., billing inquiries, payment arrangements, and production information) also accounted for nearly half of its call center transactions. It discovered that by increasing its Web adoption rates from the current 60 to 70 percent range in these categories to 80 percent, it could reduce expensive call center usage by roughly 10

million calls, or almost 20 percent. Furthermore, online services in particular recurring ones drive continuous and qualified traffic to the online channel that can be captured for targeted CRM. Moving the customer base to online billing is the most powerful of such services known to date. *** Telecoms players seeking low-cost sales revenues, significant reductions in churn, and generally happier customers today are missing a major opportunity to stimulate sales through their online channels. McKinseys thinking regard ing the principle forms of positioning an online channel, as well as its four-pronged approach for achieving online sales excellence, provides the ideas and approaches companies need to get the most from their online assets.

Duarte Bacelar Begonha is a Principal in McKinseys Lisbon office. duarte_begonha@mckinsey.com

Alexander Dahlke is a Principal in McKinseys Hamburg office. alexander_dahlke@mckinsey.com

RECALL No 5 Channel Management Call Center Excellence and a Bigger Bottom Line


04 Call Center Excellence and a Bigger

Bottom Line

Call centers can be more than a source of customer satisfaction through excellent service. Transforming customer call centers into customer contact centers can put telcos on track to greater sales from this oftenoverlooked channel. Missed call center sales opportunities can palpably limit the growth prospects of many telecoms industry players. Thats because service-related calls make up the bulk of incoming traffic to call centers, and operators often fail to capture the maximum sales revenues possible because they usually dont pursue sales during these subscriber calls. Our research shows that for wireline incumbents, only 15 to 35 percent of total call center calls include a sales focus, with the remaining 65 to 85 percent dedicated exclusively to service. The picture for mobile operators looks even worse, with only 5 to 10 percent of total calls focused on sales. However, these lackluster results also reveal opportunities for quick, dramatic improvements. For example, McKinsey helped one wireline operator achieve a 205 percent improvement in its sales attempt rate in just six weeks, moving from only 18 percent of service calls that included sales attempts to 55 percent.

call flow, and agent assignment and coaching. Executives also complain about the lack of transparency into key call center sales metrics, particularly regarding sales potential, and the prevalence of uphill selling efforts where call representatives piece together sales pitches on the fly rather than having a downhill approach (i.e., starting with a compelling package). This latter approach can be particularly effective with high-value customers. Other common hurdles to improved contact center service-to-sales performance include a lack of specialization contact center reps have too many roles to play on a given day and, therefore, lack the full skill set of any one specific area. Another impediment is the creation of incentives for reps to focus on call volumes instead of on revenue-based metrics, which ends up being a disincentive for sales, as it can lead to call churning (to maximize volume-based incentive points) rather than maximizing revenues per order (i.e., making the sale). We also find that managers often establish overly cost-based call center metrics, which lack the right trade-offs to encourage sales. Furthermore, most call centers traditionally focus primarily on service, thus causing reps to feel as if engaging in a sales pitch is an imposition on the customer.

Huge potential, many roadblocks

Given the huge potential for call center sales improvements, why arent more operators doing more in this area? We identified several key frustrations, including a lack of marketing department input into the design and operation of call centers and insufficient control over core sales tools and practices such as call scripts,

From customer service to customer contact

Based on our call center experience, we have developed a proprietary two-phase approach to help telcos achieve sales excellence in contact centers (Exhibit 1).



Achieving sales excellence is a 2-stage process

Phase 1: Align overall contact centers structure/organization

Phase 2: Optimize operations within each contact center

C se usto gm m en er t

Operating tools Enablers

Agent/service model

Structure the contact centers in a way that maximizes sales without affecting costs or harming service quality by aligning Customer segment potential Call type potential Model to serve (e.g., IVR, live call) and agent skill

e yp tt ac nt Co

De nition/implementation of tools for sales effectiveness, e.g., revenue targets, product selection, call routing, scripting and lead offers De nition/implementation of enablers to ensure effective implementation and long-term sustainability of results Performance management: to ensure that the operating system is followed in an habitual way without extraordinary effort Mindsets and behaviors: to align the mindset and behavior of people with business objectives, allowing for continuous improvement, e.g., through coaching

SOURCE: McKinsey

Phase 1: Align the call center organization and structure to match the revenue potential from each customer segment, contact type, and agent. Phase 2: Optimize the operations of each contact center via the development and use of effective sales tools (e.g., scripts and call routing) and nurture an environment (e.g., management systems, mindsets, and behaviors) that ensures effective implementation and the long-term sustainability of results. This two-phase approach can deliver significant results, including a more than 30 percent overall increase in revenues. For example, one European wireline operator captured more than a 35 percent increase in value per call following a 3.5-month pilot project. We will describe the two phases in greater detail.

model based on customer sales potential and contact type sales potential, with call center agents selected in ways that best match their capabilities and attitudes with the telcos business goals. This model takes full advantage of the revenue potential from these three highly variable elements: customers, contact types, and contact center agents. At one European wireline operator alone, we noted significant levels of variability among these three elements in its residential call center. Residential customer subsegment average sales, for example, could swing 230 percent due to different elements such as propensity to churn, contracts, or share of wallet. The variability in terms of call and contact sales conversion rates ranged up to 370 percent, driven by differences in each calls up-/cross-sell potential, product and technical complexities, and the customer situation itself. And call center agents abilities to meet sales goals also differed by up to 340 percent and are attributable to differences in sales skills, product expertise, customer satisfaction performance, and other issues. Such high levels of variability highlight the presence of significant revenue opportunities if the telco operator were to match the best combination of agent skills to the potential from each type of call in each customer segment.

Phase 1: Align the overall structure of the call centers

To boost revenues, telcos need a new way to organize and structure their call centers. Current configurations tend to favor one-dimensional call center models based on either the service offered (e.g., sales or technical support) or on the customer segment (e.g., high value). Our approach leverages an advanced, multidimensional

RECALL No 5 Channel Management Call Center Excellence and a Bigger Bottom Line



Phase 1 leads to an optimized touchpoint configuration

Customer subsegmentation. Given such high levels of variability, it becomes important for managers to approach these three elements using sufficient levels of rigor. An operators customer subsegmentation, for example, must be based on the products used (e.g., voice products such as shared vs. not shared lines and data products such as different types of ADSL), since these drive the potential for cross-sell and up-sell opportunities and correlate highly with customer value. Telcos need to aggregate customers into a number of subsegments in ways that ensure critical mass is achieved in each and that there is no loss of efficiency. The aggregation must also ensure internal coherence in terms of present/potential value and the installed product base as well as reflect the realities of customer lifecycle situations. Calls and contacts. Regarding calls and contacts, not all calls have the same potential in either sales conversion rates or average sales. In terms of both value and crossselling effectiveness, a call to collect a bad debt, for example, ranks far below a service call regarding a change of address. A subscriber changing addresses provides many potential cross-selling and up-selling opportunities (e.g., new voice or broadband services), while a bad debt customer represents a known high risk.

Agent specialization. The performance of call center agents typically exhibits high levels of variability and proves the case for specialization. Segmenting agents in terms of their customer satisfaction ratings and abilities to fulfill sales targets provided one telco with four meaningful segments: Stars were customer service representatives (CSRs) with high sales performance ratings and excellent customer care quality. Candidates for dedicated salespeople were CSRs with high sales performance but average customer care quality. Candidates for service-to-sales agents were CSRs with low sales performance but high customer care quality. Candidates for training or consequence management were CSRs with low sales performance and low customer care quality. The resulting combination of customer segmentation, calls/contacts, and agent specialization provides a coherent model that managers can use to organize and structure their call centers (Exhibit 2).



Phase 2: Operational transformation is achieved through 4 key operating tools and 2 enablers

Phase 2: Optimize the operations of each call center

With the organization and structure of the call centers established, telcos now focus on the operational transformation required to make these changes work. McKinseys approach relies on two enablers the telcos management system and the capacity to influence the mindsets and behaviors of employees and on four operating tools (Exhibit 3): 1. Call routing and automated remote channel optimization. Our experience shows that harvesting the right customers and call types from a telcos IVR (intelligent voice response) system and Web sites can generate more value than cost. Doing so requires managers to find the right balance among service, cost, quality, and revenues, with the understanding that the economics for certain customer groups and types of calls make them worth being pulled out of the IVR/Web systems and connected with live agents. For example, in situations where the potential value correlated to a contact is high, the call center should take the lead; where the potential value is low and the feasibility of handling the contact through an automated system is high, IVR/Web solutions should come first.

2. Revenue targets and offer selection. Determining revenue targets and offers using a detailed and structured approach will play a central role in building sales potential. This approach begins with a definition of the overall offer strategy (i.e., the mix of data versus voice products based on usage). From here, managers define the principles to be used (e.g., Always offer the best possible option in terms of functionality and price) and assemble a short list of products for each segment. Finally, managers can employ a voice/data/customer matrix to determine which product offer best fits which customer segment during which type of call. 3. Scripting and lead offers. When developing scripts and call offers, an important goal involves choosing the wording that best captures the shopping attitudes of the target customer. Based on research that monitored over 100,000 sales calls, this type of sales pitch modification can prove extremely effective. Scripting should also leverage words that work culled from the best call center agents. Furthermore, getting the call flow right can lead the customer toward a sale and make cross-/up-sell economics work. For example, in a service-to-sale call, the agent must serve and satisfy the customer and earn the right to sell before attempting to sell him or her anything.

RECALL No 5 Channel Management Call Center Excellence and a Bigger Bottom Line


4. Up-selling and cross-selling IT tools. Up-selling and cross-selling IT tools can help to better focus agents, providing them with the right tools at the right point of contact to make a sale and satisfy a customer. *** Telcos often miss out on opportunities to fundamentally leverage the strength of their service call centers, transforming them into customer contact centers that play a larger role in revenue generation. These contact centers represent a key channel for telcos. They are the primary contact point for customers, but the resources that lie within often go unexploited. The approach highlighted here has been implemented in over 60 customer care engagements over the last three years, proving that the methodology works, and that it delivers outsized results. McKinseys experience shows that typical customer contact center improvements yield revenue growth in excess of 30 percent, with results sometimes surpassing 50 percent. Clearly, at a time when many telcos wonder where the next growth spurt will come from, dialing into call center sales improvements makes quite a bit of sense.

Raffaella Bianchi is an Associate Principal in McKinseys Milan office. raffaella_bianchi@mckinsey.com

Gareth Morgan is an Associate Principal in McKinseys Dublin office. gareth_morgan@mckinsey.com

Tim Morse is a Principal in McKinseys New Jersey office. tim_morse@mckinsey.com

Luis Rivera is an Engagement Manager in McKinseys Madrid office. luis_rivera@mckinsey.com

RECALL No 5 Channel Management Small Business, Big Payoff: Cracking the SMB Segment


05 Small Business, Big Payoff: Cracking

the SMB Segment

The diversity of the small and medium business (SMB) landscape has proven to be a challenge for telecoms operators. A fresh, more nuanced look at this sector can deliver big returns for telcos capable of handling its divergent needs. The small and medium business segment offers very attractive opportunities to telecoms operators capable of handling its intricacies. SMBs, including SoHos (small office/home office), currently control more than half of all business-to-business (B2B) spending and in the future will drive B2B market growth because they continue to expand faster than the corporate B2B world. The pure size and growth expectations for this segment overall make it so attractive that players formerly focused exclusively on the corporate or consumer segments increasingly seek to enter the SMB sphere, creating an intensified battlefield. Due to the nature of SMBs, many fixed and mobile telecoms operators strug gle to serve this segment at the same levels of profitability they see in other segments. Small in scale, SMBs are usually defined as companies with between 10 and 1,000 employees, and the segment varies widely in terms of industries, management styles, and organizational structures. It includes all types of industries, companies, and ways of decision making. The complexity of the segment often causes telecoms operators to overserve customers with customized product offer ings and dedicated sales forces, resulting in high cost-to-serve levels and unfavorable margins. Alternately, telcos also underserve SMBs with residentiallike offers that lack proactive sales actions, resulting in unfavorable market shares and the loss of significant

gross profit margins. The segment is also very demanding, since two-thirds of SMB decision makers consider switching their telecoms provider each year, due mainly to relatively high price sensitivity. Combining these characteristics with very short compared to the corporate segment decision cycles of only a few weeks in most cases highlights the significant challenges telcos wishing to profitably serve this segment and protect margins face.

Current SMB segmentation practices are not sufficient

Most telecoms operators segment their B2B customer base according to criteria such as revenue potential versus current revenues, or affinity to complex products. Marketers then apply a one-dimensional segmentation, meaning they line up all customers like a string of pearls and then usually determine the cut-off points between different segments based on cost-to-serve levels per channel. Depending on the size of the market, one will find a differentiation between small, medium, and large SMBs versus SoHo on the lower end and corporate customers on the upper end. Based on this type of cut, providers usually assign one channel to customer segments, be it a direct or an indirect one. This channel assignment might have been appropriate in the past for an incumbent coming from a world that serves customers according to current revenues. But today the world has obviously changed, with competition increasing, offerings expanding, and many customers becoming much more educated. These changes have led to splintering customer



Operators must strike a balance with SMEs who are underserved in some areas and overserved in others

expectations and inadequate telecoms operator abilities to meet them, as shown in Exhibit 1, which is based on market research conducted in the UK. The phenomenon of polarization, observed throughout the B2C world, also seems to be relevant to SMBs (Exhibit 2). As a result, a telco serving SMBs with a regular, single channel might address only about half of the market. Or worse, in the case of competition that correctly focuses on a few specific segments offered through appropriate channels, such a telco could find itself stuck in the middle with a mediocre sales approach. The significant increase in the relevance of the Internet channel for SMBs presents an additional challenge. These businesses not only seek information in this channel, but also want to use it throughout the entire purchasing process. Over 30 percent of smaller SMBs and more than 50 percent of larger SMBs in the UK claim they want mainly to use this channel for purchasing going forward. However, today (and into the future) most SMBs use additional channels beyond and in concert with the Internet, requiring operators to establish appropriate and consistent links among various channels.

Amazingly enough, smaller SMBs apparently prefer direct sales channels even more than larger SMBs. This inclination presents significant challenges, since the cost to serve small companies with a direct sales force can hardly be justified. However, by digging a level deeper to understand what smaller SMBs mean by direct sales, we found that the real issue involved concerns about being lost in call centers where no one knew them and where they felt they are not treated appropriately as business customers. However, research shows that an interaction model, where a small team of dedicated call center salespeople interact with the SMB and a sales representative comes by only on demand, would satisfy more than 70 percent of SMBs. Operators will find that this sales team plus approach is not only significantly more cost-efficient than a direct sales force but that it also meets customers expectations. Another model chosen by some operators converts their own regional direct sales forces into SMBs themselves. The former regional sales operation in effect becomes a franchisee that in short order understands SMB needs better and serves them appropriately. Furthermore, SMBs accept this arrangement more readily, since they feel they are being served by a peer. Given its importance and complexity, the next issue we will explore reveals

RECALL No 5 Channel Management Small Business, Big Payoff: Cracking the SMB Segment



SME segment polarization is apparent in purchasing behavior and plans for future channel use

how an operator can systematically and cost-effectively serve the SMB segment.

Designing a customer interaction model for SMB

In order to enhance the customer experience for SMBs and at the same time keep costs under control, operators need to carefully think through the three building blocks of the customer interaction model: 1) developing a customer segmentation; 2) matching the segments with the appropriate interaction models and channels; and finally 3) creating a standard ized lean backbone serving all channels (Exhibit 3). The first step operators take to create an effective goto-market approach for the SMBs requires them to deeply understand the segment along several dimensions. Managers need to think not only in terms of current revenues or customer size when considering segmentation, but also about the potential for future revenues. This analysis is particularly relevant in determining the channels that the telco can afford to use in serving a specific segment. However, to really succeed in the SMB segment, telcos must define the market segments with a precision greater than that afforded by merely looking at cutomer size or revenue potential. Success requires

companies to deeply understand customer needs regarding products and solutions. The portfolio a company offers not only has implications for the addressable market, but also regarding the channels needed to explain, sell, and deliver the offering. Marketers must determine whether a customer shows a need for solutions or a willingness to pay for pre-sales consulting: such attributes clearly differentiate customers from other even larger businesses that simply seek standard voice and data products. Another often-neglected characteristic involves the question of which customers will willingly buy everything from a single source versus those who prefer using several suppliers and seek best-of-breed products and services. To capture a best-of-breed segment customer, the telco needs to think through its role in a potential ecosystem of partners, and what share it can gain in such a segment (as well as whether it is worthwhile to pursue). Such interaction requirements form an important dimension in the customer segmentation. Exhibit 4 presents a sample for an information and communications technology (ICT) player that exemplifies the two critical segmentation dimensions, product complexity (as depicted in appetite for ICT) and interaction requirements.



Successful SME customer interaction model comprises 3 elements

Once marketers define the segmentation, the second step involves aligning the sales channels with the customer segments. The SMB segment clearly requires a multichannel approach, since the different subsegments demand different routes to market. However, the art in the process involves aligning what customers would be satisfied with on the one hand, and what telco providers deem optimal on the other. In many cases, telcos tend to overdeliver. We have shown that over 70 percent of the customers who ask for a direct channel would be satisfied with a combination of a specialist call center team and direct sales force on demand. Furthermore, many customers would prefer to use the Internet as their dominant channel (although current Internet channels often do not offer the functionality needed). To satisfy these needs, we suggest a three-step approach. Step 1: Create a cost-efficient customer connection. First, to cover minimum customer service requirements, telcos should establish a lean direct approach to the customer typically, a Web channel which then serves as a standard channel to all SMBs. Step 2: Establish secondary channels as appropriate. Then, the company develops and maintains additional channels wherever SMB customers are willing to pay for them and only in these cases. These may include

call centers that provide SMBs the opportunity to talk to product specialists, or indirect channels that support a value proposition that includes some ICT, such as local areas networks or personal computers. Or it may even include high-touch direct approaches to accommodate more sophisticated customer needs, such as solution engineers or direct sales forces for the high-end SMBs (as long as they are willing to pay for it!). In order to choose the right approach, companies need to understand their own channel economics and have a clear understanding of where customers value additional sales or service support. Step 3: Build a sales and service platform. Finally, completing the SMB go-to-market approach involves building a high-quality, low-cost platform of sales support and service processes for interactions that cut across all customers. This lean backbone typically encompasses efforts to supply customers with information as well as order entry, fulfillment, training, and aftersales service. It is an administrative factory that must be rigorously managed for efficiency. Other typical levers to increase efficiency and reduce costs include centralization across geographies, the standardization of processes, the reduction of business support (e.g., demand management for secretarial

RECALL No 5 Channel Management Small Business, Big Payoff: Cracking the SMB Segment



Addressing the different customer segments is essential

services), or the provision of standard sales tools (e.g., configurators, quote tools). *** Given its potential, telcos should see serving the SMB segment as an opportunity, not a threat. They should rethink their segmentation based on customer requirements, define an appropriate channel landscape to serve more exacting demands cost-effectively, and grow a lean backbone while satisfying shared sales and service needs.

Holger Feist is an Associate Principal in McKinseys Munich office. holger_feist@mckinsey.com

Pierre Gatta is an Associate Principal in McKinseys Paris office. pierre_gatta@mckinsey.com

Rene Langen is a Principal in McKinseys Athens office. rene_langen@mckinsey.com

Maximilian Scherr is an Engagement Manager in McKinseys Vienna office. maximilian_scherr@mckinsey.com

RECALL No 5 Channel Management Seeing the Forest and the Trees: Micro-market Channel Management


06 Seeing the Forest and the Trees:

Micro-market Channel Management

The focus on macro-market share hides the significant variation that plays out on the micro-level and usually goes unnoticed from the birds eye view. A more granular perspective reveals micro-market weaknesses, and specific interventions make increased acquisition a scalable reality. Market share in most mobile markets appears stable at the highest level. Short of massive disruptions (e.g., entry of new players, big regulatory shifts, advent of new technologies), overall market share typically shifts only in the lower single digits from year to year between players. However, this macro-view usually hides the significant variation that often occurs at the micro-market level. Our observations in one emerging market have shown that while the market leader has an average 55 percent share at the national level, its market share in specific micro-markets varies widely from as high as 80 percent to as low as 20 percent (Exhibit 1). The reasons for this divergence are multiple, ranging from the structural (e.g., quality of network coverage) to the tactical (e.g., aggressiveness of the local distributor). However, this variation presents a huge opportunity to drive step-jump increases in market share and revenues. This is at the source of the distribution management system (DMS) opportunity and is based on transparency at the micro-market level, stimulation of local demand, and scalability to hundreds or thousands of micro-markets. McKinsey research has identified significant value creation potential through systematic application of

distribution management systems, both in terms of customer experience and in terms of performance (market share). For example, a player in Southeast Asia increased gross acquisitions by 75 percent through greater transparency into micro-markets and better distribution management systems. On the other side of the globe, a mobile operator in Central Africa doubled its gross acquisitions through an aggressive point-of-sale recruitment strategy.

Transparency at the micro-market level

Understanding performance variations at the micromarket level is not trivial. To be actionable, micro-markets need to be defined at the city or town level. In one Asian market, for example, 1,500 micro-markets were defined at the town, village, and rural district levels. At this level of granularity, data availability becomes a challenge, especially in emerging markets. However, by leveraging basic census data, operators can gain very actionable insights. Specifically, basic census data around population count and household income for each micro-market, married with the operators internal data on subscriber count and revenues for each micromarket, is sufficient to gain insight into the operators performance at the micro-market level. This performance is benchmarked against the potential for each micromarket (where micro-markets are typically clustered by size or by income bracket). The operator data is then tracked monthly to identify trends in each micro-market and to enable prioritization and targeting of micromarkets for action. The resulting priority grid enables identification and prioritization of micro-markets based on current performance and revenue trend.



DMS reveals geographic variances and captures the potential that lies within

Beyond transparency across micro-markets, tracking and monitoring tools have been developed that enable greater transparency within each micro-market, highlighting market penetration, revenue penetration and share of wallet, and retailer penetration. Exhibit 2 is an example of this dashboard for one Asian market.

Local price promotions for subscribers Frontline sales force training programs Retailer loyalty programs. Our work with emerging operators in Asia gives clear evidence in support of the idea that there is significant value potential in influencing the behavior of retailers through retailer-targeted campaigns at the micro-market level (Exhibit 3).

Stimulation of local demand

Once high-potential micro-markets are identified and targeted, the next step is to understand the root cause behind the underperformance. Micro-markets with structural issues (for example, quality of network coverage) should then be flagged and dealt with separately (and quickly). Beyond the structural matters, tactical issues typically include underpenetration of retailers, lack of focus by distributors, aggressive local compet itive actions (such as advertising, merchandising, local promotions), etc. It is critical to understand the drivers of underperformance and craft interventions to address them. Taken as individual campaigns or in combination, intervention actions include: Retailer recruitment drives Reload-stretch programs for retailers Merchandising and advertising blitzes

Scalability to hundreds of micro-markets

The 80:20 rule applies, in that targeting and intervening in 20 percent of the micro-markets will typically yield 80 percent of the benefit and upside. However, in our example market in Asia with 1,500 micro-markets defined, this in practice means intervening in 200 to 300 micro-markets. This requires a process that scales seamlessly from test ing specific intervention actions in pilot locations to scaling successful programs to all relevant micro-markets. The execution challenge in two or three micro-markets is manageable but can quickly become unmanageable when the number of markets is multiplied by 100. What is required is a process that includes three key elements:

RECALL No 5 Channel Management Seeing the Forest and the Trees: Micro-market Channel Management



A multidimensional dashboard enables micro-market monitoring, tracking, and target setting


Micro-market campaigns can have a significant impact on frontline sales



Sales stimulation engine develops, tests, standardizes, and packages campaigns for greater efficiency


Matching library campaigns to micro-market needs is the first step to capturing impact

RECALL No 5 Channel Management Seeing the Forest and the Trees: Micro-market Channel Management


Lifting revenues through DMS

The success story of one Asian operator In one Asian market, the leading operator holds 55 percent of a highly competitive market with a very complex distribution structure. In order to quickly get its products to market, the operator leverages the reach of third-party distributors to connect to its network of retailers that sell the operators SIM and recharge to its prepaid subscriber base. This allows the operator to cost-efficiently get its products to subscribers; however, the operator is reliant on a two-tier distribution structure with limited direct interaction with the subscriber base. To address this issue, the company deployed a distribution management system (DMS) that enabled the operator to: Ensure sales transparency on items such as target setting, area performance, and sales performance. This transparency enabled targets on SIM sales to be set 75 percent higher. Understand penetration, retailer coverage, and ARPU at the level of each city or town. Based on this, focusing activities on the top 200 locations has the potential to drive a 5 to 10 percent revenue gain in these locations. Launch 15 on-the-ground sales tests over a twomonth period in various locations throughout the country, covering different types of promotion configurations and location types (e.g., retailer loyalty cards, distributor incentives, retailer recruitment drives, sales stretch/reward, salesperson commissions, raffles, SIM consignment). The test rollouts also allowed on-the-ground feedback that improved promotion plans and mechanics (e.g., calibration of rewards, identification of required merchandising, development of appropriate selling kits). Broad-launch two programs to 50 locations to capture at-scale impact. And based on these tests and broad launches, the operator was able to define a six-month, at-scale road map to release local retail promotions around the country. Initial results are encouraging, with local launches projected to yield 1.5 to 2.0 percent incremental revenue lift in the near term and signif icantly higher (in the 5 to 10 percent range) when scaled to multiple locations. In addition, the regions are on track to deliver on the 75 percent higher SIM sales targets.

Developing, testing, and standardizing the intervention actions/campaigns. This includes applying CLM-type scientific test methodology to retail campaigns and standardizing campaigns that are shown to work to enable scaling up to hundreds, if not thousands, of micromarkets. This typically involves creating retail campaign kits that are easily understood and deployed by region-level sales personnel (see Exhibit 4). Adopting a simplified action plan per province/city. Match the identified needs and opportunities with about 10 campaigns that will provide most of the impact (Exhibit 5). Intense frontline training, coupled with a robust cascade process. The execution challenge inherent in deploying campaigns in hundreds of micro-markets is not trivial. In addition to ensuring simplicity and scalability in the

campaign design, a robust training and cascade process is critical, coupled with elements of lean process design, and energy- and excitement-building activities and events. *** Major performance improvements can be attained by addressing issues on the micro-market level. Gains of 5 to 10 percent of share are possible. Identifying areas where aggressive action may make sense (i.e., where an intervention might be beneficial as opposed to being harmful) is critical for successful management of gross subscriber additions, as well as for top-up stimulation. Designing a small set of campaigns that are able to change the status quo in each area and ensuring the ability to scale or repeat this hundreds of times is at the core of distribution management systems: outsmarting and outnumbering the competition!


Andr Levisse is a Principal in McKinseys Singapore office. andre_levisse@mckinsey.com

Nimal Manuel is an Associate Principal in McKinseys Kuala Lumpur office. nimal_manuel@mckinsey.com

John Rubio is an Engagement Manager in McKinseys Chicago office. john_rubio@mckinsey.com

RECALL No 5 Channel Management Channel Tuning: Managing Subscriber Costs


07 Channel Tuning:

Managing Subscriber Costs

Customer acquisition no longer delivers the growth it once did, and value extraction from other links of the value chain has become top priority. Successful operators are now turning to one of the more overlooked value levers the careful management of subscriber acquisition and retention costs. As the era of double-digit growth continues to recede, the mobile industry has shifted from concentrating on signing up new customers to capturing as much value as possible from every aspect of the business. One promising but often untapped opportunity involves subscriber acquisition and retention costs (SAC/ SRC) offered through an operators various distribution channels. These include both the hardware subsidies and cash that operators pay to customers in the form of discounts and commissions paid to the channel itself. Our experience shows that, managed well, such commissions can help operators drive their overall commercial performance. In the mobile industry, and to a lesser extent the broadband and digital TV arenas, the way a company sets its SAC/ SRC can play a pivotal part in establishing the competitive positioning of its customer offers. This is due to the fact that hardware subsidies, such as those offered on mobile handsets, play a substantial role in new customer acquisition success. Furthermore, the rapid pace of handset development makes it necessary for operators to make follow-up investments in handset replacements in order to retain customers. For broadband and digital TV discounts, free installation and WIFI modems have become an important driver in acquisition success.

Channel commission levels represent another important factor that drives subscription growth. Third-party retailers, for example, that can steer their customers to different operators or products, can easily allocate new subscribers to a specific brand or proposition, making these retailers very responsive to changes in commissions. SAC/SRC levels can, thus, have a major impact on operator efforts to attract new customers and are large enough to warrant attention since the expense represents 10 to 30 percent of an operators total cost. As a result, on-going optimization work and tactical changes that involve both channel commissions and hardware subsidies or discounts can play a fundamental role in telecoms efforts to gain or sustain market leadership at a healthy EBITDA level.

Five tools that optimize commission levels

To maximize their return on SAC/SRC costs, operators have developed five value-based tools and process changes they can use to determine optimal distribution commission structures and commission levels: 1. optimize customer incentives per proposition, based on customer preferences and perceived value; 2. differentiate renewal offers based on expected customer value and the likelihood of offer acceptance; 3. align external channel compensation structures, incentives, and reporting with the operators value generation goals; 4. create internal channel value-based transaction commissions to drive the sales of high-value products; 5. adapt commissions, hardware subsidies, and discounts on an ongoing basis to shift volumes or to react to market and competitor dynamics.



Renewal offers are often out of sync with individual customer value

1. Optimize customer incentives. As a result of handset subsidies, customers tend to link buying decisions for mobile propositions closely with operator handset offers. Specifically, customers trade off the up-front payment for their desired handsets against the monthly commitment or minute prices in available price plans. Market research demonstrates that customer preferences for handsets differ substantially. For instance, some customers prefer low (or no) up-front payments for a high-end phone and accept a high monthly commitment, while others prefer to keep their monthly expenses as low as possible. To address this particular issue, operators can optimize SAC and leverage customer trade-offs between specific monthly commitments, voice prices, SMS prices, and handset types by: Developing tailored combinations of price plans and SAC levels, per customer segment, based on customer preferences for handset types and up-front payment versus price-plan economics Changing the target handset mix (weighted toward low- and mid-end phones) when doing so coincides with specific segment preferences

Optimizing the up-front payment for handsets based on break points in customer willingness to pay. For example, customers seeking low-end handsets may be largely indifferent to a requirement of up-front payments of EUR 10 to 15, but payments above that break point might cause them to reconsider. Developing SIM-only propositions with attractive voice and/or SMS offers. Although the ARPU (average revenue per user) of SIM-only customers is lower due to discounts on the price plan, the return on investment (ROI) is typically high, because SAC, reduced to channel commissions, is substantially lower. 2. Differentiate renewal offers. ARPU levels per customer tend to differ significantly, even within the same price plans, while renewal offers are often linked to specific price plans. Therefore, there is a mismatch between the value of a customer and the renewal offer he receives, giving high-value customers a worse offer and lowvalue customers a better offer (see Exhibit 1). So it pays for operators to provide better renewal offers to high-margin customers than they would to low-margin subscribers, because the additional investment can make the offer more attractive than the standard acquisition offer for the same rate plan, reducing the amount of churn among high-margin customers, while

RECALL No 5 Channel Management Channel Tuning: Managing Subscriber Costs



Customer lifetime value varies significantly by product

the higher margin justifies a higher investment. Using the same argument, investments in low-margin customers can be reduced. While doing so will result in higher churn levels among these less valuable customers, the downside is limited by the segments low margin. Fortunately, operators have all the information they need to differentiate renewal offers based on individual customer value. However, getting this process right poses the key challenge of implementing value-based differentiated renewal offers. For example, all channels that offer renewals need to have access to value information for each individual customer. Operators can typically adapt existing IT systems to make this data available or provide it through a separate process (e.g., Web-based or by phone). Also, these channels need a fraud-proof process for paying out differentiated renewal offers that prevents high payouts to unauthorized customers. Furthermore, external channels require a control mechanism to prevent the unauthorized use of customers value information. 3. Align external channel compensation. In many markets, third-party retailers have consolidated, thereby becoming large international players with increased market power vis--vis both mobile operators and

device makers in some cases enabling them to purchase handsets at comparable or even better prices than operators. Furthermore, they have improved their marketing and sales capabilities, allowing them to claim part of the customer relationship (e.g., by mailings to out-of-contract customers) and to steer customers toward the operator of choice typically the one that pays the highest commission. As a result, retailers have become very skilled in maximizing the number of transactions they realize, often rotating customers between (or within) operators. The result of this is a reduction in average lifetime (e.g., until churn or renewal), reducing the return on SAC/SRC. To counter this drive to generate a maximum amount of transactions, operators should align third-party retailer incentives with their own value generation drivers. Since the operator pays not only a commission to the retailer with every transaction but also a handset subsidy or a discount to the customer, it should focus on developing a winwin strategy to reduce the number of transactions by paying out part of the handset subsidy or customer discount (that will be saved if no transaction occurs) together with the transaction commission (while there is no transaction) to the third party. In this way, the total payout is reduced, and customers become less



Insights on product and channel profitability are key to optimizing channel mix and SAC/SRC levels

accustomed to the idea of getting a free phone at the end of their contracts. To implement this option, operators need to set up a detailed monitoring and reporting system that tracks lifetime per individual customer to calculate payouts for every third-party retailer. This system can also be used to differentiate commissions based on the quality of acquired customers, giving the third-party retailer an incentive to attract more high-value customers. 4. Create internal channel value-based transaction commissions. The internal sales channels typically lack incentives to sell products that create the most value for the company, because they often fail to consider that different products represent varying degrees of value to the company (Exhibit 2). Instead, they often focus on the detailed targets of the different business lines (hardly ever in line with maximum value generation) or have a profit center structure that offers a fixed commission per transaction, resulting in pushing the simplest sale (i.e., the sale of the lowest ARPU broadband customer delivers the same commission as one with three times the ARPU). As a result, operators do not optimize the trade-off between the likelihood of selling a proposition and the value of that proposition to the company. A better solution has the operator

compensate the internal channels based on the value generated by each proposition sold (including its possible strategic value). In this case, channels will automatically optimize value generation for the company, because doing so will align with attempts to generate the highest compensation for the channel. 5. Adapt commissions, hardware subsidies, and discounts. The previously described four tools and processes can help operators establish a starting point as they begin to set sales channel commissions, hardware subsidies, or discount levels. However, the telecoms market is inherently dynamic, requiring industry players to shift and sometimes pirouette on an ongoing basis, as tactical product and channel performance assessments change in response to competitor activities. Before deciding on commission changes, operators must clearly define their key objectives: Do they want to boost the budget years EBITDA, maximize (long-term) value generation, or increase revenues? The objective drives the decisions on SAC/SRC and channel mix optimization. For instance, if the budget years EBITDA needs to be increased, the volume of propositions with the shortest payback time should be maximized. If value generation is the objective, propositions with the highest ROI should be pushed.

RECALL No 5 Channel Management Channel Tuning: Managing Subscriber Costs


Tactical decision making on distribution consists of changing sales volumes and shifting them between channels, facilitated by changes in sales channel commissions and/or customer incentives (hardware subsidies or discounts). To decide on these changes, operators need to develop a monthly cockpit that summarizes actual channel and product performance versus targets (see Exhibit 3), as well as competitor dynamics and conduct. Performance is defined as a number of sales per proposition channel combination and the respective return on SAC/SRC. To calculate this return, a detailed understanding of the value of acquired or retained (in case of renewal investment) customers and the total investment in these customers (SAC/SRC), both in terms of the total channel cost and customer incentive, is needed. Most operators will assume that there is little variation between customers on the same proposition, but this is not the case. There is significant variation between customers along two dimensions: existing vs. newly acquired customers as well as between customers acquired on the same proposition but through different channels. Therefore, operators must constantly measure the value of acquired and renewed customers. Another driver of tactical distribution decision making is competitor dynamics. Changes in competitor SAC/ SRC levels need to be understood, and a response should be considered to avoid being surprised by substantial changes in gross adds or renewals. To achieve this, operators must track promotional activities as well as channel commissions and customer subsidy levels. This typically means tracking the top 10 to 15 handsets of key competitors by main price plan. These insights

provide a detailed quantitative picture of each players aggressiveness and specific tactical focus, including what it considers as priority segments. Additionally, industry rumors and public statements can complete the view of key player conduct. Tactical optimization decisions often involve fundamental trade-offs, with positive effects for some organizational units, but adverse effects for others. For instance, reducing a specific channels share of the product mix clearly goes against the interest and incentives of the channel manager. Therefore, operators must undertake regular (e.g., monthly) decision-making meetings with key managers regarding the companys optimal tactical go-to-market approach. Participants must include managers responsible for profit/loss, those responsible for the SAC/SRC budgets, key channel managers, and representatives from the analytics unit. This team should undertake a joint review of the fact base on the companys compliance with previous decisions, develop new insights on performance, and discuss proposed improvement opportunities along with reaching agreement on new actions. *** As operators work to extract all of the value they can from their value chains, taking a systematic approach to managing distribution-related subsidies and commissions can generate unexpected returns in terms of savings, revenue enhancements, and customer retention improvements. The approach described here provides operators with the levels of robustness and rigor they need to ensure that they have set their distribution subsidies and commissions at the most competitive levels.

Lars Engel Nielsen is an Engagement Manager in McKinseys Copenhagen office. lars_engel_nielsen@mckinsey.com

Peter Hanekamp is an Associate Principal in McKinseys Amsterdam office. peter_hanekamp@mckinsey.com

RECALL No 5 Channel Management Cashing in on Emerging Market Mobile Distribution


08 Cashing in on Emerging Market

Mobile Distribution

Mobile operators that crack the complex and often overlooked emerging market distribution challenge can capture lucrative rewards. Four levers should be taken into account. Many emerging market operators totally overlook the true potential behind distribution, despite the fact that it is commonly considered a key factor for success in their growth businesses. Based on our experience, mobile network operators (MNOs) that optimize distribution in an integrated way in terms of the architecture they use across their partner and channel networks, the incentive system they devise, the tools they employ, and the ways they organize their resources and activities can generate an EBITDA uplift in excess of 10 percent (Exhibit 1) a significant sum, particularly in relation to the micro-sized, often declining ARPU (average revenue per user) levels these markets often show.

approach 60 percent. Major cities such as Johannesburg, South Africa, or Bogota, Colombia, are starting to show market characteristics similar to those found across Western Europe. However, much of the remaining growth is found in rural areas and in bottom-of-the-pyramid segments. This growth phase usually coincides with new mobile entrants who begin to erode value share by targeting the high ARPU segments. As customers start to have a choice of operators, dual-SIM rates of 40 to 50 percent are not uncommon in emerging markets. To capture the remaining growth opportunity, operators start to rely heavily on partners to execute their distribution strategy. However, the capabilities of these distribution partners are often a serious concern. A fact that becomes evident only when one examines distributor conduct on the ground. McKinsey research shows, for example, that many distributors in emerging markets often play a less active role than one would typically assume. Many regions have no distribution presence at all. For those that do, the availability of products is often inconsistent, and attempts to push products such as starter packs or mobile airtime at the retail level are extremely low. Exhibit 2 reveals, among other issues, shockingly high SIM stock-out levels among retail outlets across multiple African markets each incident marking a lost acquisition opportunity because customers swiftly shift to competitive offerings if their current operators product is not available.

Why distribution matters in emerging markets

As mobile market growth begins to flatten, efficient sales and distribution performance becomes increasingly important. During the initial nascent high-growth phase, competitive intensity often remains rather low. Mobile players often do not invest in their distribution capabilities but rely on a handful of distribution partners to supply products in densely populated geographies. By simply operating a reliable network, the numbers of customers magically seem to grow each month. The days of easy growth disappear as penetration levels in major cities, even in places such as Sub-Saharan Africa,



An integrated focus on distribution can yield up to 10% in EBITDA increase

Impact on EBITDA Percent Architecture 2 Rolled-out zone-based distribution program Introduced incentives based on ROI and linked to net adds Integrated KPIs across group to POS Focus on M-top-up for cost savings and information transparency 1 On-the-ground execution staff to minimize stock-outs, recruit outlets, and execute brand consistency 10 Example over a 2-year time frame, an African mobile operators distribution strategy Increased outlet presence from 15% to 45% Increased gross add share from 15% to 40% Decreased stock-out rates from 6% to 1%





SOURCE: McKinsey

Mastering unique emerging market challenges

Given the major capability gaps, operators who actively manage their distribution networks significantly outperform competitors who play more passive roles. For example, our research reveals a strong, positive correlation between the average number of visits a companys staff makes to its partners POS (point of sale) outlets in a region and the percentage of new customers (gross adds) the region generates. The overall value of getting mobile distribution right in emerging markets can be significant. One operator was able to triple its market share over a two-year period by focusing on an integrated commercial program that paid significant attention to building an effective feet on the street distribution strategy. However, mobile distribution in emerging markets presents challenges far beyond those experienced in developed countries, requiring operators to apply significantly higher levels of both innovation and control in terms of execution. In fact, about half of the population typically reside in rural areas and are, thus, more difficult to reach. In the future, these areas will likely account for over 50 percent of the growth the markets experience.

Many emerging markets also lack established channels, since relatively few MNO stores exist and chain stores, if they exist at all, are only just now beginning to emerge (i.e., most African countries have yet to see the emergence of the Carrefour- or Tesco-type of hypermarkets that are commonly found across Western Europe). Furthermore, existing distributors might not necessarily be committed to the idea of providing telecoms products. They could just as easily choose other consumer goods or financial products and distribute these within their established urban turfs, rather than driving their business into the underserved parts of their markets. Resource constraints on the distributors side or misdirected incentives from the operator might also prove to be severe roadblocks to successful expansion. A key impediment involves the lack of funding or access to credit, as distributors and dealers often face severe capital constraints many distributors and POSs often can only afford to stock one days worth of products and, therefore, think carefully about the return on investment (ROI) of each product line they carry. Often when the incentive structures are misaligned, POSs will discount their products heavily to recover their working capital, further weakening an already tenuous case for carrying mobile products.

RECALL No 5 Channel Management Cashing in on Emerging Market Mobile Distribution



Most distributors do not focus on distributing, and operational retail performance clearly demonstrates this gap

Operators and their distributors must also contend with very challenging economics and unusually low ARPU levels, as markets almost exclusively rely on prepaid models, and airtime top-up expenditures can be USD 1 or less. In many cases, subscribers have so little income that loyalty to a specific mobile service is nonexistent customers often collect start-up cards and use them as recharge cards. Companies also suffer from the limited data transparency inherent in dealing with prepaid customers which can hamper performance improvement initiatives. In addition, operators typically lack comprehensive information regarding the locations of their retail points of sale, which may be no more than a simple desk or an umbrella outlet set up in a market or on the side of a street and must contend with the lack of capabilities within their distributor and dealer organizations.

among high ARPU customers), and optimizing expected revenues against subscriber acquisition and retention costs. In most cases, the most advantageous blend of these elements will change over time, requiring operators to flexibly steer their way to desired outcomes using appropriate incentives. Operators should pursue three specific distribution objectives. First, they should work to boost market penetration, increasing their presence at the retail level by assuring maximum operator presence across potential points of sale. Second, they should focus on ways to increase their offer availability and attractiveness, ensuring that the points of sale that usually carry operator products remain consistently well-stocked. Finally, sustaining the companys push into the market via POS outlets requires operators to offer incentives to their points of sale to relentlessly and proactively push their products and to ensure that the offers are visible and well-marketed. Companies should actively identify and address their shortcomings regarding these objectives and employ a systematic performance review process to identify improvement opportunities. Expectations from a corporate center perspective might differ drastically from the reality on the street, turning go-and-see reviews into a valuable exercise.

Creating a successful distribution agenda

Given the uniquely vexing nature of distribution in emerging markets, operators seeking above-average returns must link their distribution objectives to their strategic priorities. These strategic priorities might include the trade-offs companies must make in terms of attracting new subscribers, boosting airtime revenues, reducing user churn levels (especially



Four levers need to be pulled in an integrated manner to ensure maximum capture of the distribution objectives

Four main levers for improving distribution performance

Improving presence, availability, and push requires an operator to address four main levers: architecture, incentives, enablers, and organization & processes (Exhibit 3). Define the architecture based on the capabilities of channel partners. Given the limited execution capabilities of most channel partners, the lack of focus on growing, rural regions, and an operating model that pits one POS versus another in a race to the bottom, a hands-on approach to managing the frontline execution model is crucial. Borrowing best practices from FMCG (fast-moving consumer goods) players such as Coke and Unilever, operators must begin to guide the performance of their partners at the front lines (Exhibit 4). Operators need to determine their approach to market opportunities and the combination of indirect and direct channels that works for them. In the metro/downtown areas of emerging markets major cities (e.g., Accra/Ghana, or Mumbai/India), direct channels allow for more customer intimacy and better service experience, especially given the relatively high ARPU customers that frequent these places. However, in

many other parts of a market, indirect channels are needed to achieve geographic reach quickly and economically. The mix of indirect and direct depends on the level of penetration in a region (not just on the country-level) and on the capabilities of the channel partner. Indirect channels, including wholesale plays, make sense where the economics of direct distribution are prohibitive. However, when there are few large channel partners to work with (e.g., Tesco), there is more reason to tread cautiously. There is a lack of control that is inherent in having a broad range of distributors with an unknown number of POSs, and this can undermine an operators brand promise. To ensure a consistent brand execution, zoning is essential because it: 1. Enables distributors to focus on selected zones by ensuring there are sufficient sales outlets (POS) to move the product 2. Ensures adequate margins for distributors and POSs to make carrying the product a viable business opportunity 3. Allows operators to link frontline execution to specific distributors (e.g., stock-out rates of less than 5 percent, latest trade material).

RECALL No 5 Channel Management Cashing in on Emerging Market Mobile Distribution



Distribution architectures can be mapped against consistent penetration and distribution capability

For truly remote regions, many operators must go directly to the customers with innovative models such as setting up cargo containers as fulfillment points or teaming up with local leaders in revenue-sharing schemes. Refine incentives. Operators must design rewards that align the efforts of each player in the distribution chain according to the companys key objectives and are able to accommodate changes in focus (e.g., temporarily shift ing incentives from airtime to activation). However, there are five common pitfalls in emerging markets that have to be addressed through an integrated distribution strategy versus simply changing the payment amounts. 1. Trapped in the starting position: Many operators feel trapped and unable to change their incentive structures due to historical reasons. Incentive structures can only be meaningfully changed once an appropriate architecture that allows control is deployed. One Middle East operator undertook the painful tasks of eliminating many of its distributor relationships and introducing zoning to ensure the remaining partners were much more profit able. This move allowed it to reduce commissions by over 25 percent.

2. Race to the bottom: Many operators engage in a race to the bottom by constantly increasing commissions or by taking a me-too approach. A structured ROI approach that considers the relative market power and brand strength can actually allow operators to pay significantly less than current levels. 3. Limited link between payments made and those creating value: Often operators lack visibility on the POS and, therefore, pay exorbitant amounts of money to distributors with the false hope that it will reach the retailers (who ultimately influence key decisions such as SIM purchase). Using audit techniques and tools such as OTAR (over-the-air recharge) can increase visibility and, hence, allow operators to reward those that matter. 4. Lack of focus on operational performance: Many operators are frustrated at the lack of consistent execution in markets. Linking incentives to key operational metrics such as stock-out rates and the number of retailers in a given geography that are carrying products can be achieved through zoning and periodic auditing. One West African operator made field execution a minimum requirement for distributor bonuses.


5. Commissions not linked to strategy: Operators tend to continue with their existing incentive structures even though the market conditions have changed. Linking distributor and POS performance to strategic aspirations (e.g., growth outside of major cities and airtime sales within major cities) can help all parties achieve better economics. One operator successfully increased its subscriber base by using deferred bonuses linked to net additions. Introduce effective enablers (KPIs and OTAR). Managers can adopt a number of operational tools to optimize their distribution models, including a systematic collection of key performance indicators (KPI) into a dashboard to monitor individual partners distribution performance relative to overall performance. We believe that five KPIs matter the most in emerging markets. 1. Gross add share: The percent of subscribers relative to a companys market power indicates whether an operator is executing well or not. We often find that many players boast of their total gross adds but do not highlight that they woefully underperform relative to their market share. 2. Percent of retail outlets carrying product: This refers to the number of retail outlets that carry an operators product versus the universe of outlets that can carry the product. We find that many operators fall 10 to 15 percent short of their potential on this measure. 3. Product availability: This is often not reported or underreported due to a lack of visibility at the POS. For example, during audits of selected markets, we discovered stock-out rates for SIMs that approach 80 percent. 4. Trade marketing availability: Many markets simply do not focus on trade marketing material, which is especially true in emerging markets with high dual SIM rates (in excess of 50 percent). 5. Distribution costs: Examining total distribution costs as a percent of overall revenues is crucial both for the operator as well as the competition. We have often seen sales managers continuously pump the channel with ineffective promotions without a regard for the ROI of the investment. Establishing an OTAR system can provide emerging market operators with significant visibility on the front

line as well as a cost-effective distribution solution for remote regions. Despite their overall success across various emerging markets, many operator OTAR systems underperform. Several criteria have to be in place: Sufficient network capacity for fast processing so customers get their top-ups quickly Education campaigns to increase ease of usage among illiterate customers Sufficient base of POSs that offer OTAR Incentives for both the POS and consumers to trial the products Marketing campaigns that clearly position the product. One operator in a country with mobile penetration rates of under 10 percent applied these five lessons and quadrupled its OTAR usage rate in terms of transactions. Fine-tune the organization & processes to control execution. A robust distribution strategy requires a strong field support organization with sufficient staff embedded in processes that can align the various actors in the distribution system with the incentive system in place. Four types of organizational elements are required. First, regional distribution organizations for operators should include a marketing function tasked to recruit new outlets jointly with distributors and to ensure that the latest promotional materials and branding elements are in place in each region. Second, a regional sales organization should interact with the distributors on an ongoing basis (daily visits if competition warrants it). Managers should regularly monitor POS coverage levels, review specific targets and performance track records with each distributor, resolve any logistical and process issues, and teach distributor staff how to sell more effectively. Third, the distributors own organization, on the other hand, needs to be fine-tuned to provide sufficient sales and service support to dealers. The distributors service and sales managers should be responsible for running stores and service centers in each territory, while dedicated field sales managers cover predefined sets of shops in person, ensuring sufficient stock levels, examining accounts, and working to improve operational performance. Finally, an independent audit and analytics function should be set up to ensure execution happens

RECALL No 5 Channel Management Cashing in on Emerging Market Mobile Distribution


at the POS and that accompanying adjustments that need to happen are put in place. *** The value proposition required in emerging markets is changing, and operators must evolve as well, especially regarding distribution strategies. While many MNOs take distribution performance for granted, our work shows that focusing on this area can deliver major benefits. The ideas presented here can help mobile players capture this prize rapidly and surely.

Fabian Blank is an Associate Principal in McKinseys Berlin office. fabian_blank@mckinsey.com

Zakir Gaibi is a Principal in McKinseys Dubai office. zakir_gaibi@mckinsey.com

Acha Leke is a Principal in McKinseys Johannesburg office. acha_leke@mckinsey.com

John Tiefel is a Principal in McKinseys Dubai office. john_tiefel@mckinsey.com

RECALL No 5 Channel Management The Phone House Keeping Operators and Customers Happy Under One Roof


09 The Phone House Keeping Operators

An Interview with Jaime Pfretzchner, The Carphone Warehouses Executive Operations Director for Spain

and Customers Happy Under One Roof

With its brands The Phone House and Best Buy Mobile, The Carphone Warehouse has built up a significant telecoms business through its 2,200 stores in 11 countries, becoming the worlds largest independent telecommunications retailer. After 13 years in the telecoms industry and 10 in the company, Jaime Pfretzchner has assumed various responsibilities. He currently manages the commercial strategy, network relationships, and operations (purchasing, logistics, and after sales). McKINSEY: Carphone Warehouse is undoubtedly successful from a birds eye perspective. Is the success uniform across your various markets? JAIME PFRETZCHNER: Our sales in each of the ten countries we serve have grown significantly, around 30 to 45 percent year on year over the last several years. Take Spain for example. 22 million handsets were sold last year in a country with a population of 43 million. Looking at France, however, we see a more modest picture, with about 20 million handset sales per year to a population of 63 to 64 million, but it shows a good possibility for growth. Our success is definitely attributable to customer satisfaction. We see some growth markets in China and the rest of Asia, but overall we are facing a slowdown in customer growth coupled with a prospective economic global crisis. McKINSEY: Does this seem to be the experience of retailers across the board or are different types affected in different ways?

JAIME PFRETZCHNER: Well, lets look at three typical retail types. We have operator-owned stores, exclusive agent stores, and independent stores. Each type comes with its own set of advantages and problems. The exclusive and the operator-owned stores are typically very expensive for the operator, who has to provide for the full cost structure and risk of the store and limit the product range available to the retailer. This is a pretty high overall cash burden. Moreover, in operatorowned stores, operators are struggling, trying to make them profitable, as there is little real drive for efficiency in retail sales culture. When it comes to the independent stores like us, we understand that larger operators have mixed feelings towards us. They typically dont like this platform because their products and services are constantly being compared to others, and they fear they are losing control over the client. McKINSEY: Given the way customers as well as operators perceive the various retail platforms, how do you see your own role? JAIME PFRETZCHNER: Well, our role is to give the best proposition we have, to give customers a place where they can compare the whole set of offers in the marketplace. And thats what were doing. Weve introduced a catalog this year that offers yet another way for our customers to shop for their ideal product or service. On top of that we have an extremely knowledgeable staff to help our customers determine what it is they actually need. I believe that not being exclusively linked to any network is an advantage here. Our customers trust our objectivity and advice.


McKINSEY: With the focus on acquisition in the mobile market diminishing, how has the customer activity mix evolved? JAIME PFRETZCHNER: Customer loyalty and cross-selling definitely receive greater attention. Most customers in the market have been acquired by now, so we are looking at opportunities such as selling fixed line services to our mobile customers. If an operator is providing a different kind of service, then it is our job to show customers exactly how it might be beneficial to them. McKINSEY: Lets take it from the consumers perspective. Is there a clear favorite regarding store format? JAIME PFRETZCHNER: I believe that there are different moments for different stores. When customers are looking for information on the handset, the operator, and the tariffs they value the choice and independent advice provided by non-exclusive stores, as there is a full range from which they can choose. When we look at upgrades and renewals, however, we understand that many times consumers believe that an exclusive store is more likely to give them better service. So, independent stores attract new prospects, while existing customers typically go to an exclusive or operator-owned store. But we have also realized that experienced customers often prefer going to an independent store, even for renewals, just to get better impartial advice. For a long time our objective has been to assure both customers and operators that we are able to satisfy returning customers, giving them a better retail experience at a lower cost. McKINSEY: You have operations in 10 countries. Is this service orientation something that transcends all of those borders? JAIME PFRETZCHNER: The focus is pretty much the same, but the regulatory and market contexts differ significantly, and that has a big influence. For example, subsidies are not allowed in Belgium, and as such its more difficult for operators to push phones given the resulting prices. The UK represents the other extreme where the subsidy is amazingly high you can easily reach 300 or 400 subsidy per phone. The picture varies dramatically from market to market as well prepaid, post-paid, SIM-free or locked versions. We have to cater to the needs of all customers in each of these contexts.

McKINSEY: One of the advantages that independent distributors typically have is access to various handsets at discounted prices directly from vendors. Can this be a strategic lever for retailers? Is it at odds with handset strategies from operators? JAIME PFRETZCHNER: In the markets that allow it, I see our ability to manage the complete range of handsets as a benefit to the customer and to the operator as well. With 6, 10 or 15 thousand points of sale, operators simply cannot manage a range of 200 handsets. What we see is a market where operators focus on maybe the 3 to 5 biggest-selling handsets. Then we complete the range, giving the customer even more choice and advising as appropriate telling them for example No, you cannot connect to this operator with this handset. As retailers, were the professionals in managing the range of products in the retail stores. The operators are the professionals on tariffs and customer management. I think its quite complementary and we should be able to work together seamlessly. McKINSEY: You mentioned that operators often see non-exclusive channels such as yours as a barrier between them and the customer. What is your opinion on this concern? JAIME PFRETZCHNER: At the beginning of our relationships, typically operators have misgivings. We have shown most of our partners, however, that we typically enjoy lower churn and better ARPU than other channels. Its not in my interest either to have customers switching networks. In the end, I would like the customer to stay with me for as long as possible. Our own loyalty proposition and direct marketing seeks to maintain our customers where they are, not to have them jump from one operator to another. If the operator seeks long-term customers I have to bring them. Its as easy as that. If the incentive systems operators put in place are wrong and create arbitrage opportunities, Im the first one to raise my hand. In the long run, it is never in my interest to be at odds with operators. McKINSEY: What is your perspective on MVNO strategies, particularly when a distributor owns a specific MVNO and may have an incentive to move a customer from a particular operator toward his MVNO? JAIME PFRETZCHNER: Our experience shows that MVNOs are best suited for particular customer niches, and the industry as a whole has benefited from them.

RECALL No 5 Channel Management The Phone House Keeping Operators and Customers Happy Under One Roof


We believe, however, that a massive MVNO would never be an attractive value proposition; neither for itself nor for the operators. Finding specific niches, as we try to do with our own MVNOs, however, means that we can capture incremental business for the operators and promote a greater choice for the customer. McKINSEY: What would you say is the way forward for channels, considering the fact that the market is no longer booming and acquisition isnt the key anymore? JAIME PFRETZCHNER: In most of our markets, we see a store footprint that we believe is unsustainable. We see thousands of retailers with little regard for professionalism or efficiency. Two or three years ago, it was so easy to sell mobile phones and there was such a big market that any store could be opened and easily maintained, you just had to buy a shelf and put the phones there. This is clearly no longer the case. At this point, I believe it is impossible for many of the smaller exclusive retailers to survive. My view is that distribution will evolve towards fewer retailers in better locations with greater financial resources. It certainly is cheaper, easier, and more productive for a operator to manage 3,000 sizeable points of sale instead of 10,000 small ones. McKINSEY: Beyond location and footprint optimization, do you see opportunities to optimize operations in the typical store model today? JAIME PFRETZCHNER: Most certainly, weve realized how much of a difference the staff can make. After a change in management or in frontline staff, sales may double or drop drastically. The key is to develop and retain quality people through good human resources policies. In our best store we typically see low turnover and continuous training. This is our target model for all stores and, I believe, what differentiates us. I believe that increasing productivity is the key priority in a context of market slowdown, particularly sale effectiveness. It is critical for us to maintain our footprint, and if the market is slowing down, we just have to push our people to be better. We do not want to roll back stores, so we put a lot of effort in trimming sales routines, incentives, and training to achieve our optimal quality in terms of customer experience without pushing costs up. McKINSEY: What role does the enterprise customer play in your business?

JAIME PFRETZCHNER: Typically, around 25 percent of the post-paid business comes from enterprise and SoHo sales. For the retailer, this translates into approximately 10 to 15 percent of our business. Were usually talking about small- and medium-sized businesses. The larger companies are often served directly by the network, as they can provide offers that we could never match. We have a great opportunity, however, with the smaller ones. This is actually a market that we see as still growing in the near future. McKINSEY: Does the rise in the online channel have an impact on retailers overall distribution strategies? JAIME PFRETZCHNER: My sense is that, in the end, people want to see, touch, and physically compare the handsets. In many countries, post-paid activation requires physically signing and sending contracts and ID checking. A number of operators whose propositions focused on the Web have made U-turns and are looking to partner with the distributor channel. They realize that this channel is still key if they want to make volume a part of their strategies. Online sales are important to attract specific niches but also have their costs. Customers expect to pay less online, so prices have to be reduced. Factoring in the costs of call centers, profit margins end up being less than ideal even if the fixed costs are lower. I think the ideal formula integrates the online and store channels, using online for niche customers and for complementing the store in information gathering, pre- and post-sales. McKINSEY: Looking ahead, what would you say are the key priorities for retailers and operators? JAIME PFRETZCHNER: For me, as a retailer, the first priority is and always will be the customer understanding the customer needs in a context of market saturation and being able to change our activity mix accordingly. It will be important to maintain good relationships with the operators, ensuring that they understand our value added not as marginal capacity but as true retailers of excellence. In the end, we are partners in business, and the success of the industry is our success. They lay out their strategies, and our success depends, in part, on us adapting to those strategies. McKINSEY: Do you think that the operators share these priorities?


JAIME PFRETZCHNER: I think so, they know we will adapt to their strategies. Operators will obviously maintain their focus on selling phones, but they are now more and more pushing the avenues of mobile broadband and fixed. This means that it will be a focus for us as well. Handset insurance and all of the PC- and handset-related business accessories are also promising. *** Mr. Pfretzchner was interviewed by Duarte Braga, a Principal in McKinseys Lisbon Office.

RECALL No 5 Channel Management Channel (R)evolution Branding, Technology, and the Reinvention of Retail


10 Channel (R)evolution Branding,

Technology, and the Reinvention of Retail

An Interview with Dr. Jens Gerhardt, freenets Director of Retail Sales

freenet AG is one of Germanys leading Internet and telecommunications providers. A publicly traded company, the March 2007 merger of Internet and landline provider freenet.de AG with wireless service provider mobilcom AG built a universal provider of Internet, landline and mobile telephony services. In his current position at freenet, Jens Gerhardt is responsible for Internet, fixed line, and mobile turnover at all of their German indirect channels, including independent retailers, external online sales, and largescale retail. He joined mobilcom AG in 2005 after working with McKinsey & Company. McKINSEY: Could you share your perspective on the evolving roles of channels, particularly when it comes to integrated operators such as freenet? JENS GERHARDT: Well, I can speak specifically about channel evolution in Germany over the last several years. On the retail side weve got operator-owned shops, as the most important channel, and independent retailers. Then theres the online channel, which has clearly grown and continues to take market share. Finally, theres direct marketing, which includes TV, mail, and the uniquely German door knocking structure, which has all but died. The first big shift in the retailer channel came in 2000 when prepaid hit the market and prices drove commissions down. Retailers lost quite a bit of market share, and only the clever ones managed to survive. McKINSEY: So is flexibility the key to retail survival?

JENS GERHARDT: Its part of it, but a focus on customer retention, training of shop personnel, and store location is also critical. Regarding the latter, retailers are fighting hard to secure the best locations as the number of retailers in the market is shrinking. McKINSEY: Do you attribute the decline in retail numbers solely to the increasing popularity of the Internet? JENS GERHARDT: I wouldnt say solely. It also has to do with product popularity and familiarity. Todays customer is more or less interested in voice or SMS and not yet ready to buy more sophisticated products like the mobile Internet. Even those at one time were harderto-use technologies, but consumers are familiar with them now and dont necessarily need the one-on-one sales environment of the retail store channel. Its the more complex products that add to the retailer value proposition because they can really help to explain the technology to the customer. Right now, though, the interest in these products is still too low to service at the required scale. I think going forward that retailer numbers will shrink until interest in the more complex technologies begins to grow significantly. McKINSEY: Could you offer an historical example of this shift in the value that the retailer provides the customer? JENS GERHARDT: Sure. Television technology provides a good example. In the 50s and 60s, you could only buy TVs at small, local retailers. As those products became more user- and consumer-friendly, they became available


only at really big stores. Now, television technology is rather complex, and you see the retailers getting more and more involved once again. I think this could also happen in the mobile industry but not in the next two years. McKINSEY: In the German market, all major operators and some of the larger resellers have announced pretty aggressive shop expansion plans. How does that fit into the market picture that you just explained? JENS GERHARDT: I think its part of a branding strategy for some. You can invest in TV ads or you can put up a shop. A shop is always there, it looks nice, and its always visible. Its a bit of advertisement. The prime urban retail real estate is always secured by operator-owned shops. Their first order of business is to drive the independent retailers out of the downtown locations. Independent retailers focus on smaller cities where they are able to protect their own markets by having three or four stores. McKINSEY: Does this urban strategy explain the recent acquisitions of midsized retailer chains by operators like dug and debitel or SMS Michel and E-plus? JENS GERHARDT: Definitely. Operators see an advantage in having branded, operator-owned shops that sell exactly what they want to have sold there where they can send their own customers. The cost of operating 100 shops may be high but the opportunities for branding and, ultimately, control make it a worthwhile investment. McKINSEY: Given the trend youve described of selling to operators, whats the future for independent retailers? JENS GERHARDT: As long as the strategic surplus is there, the owner of a larger chain that is focused on telecoms will be able to sell it to an operator. On the other hand, smaller retailers, lets say with 20 or fewer shops, will remain functionally independent because they will sell other products. There is always a market. They dont have to die. They will suffer a little bit this year and next year if they only do telecoms, but the new products and services will become more complicated and there will be enough money to make from them. Its an oscillation. McKINSEY: Some people believe that retailers might go back to their roots where a player like debitel via its dug shops would offer all operator brands side-by-side

and act as an independent advisor. How do you see the market demand for such a role? JENS GERHARDT: I am actually working with independent retailers that are running two shops next door to each other. One is an operator-branded shop, and the other sells offers across all networks, including ours. From the outside it looks like two different stores to the customer, but inside its the same owner. One would assume that sales in the independent shop would go down after opening the operator-branded one but they didnt. The shops were attracting completely different customer segments. There definitely seems to be a market demand for this. McKINSEY: To what degree do operators have to be mindful of shop productivity their own as well as that of independent retailers? JENS GERHARDT: Its very important to be aware of the productivity of your retail channels, and measuring it is quite straight forward. How many people visit the shop? How many leave without buying anything? What was the value of the transactions that did take place? Managing the performance is a different story. Of course, with operator-owned channels its a bit easier, as the operator has more control. McKINSEY: And with the external partners? JENS GERHARDT: It depends a little bit on how you work with them. When the relationship with the retailer is sporadic, you dont want to invest too much. You might train them, and then theyre better in sales but now also working more efficiently for your competition. But, as you look at the retailers with whom you have closer and closer relationships, exclusive ones in particular, an operator can begin to look at benchmarking and incentives that are more similar to those of its own shops. In the long run, it might pay off for independent resellers to work closer with one operator, as the operator might decide to invest in the resellers productivity. McKINSEY: So, its greater incentives that lead to greater productivity? JENS GERHARDT: Well, its not as black and white as that. The motivation for productivity is dependent on the type of relationship. For retailers who are relatively far away it might be as straightforward as greater commissions. You raise the commission on your focus

RECALL No 5 Channel Management Channel (R)evolution Branding, Technology, and the Reinvention of Retail


products, and they will sell more. The closer they are to you, however, the more important the non-money elements become exclusive training opportunities, superior payment processes, and a host of other business-to-business ideas that make the relationship easier for them without significant additional cost to you. *** Dr. Gerhardt was interviewed by Alexander Dahlke, a Principal in McKinseys Hamburg office.

RECALL No 5 Channel Management Appendix


McKinseys Telecommunications Extranet

McKinseys Telecommunications Extranet is the gateway to some of the best information and most influential people in the telecommunications industry. The Extranet offers selected McKinsey-generated information that is not available in the general Internet. Extranet users have access to selected McKinsey articles on subjects ranging from Industry & Regulation, Growth & Innovation, Sales & Marketing, Services & Operations, IT & Technology, Corporate Finance, Organization & HR, Corporate & Enterprise, and Equipment & Devices. Direct communication channels ensure that your questions and requests will be addressed swiftly. The site is updated weekly with new articles on current issues in the industry. Through McKinseys Telecoms Extranet you can: Obtain exclusive information free of charge and take advantage of an Internet portal specifically designed for the industry. Access cutting-edge business know-how, interact with other experts to gain new perspectives, and contact leading industry professionals. Stay well-informed with daily industry news from factiva that you can tailor to your needs and interests. General information about the site is available at: http://telecoms.mckinsey.com Contact: telecoms@mckinsey.com

RECALL No 5 Channel Management Appendix


The Telecommunications Practice

McKinseys Telecommunications Practice serves clients around the world in virtually all areas of the telecommunications industry. Our staff consists of individuals who combine professional experience in telecommunications and related disciplines with broad training in business management. Industry areas served include network operators and service providers, equipment and device manufacturers, infrastructure and content providers, integrated wireline/wireless players, and other telecommunicationsrelated businesses. As in its work in every industry, the goal is to help McKinseys industry clients make positive, lasting, and substantial improvements in their performance. The practice has achieved deep functional expertise in nearly every aspect of the value chain, e.g., in capability building and transformation, product development, operations, network technology, and IT (both in strong collaboration with our Business Technology Office BTO), purchasing and supply chain, as well as in customer lifetime management, pricing, branding, distribution, and sales. Furthermore, we have developed perspectives on how new business models and disruptive technologies may influence these industries.

Telecommunications Practice 2008 Copyright McKinsey & Company, Inc.