Caribbean Telecoms Briefing

2nd in a 6-part series

Prepaid Strategies and Minimising Churn

by Jos F.Otero

www.informatm.com

www.telecoms.com

C a r i b b e a n Te l e com s B r i e f i n g

About the author

Jose F. Otero is the founder and president of Signals Telecom Consulting, a multinational telecommunications consultancy focused on the Latin American and Caribbean markets. Mr. Otero has conducted work for IGI Consulting, Chile-based Proteus, the Inter-American Telecommunications Commission of the Organization of American States (CITEL), the Consortium for Telecommunications Research at Mexico City-based Centro de Investigacin y Docencia Econmica (CIDE), The Strategis Consulting Group and others. He frequently speaks at industry events and has provided market insight to the World Bank, the Caribbean Association of National Telecommunication Organizations (CANTO), the US Department of Commerce, the Federal Communications Commission (FCC), Colombias Center for Telecommunications Research (CINTEL), the US National Information and Telecommunications Administration (NTIA), and the US White House. Mr. Otero has lived in the Caribbean for many years and has traveled extensively throughout the region. He has authored numerous reports about Latin America & the Caribbeans telecommunications industry including Mobile Opportunities in the Caribbean,Puerto Ricos Mobile Market, The Caribbean Role in the Path Towards Consolidation and Latin Americas Mobile Trends & Forecasts. He is frequently cited in industry publications such as Business News Americas, Tele-Semana, LatinFinance, Latin America Telecom Advisor and LatinCom, among others. He can be reached at jose.otero@signalsconsulting.com.

Briefing staff
Editor Leslie Hillman (Miami) leslie.hillman@informa.com Managing Editor Olivia Gibney (London) olivia.gibney@informa.com Production Editor Marta Almansa (London) Web Site www.telecoms.com Marketing Manager Jo Cura T: (44) 20 7017 5256 F: (44) 20 7017 5071 joanna.cura@informa.com Publisher Mark Newman 37-41 Mortimer Street London w1T 3JH UK T: (44) 20 7017 5000 F: (44) 20 7017 4288 Miami Editorial Office 1602 Alton Road PMB# 588 Miami Beach FL 33139 USA T: (1) 305 695 0634 F: (1) 305 695 3965 Subscriber Service Todd A McKellar One Research Drive Westborough MA 01581 USA T: (1) 508 614 1665 F: (1) 508 614 3765 todd.mckellar@informa.com Distributed 6 times a year ISSN no. 1745-9559

No part of this publication may be copied, photocopied or duplicated without prior written permission from the publishers.

2005 Informa Telecoms & Media

C a r i b b e a n Te l e com s B r i e f i n g

Contents
EXECUTIVE SUMMARY PREPAID STRATEGIES 1 3

Prepaid drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 Economic conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Leveraging the mass market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Achieving critical mass. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Prepaid is still a valuable proposition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Subscriber acquisition costs (SAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Prepaid and data services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 Prepaid technological challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Legacy infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Solution provider/vendor approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Figure 1.1: Vendor approach within convergent mobile service matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

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

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

CHURN AND CUSTOMER RETENTION

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Churn and prepaid services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Tackling prepaid churn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

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

Advanced prepaid customer analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Case study: churn management at Verizon Dominicana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Figure 2.1: Verizon Dominicana mobile churn growth rate, 2001 vs. 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

CONCLUSIONS

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Executive summary
Rapid subscriber growth, small populations and increased competition are leading Caribbean mobile markets to reach saturation levels faster than their counterparts elsewhere in the Americas. This presents potential difficulties for those mobile operators that are depending on continuous subscriber growth as the main route to increase revenue and penetrate the lower segments of the economy. New entrants in the market, such as Dominican Republic-based operator Orange Dominicana, are more often than not the operators following this trend. Caribbean mobile operators need to understand that growing their subscriber base will not permit them to survive profitably in an environment characterized by increased competition, high prepaid service penetration, limited service differentiation and a pool of potential new subscribers with limited disposable income and low purchasing power. It is correct that a growing prepaid subscriber base characterized by lower usage rates has a direct impact on ARPU which seems to be the main statistical metric of interest for investors still even today. But making the generalized statement that prepaid users are always less profitable than contract subscribers is not accurate. Prepaid offers incredible advantages for mobile operators that learn how to leverage this segment of their subscriber base while decreasing subscriber acquisition costs (SAC). This latter issue mostly defined by how much an operator subsidizes the handsets it sells is the key factor in determining a customers profitability as these costs must be recouped before a customer can be considered profitable. Historically, Caribbean mobile operators have implemented heavy handset subsidies indiscriminately to both prepaid and postpaid services. Operators hoped that ramping up their subscriber base quickly, regardless of the costs of the strategy, would put them in a better position when they start offering enhanced value added services through 2.5G networks. But the realities of the Caribbean markets slow uptake of enhanced data services, the continuous decrease in voice telephony rates, increased competition among operators, low handset replacements rates (a key variable to determine subscriber migration patterns) and high churn rates are forcing operators to review this strategy. In most markets, operators are slowly phasing out handset subsidies for prepaid customers. This has given the prepaid segment better prospects for profitability, since a small decrease in handset subsides has a significant impact on the profitability of a customer. Decreasing handset subsidies may discourage new customers to some extent, but this has become less of an issue since manufacturers are now selling less expensive handsets for each of the three major technologies present in the region: TDMA, CDMA and GSM. The supply of

Executive Summary

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Executive Summary
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cheaper handsets is also multiplying through other sources, such as the parallel market and refurbished handset providers. With the costs of handsets coming down, operators can offer lower subsidies and still offer lower prices to their customers. Once SAC is brought to a manageable level, churn is the next major challenge for wireless operators. The loss of a customer not only impacts subscriber figures but also bottom-line profitability. The immense costs involved in acquiring new customers leads operators to invest huge amounts of time and money into developing strategies designed to tackle and dissuade churn. When dealing with the prepaid sector, the problem of churn is magnified by the ease with which it can occur. In many cases the end-user has no ties with the prepaid operator other than through the service that is delivered upon voluntary payments by the customer. Most operators offer aggressive subsidies on prepaid handsets and no subsidies on calling rates: in most cases prepaid tariffs are higher than postpaid. This makes any reduction in price by a competing prepaid operator extremely attractive to a prepaid user and provides a high potential for that customer to churn. As a result of these market factors, the prepaid operator must compete on quality of service. Since any operator, regardless of size, can compete on a relatively level playing field when it comes to quality of service, this has made for an even more competitive market. Historically, mobile operators in the Caribbean as well as elsewhere in the world have not been overly concerned with churn, since the extraordinary growth of wireless more than made up for high churn rates. But those that are now looking at reducing churn use customer relationship management (CRM) as the base for their initiatives. The software elements used to handle the customer relationship include: Contact centers call centers and web access sites including automated sites Data warehouse applications incorporating analysis and customer segmentation tools Management tools including marketing campaign tools and applications generating promotions that are linked to customer database/profiling applications Complaint/enquiry management tools sometimes linked to sales and workforce automation applications/software. The key requirement of CRM is to be proactive as well as reactive in the facilitation of strategic and technological monitoring of business conducted between the customer and supplier. Although attending to the customer-supplier relationship entails a degree of expense, it is still less than that of acquiring a new customer. Historically, CRM and churn reduction applications have only been utilized for postpaid accounts and have not attempted to tackle the unique challenges and requirements of churn reduction, loyalty and CRM within the prepaid environment.

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Prepaid strategies
Rapid subscriber growth, small populations and increased competition are leading Caribbean mobile markets to reach saturation levels faster than their counterparts elsewhere in the Americas. This presents potential difficulties for those mobile operators that are depending on continuous subscriber growth as the main route to increase revenue and penetrate the lower segments of the economy. New entrants in the market, such as Dominican Republic-based operator Orange Dominicana, are more often than not the operators following this trend. Caribbean mobile operators need to understand that growing their subscriber base will not permit them to survive profitably in an environment characterized by increased competition, high prepaid service penetration, limited service differentiation and a pool of potential new subscribers with limited disposable income and low purchasing power. Born during the mid-1990s in western Europe, the prepaid model has had an unprecedented impact on subscriber growth wherever it has been introduced. In most Caribbean markets including Jamaica, Guyana or Suriname, prepaid subscriptions make up 90% or more of total mobile subscriptions. This unexpected growth has two main consequences: a) it allows mobile telephony to surpass fixed-line telephony in penetration levels, as seen in most eastern Caribbean markets, and b) it forces a decrease in fixed-line telephony tariffs. By making the services available to and accessible by all segments of the economy, mobile telephony moves from being a luxury item to being considered a commodity or even a basic service. As a result, prepaid service is a key component of mobile service providers portfolio. Unfortunately, prepaids golden age is approaching its end. Caribbean mobile operators cannot continue to follow a market strategy purely based on aggressive customer acquisition to build critical mass without adopting some measures to qualify new users. The reality in many Caribbean markets is now a shrinking pool of potential customers, increasing operator debt levels, limited available vendor financing, an overabundant number of mobile service providers, a decrease in voice rates, and new subscription plans that negatively impact the operators profit margins (such as the rollover minutes features offered by Cingular Wireless, Digicel and Setar of Aruba). This is forcing operators to look for new revenue streams that could counteract the decrease in subscribers ARPU levels. Although the rollout of 2.5G/3G networks are often mentioned as a remedy for resolving the industrys malady of diminishing profit margins, advanced networks are for the most part being tailored for individual contract/postpaid subscribers. Or, as seen in the 1xEVDO and EDGE deployments in Puerto Rico and the Cayman Islands, they are also being

Prepaid Strategies

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targeted at enterprise customers. Mobile operators regard the new enhanced data-centric services permitted by next-generation networks as enablers to boost their revenues. Since traditionally prepaid voice services have been targeted to serve lower income strata, this segment of the population has been largely ignored by the operators as potential consumers of mobile data services beyond SMS. It is necessary for Caribbean mobile operators to understand that only by making data-centric value-added services available to their prepaid subscribers will they have a better chance of recouping their investments in 2.5G spectrum and/or network buildout.

Prepaid drivers
Economic conditions
Mobile operators initially introduced prepaid service as a buffer against fraud and bad debt. So it is understandable that the model really took off and prepaid use skyrocketed during the economic crises in southeast Asia and Latin America in the late 1990s. The worsening economic conditions forced many mobile users from developing countries to switch their service plans to a prepaid one as they could better monitor their spending and control their usage. For example, Latin Americas mobile service industry growth increased dramatically with the introduction of prepaid services during the late 1990s. Countries such as Venezuela and Mexico encountered a drastic increase in their prepaid subscriber base during that time, posting a compound annual growth rate (CAGR) of 251.14% and 116.55% respectively during the 19962001 period. Similar growth rates were experienced throughout Latin America and then more recently in the post-liberalization Englishspeaking Caribbean. Prepaid opened mobile services to the lower economic segments of the regions society where lack of credit became one of the main drivers that made prepaid so attractive and caused an explosion in customer numbers.

Leveraging the mass market

Introducing prepaid services allowed mobile operators to leverage the mass market: making telephony accessible to the lower income strata vastly increased the size of the potential addressable market. This point becomes crucial in Caribbean countries such as Cuba and Haiti, where fixed-line installation rates are prohibitively expensive, putting telephony out of reach for large segments of the population. Mobile networks and the prepaid model have provided a cheaper alternative, which, combined with low fixed-line telephony penetration, resulted in incredible growth rates for these services.

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Achieving critical mass

Telecoms liberalization in the Caribbean has also fostered the development of prepaid services. The increase in the number of mobile service providers has forced new entrants to focus on their prepaid offering as a means to acquire the necessary critical mass that would make their business viable under a competitive model. But gaining market share cannot be the sole purpose of a mobile operator, as divergent experiences have shown. For example, Mexican mobile operator Unefon started operations with a strategy based on only offering prepaid services to its customers. It targeted lower income users and provided rates that were a third of those being charged by the incumbent operators. Eventually the company launched contract services but its low rates and heavily subsidized handsets have made it extremely difficult for the operator to recoup its investment with its slim profit margins. On the other hand, Virgin Mobile UK, a mobile virtual network operator (MVNO), has managed to build a large subscriber base by offering prepaid services combined with other products/services from the Virgin Group (i.e. airline-ticket contests, DVDs, etc.). Its success shows that prepaid customers can be just as valuable and profitable as postpaid customers.

Prepaid Strategies

Prepaid is still a valuable proposition

It is true that a growing prepaid subscriber base characterized by lower usage rates will have a direct impact on ARPU, which is still the main statistical metric of interest for investors. However, the generalized belief that prepaid users are always less profitable than contract subscribers is not accurate. Prepaid offers incredible advantages for mobile operators that learn how to leverage this segment of their subscriber base while decreasing subscriber acquisition costs (SAC). This latter issue mostly defined by how much an operator subsidizes the handsets it sells is the key factor in determining a customers profitability as these costs must be recouped before a customer can be considered profitable. Historically operators have identified prepaid users as the segments of society who do not have access to credit or bank accounts and a smaller segment of individuals who wished to control their expenditures. The use of prepaid for credit control is a primary driver for mobile prepaid use and has made prepaid users resist migrating to postpaid accounts, despite operators removing subsidies on handsets and prepaid tariffs to encourage them. Highly saturated prepaid markets, such as Italy, have disproved the preconception that prepaid is a low value service option upon which a successful business cannot be built. That country has also proved an extremely successful market in terms of ARPU. The conception of what constitutes profitability in relation to prepaid has been turned on its head by a reappraisal of how profit is measured. Instead of merely considering ARPU, the

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margins involved in provisioning and servicing different types of mobile customer are taken into account to calculate the Average Margin Per User (AMPU) to gain a benchmark for profitability. This misanalysis of the prepaid user segment is characteristic of the lack of information operators have about their prepaid users. However, operators are placing greater resource behind developing systems and undertaking research and analysis to achieve a better understanding of their prepaid users and the various segments that populate the prepaid user base. Developments are ongoing in profitability analytics, predictive churn analysis and data-mining. Identification of the customer is extremely important for several reasons, not just for its primary roles as a marketing device for improved customer servicing and to dissuade churn. The most important driving factor behind acquiring customer data is for its use in complex billing and rating applications to deliver content, as well as service-based billing based upon users perceived value of content. Prepaid has an important role in the content economy wireless revenues derived from content and premium services due to its dominance in an important segment required to drive forward data and content/service use into the mainstream: the youth segment. Customers in this segment often cannot be served by postpaid contracts due to their lower economic standing, lack of access to credit/debit cards and banking infrastructure. Yet they consume the greatest portion of mobile entertainment services a primary driver for the consumption of mobile data.

Subscriber acquisition costs (SAC)

Subscriber acquisition costs are defined as the average cost incurred by the mobile operator for each new-signed customer. Mobile operators that are able to decrease their average SAC have a healthier financial outlook, as they are able to recover their investment more rapidly and subsequently increase per-user profit margins. Most SAC fall into four major categories: a) packaging & distribution logistics, b) promotion & advertising, c) commissions for distributors, and d) handset subsidies. Historically, Caribbean mobile operators have implemented heavy handset subsidies indiscriminately to both prepaid and postpaid services. Operators hoped that ramping up their subscriber base quickly, regardless of the costs of the strategy, would put them in a better position when they start offering enhanced value added services through 2.5G networks. But the realities of the Caribbean markets are forcing operators to review this strategy. These markets are experiencing a slow uptake of enhanced data services, a continuous decrease in voice telephony rates, increased competition among operators, low

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Prepaid Strategies

handset replacements rates (a key variable to determine subscriber migration patterns) and high churn rates. As a result, operators in most markets are slowly phasing out handset subsidies for prepaid customers. This has given the prepaid segment better prospects for profitability, since a small decrease in handset subsides has a significant impact on the profitability of a customer. Decreasing handset subsidies may discourage new subscriptions to some extent, but this has become less of an issue since manufacturers are now selling less expensive handsets for each of the three major technologies present in the region: TDMA, CDMA and GSM. The supply of cheaper handsets is also multiplying through other sources, such as the parallel market and refurbished handset providers, which is an important component of the Dominican Republic and Cuban markets. With the costs of handsets coming down, operators can offer lower subsidies and still offer lower prices to their customers. Therefore, it is recommended that mobile operators target handset subsidies toward contract subscribers. Traditionally these customers have generated a higher ARPU than prepaid users and with a contract they are less likely to switch providers, diminishing the risk of losing the customer before the companys SAC has been covered. Also, mobile operators can impose fines if necessary to ensure the recovery of their investment if the subscriber decides to discontinue service before the fulfillment of the contract. Finally, mobile operators may also reduce acquisition costs by common sense measures such as the utilization of IVR systems for handset activation and the increase of distribution channels for prepaid cards.

Prepaid and data services

Operators throughout the Caribbean are diversifying their portfolio by tailoring their services to the enterprise segment. What before was perceived to be almost an exclusive niche for iDEN operators (such as Nextel in the US or Avantel in Colombia) is now plagued by competition from mobile operators. For example, Verizon Wireless in Puerto Rico is targeting enterprise customers with the introduction of services like CDMA2000 EV-DO and Push-to-Talk over Cellular (PoC). Thus, Caribbean mobile operators are creating enterprise departments to penetrate this segment better. It is important to stress, however, that paying greater attention to the enterprise market will not be sufficient in itself for mobile operators to recoup the heavy investments made on spectrum acquisition and network upgrades. Mobile operators have to commercialize 2.5G services to both contract and prepaid users, while playing the differentiator card to increase brand loyalty. In turn, this will allow the operator to create new revenue streams from prepaid subscribers while speeding up the ROI on the new networks.

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Prepaid technological challenges

As mobile operators evolve toward next-generation services, the prepaid model faces numerous challenges. These range from provisioning for legacy technologies and backoffice applications to developing completely new applications and solutions designed to tackle the problems created by demands to rate, bill and mediate for new and innovative prepaid wireless service offerings. The major areas of technological challenge for prepaid include: Roaming technical challenge and solution approaches Intelligent Networks (IN) requirements and approaches Billing for content including billing, mediation and rating. The key challenges involve how to structure the prepaid network while considering legacy infrastructure, billing requirements of current and future services and BSS/OSS integration. That said, it is important to highlight that in the Caribbean both Digicel and Cable & Wireless are already offering prepaid roaming to their subscribers.

Legacy infrastructure
Much of the technological framework of prepaid systems evolved from voice services, which have proved effective in this role. However, as services have evolved, so have the demands placed upon the technological systems supporting them. Factors influencing the evolution of the prepaid market include: The introduction of competition to the operator environment, leading to a greater need to diversify pricing/tariff and charging structures required for market differentiation. This has placed additional pressure on rating, billing and mediation systems, as has been experienced by Cable & Wireless following the arrival of Digicel and Cingular in most of its markets. Growing demand from users for roaming, as demonstrated in Cable & Wireless and Digicels launch of prepaid roaming Development of next-generation network technologies The requirement to offer VAS to users whether current or next-generation services independent of their contract status i.e. prepaid or postpaid. These challenges can be further distilled and categorized into three main technologyspecific areas:

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Prepaid Strategies

Challenges at the network level, e.g. how to gather data on prepaid users from the core network, how users are identified on the network or how credit is accrued and depleted etc. How collected data can be converted into information that can be utilized for marketing, development of pricing structure, overall market strategy etc. How collected data is to be used to bill and rate for services. This process is made more difficult by next generation billing mechanisms such as value-based billing. This form of billing is based upon rating services by perceived value of a service. This is problematic under the prepaid model because prepaid users are generally anonymous, which makes it more difficult for the operator/service provider to ascertain the perceived value to these users for a particular service. There are various technical approaches to tackling the demands of prepaid systems, which range from determining user capabilities and account status to data capture, transmission and processing. Selected key approaches are summarized below. Point solutions: these involve an adjunct piece of equipment used to provide call control, database functions, and administrative functions and call processing. All calls must traverse a single network element or point. An example of this is a service node-based solution. Handset solutions: intelligent capabilities are being placed in the mobile terminal enabling the determination of capabilities and the account status of a particular prepaid subscriber. Within this approach, a broad demarcation can be made between SIM-based and proprietary solutions: SIM-based logic in SIM determines prepaid subscriber capabilities and account status. Proprietary handset based solution for ANSI-41 networks. There are similar benefits and disadvantages to the SIM solution. The user is identified as a prepaid customer without the amendments required to inter-carrier roaming agreements. The user can make calls at will limited by logic resident in the handset, which limits calling based on customer account status. Network Based solutions utilizes signaling networks for data capture, transmission and processing. This category can be further broken down into ISUP non-standard, TCAP standard and TCAP nonstandard (proprietary). ISUP non-standard uses ISUP-loop back to mislead the switch into seeing the call as a communication from another switch, normally required for call set up via ISUP, when in actuality the system is performing database operations necessary to process prepaid calls. It is similar to point solutions as all calls must go through single point.

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TCAP standard WIN and CAMEL enhanced. Allows roaming when the serving operator has necessary triggers and software logic resident on the serving network (also defined as a standards-based IN solution). TCAP proprietary vendor specific with no resource requirements. Uses proprietary mobile IN Mobile Switching Circuit (MSC) and Service Control Point (SCP) logic for call processing. Roaming is complicated by the non-standard nature of the system, requiring similar switches to be implemented in the server and home network with comparable software logic and triggers armed. Agreements on roaming are also required for messaging interactions between serving and home systems. Hybrid solutions mix of various competencies, such as having SIM solution for basic prepaid call processing with a TCAP-based IN complement for VAS. Call Data Record (CDR) solutions near real-time tracking process. CDRs are monitored after a call is placed. A major issue is the fact that calls are monitored after the event allowing connection with zero account balances. A particular problem that needs to be addressed for content services, which are typically higher priced than voice rates.

Solution provider/vendor approaches

There are four main vendor categories that offer differing approaches to the problem of prepaid content rating, mediation and billing: Billing vendors Content providers Core/IN vendors (wireless specific) IP vendors. Each of these vendor categories brings a core set of skills and experience to the challenge of prepaid within next-generation networks. In Figure 1.1 the various approaches taken by the four vendor types are overlaid with the constituent parts of the convergent mobile service matrix. Each of the vendor types occupies its own position within the converged model of next-generation services, which is evolving as new service and network capabilities emerge and the end-user migrates ever closer to the centre of this converged service matrix.

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Figure 1.1: Vendor approach within convergent mobile service matrix

Payment (mechanism) - prepaid, postpaid, 3rd party, Mwallet, credit card , debit card etc. Billing vendor approach Content provider approach

Community (user) consumer, business, group

Services voice, data, multiple services

IP approach IN/Core network approach Access (network) GSM, GPRS, CDMA, UMTS, WLAN Devices mobile, PDA, gaming device, laptop

Source: Informa Telecoms & Media

In each case the vendor type proximity to a part of the convergent services matrix illustrates the relative knowledge and experience the vendor type has in relation to it. For example, the billing vendor approach is closely aligned with the payment mechanism of the convergent service matrix due to having first-hand experience and knowledge of developing applications/solutions in this area.

Prepaid recharge
The process of topping up a prepaid account is a significant part of the prepaid process. It cuts into numerous facets of the prepaid process including the transactional process between user, operator and third parties. The top-up process also acts as a point where operators can leverage strategies to communicate with the end-user to analyze and identify potential churn targets and deliver marketing. Finally, the top up process can also be used as a mechanism from which to develop the prepaid platform as a mobile commerce device. Cable & Wireless has been aggressively promoting its Direct TopUp or eTopUp services (see Figure 1.2). This will lead other market players to introduce these services as well in order to offer a comparative service to their subscriber base.

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Figure 1.2: Cable & Wireless TopUp advertisements

Now Available Here

No Cards and No PIN Choose Any Amount over $5 Automatic eTopUp for Cable & Wireless Pay as You Go Phones.

Source: Cable & Wireless

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Prepaid Strategies

There are numerous strategic challenges for prepaid recharge. There is a user resistance to prepaid-postpaid migration so the operators need strategies to serve their prepaid customers more cost-effectively. These strategies include the evolution from scratchcard/voucher-based recharge mechanisms toward fully automated/electronic recharge mechanisms. At the moment, operators still have to support numerous recharge mechanisms and offer recharging in a roaming environment. The communication and interaction between operator and customer at the recharge point allows the operator to generate information that can be used for a number of purposes, including churn reduction, customer value analysis, marketing and balance check mechanisms. It can also be used to support the operators strategy by revealing end-user prepaid recharge usage patterns. Caribbean operators are looking for more efficient ways to provide their subscribers with electronic recharge solutions in the local market. In addition to this emulating the experience of operators in the Philippines they are also looking at the emigrant community as a source for additional revenue by implementing systems that allow international recharge for relatives in the Caribbean.

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Prepaid Strategies
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Prepaid Strategies and Minimising Churn

Churn and customer retention

Lowering churn or the rate at which customers switch to another operators network has become an increasingly important consideration for operators. Their land-grab strategies, ie gathering the greatest number of subscribers as quickly as possible, are now evolving into strategies geared toward increasing users spend on mobile services. Historically, mobile operators in the Caribbean, as well as elsewhere in the world, have not been overly concerned with churn, the extraordinary growth of wireless more than made up for high churn rates. But those that are now looking at churn use customer relationship management (CRM) as the base for their initiatives. The software elements used to handle the customer relationship include: Contact centers call centers and web access sites including automated sites Data warehouse applications incorporating analysis and customer segmentation tools Management tools including marketing campaign tools and promotion generation applications linked to customer database/profiling applications Complaint/enquiry management tools sometimes linked to sales and workforce automation applications/software. The key requirement of CRM is to be proactive as well as reactive in the facilitation of strategic and technological monitoring of business conducted between the customer and supplier. Attending to the customer-supplier relationship does entail a degree of expense, although it is less than that of acquiring a new customer. Historically CRM and churn reduction applications have been used for postpaid accounts and as such have not attempted to tackle the unique challenges and requirements of churn reduction, loyalty and CRM within the prepaid environment. In those markets where wireless penetration is approaching saturation, the cost of identifying and acquiring new customers is high, while the ARPU potential of these subscribers is likely to be less than existing or established subscribers with other operators. Consequently the prepaid market is itself predisposed toward encouraging churn because subscriber acquisition is most cost-effective when achieved through churn from competitors. Historically this churn has been encouraged by competition on pricing and promotions designed to draw users away from competitors. However, to compete largely on price leads to a particularly chaotic model of churn which damages a markets development and stability over time.

Churn and Customer Retention

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Churn and prepaid services

Prepaids critical problem is the almost non-existent brand loyalty, mainly due to the lack of interaction between mobile operators and prepaid subscribers. Although the rollout of prepaid WAP services provides the possibility of some interaction between operator and consumer through registration over the Internet Caribbean mobile operators need to increase their visibility to prepaid subscribers. Operators can implement low-cost solutions, such as text messages offering discount vouchers or handset upgrade offers, or can launch promotional campaigns targeting the prepaid subscriber base. The main objective of these campaigns is to highlight the advantages and uniqueness of the prepaid service offered by their mobile operator, which would help towards shattering the notion that all prepaid services are identical. Moreover, Caribbean mobile operators need to emulate their western European counterparts efforts by shifting from being almost completely focused on customer acquisition to a new view where customer retention becomes increasingly important. Digicels group executives, for example, are already talking about a change in strategy and the company is embarking on a drive to pay more attention to customer retention although it is still not entirely clear what specific moves the company has made or will make in this regard. Besides the promotions or bonus points currently offered by operators, technology and content partnerships will become a key ingredient to retaining customers and successfully minimizing subscriber churn. For example, SMS-enabled handsets are required for the adoption of SMS, but the selection of push/pull SMS services or SMS-based commercial transactions will depend on the number of content partnerships entered into by the mobile operator. Since differentiation is the ultimate goal, mobile operators should seek to increase the amount of proprietary content and services offered to their subscriber base. Once again, it becomes imperative for mobile operators to segment their prepaid subscriber base to allow high-end prepaid users to obtain the same type of services offered to contract subscribers, which could also come at a reasonable premium to serve as an incentive to migrate towards a contract subscription service. Competitive mobile operators outside the Caribbean such as Telefonica Moviles in Venezuela (formerly Telcel BellSouth) also hope to foster loyalty by becoming full service operators, offering bundled telecom services to their current subscriber base. Competitive operators in the Caribbean could pursue the same strategy.

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Prepaid Strategies and Minimising Churn

Churn and Customer Retention

Tackling prepaid churn

Churn is one of the biggest challenges wireless operators face as the loss of a customer not only impacts subscriber figures but also bottom-line profitability. The cost of acquiring new customers is typically much higher than that needed to retain them, so operators such as Verizon Dominicana in the Dominican Republic are investing huge amounts of time and money into developing strategies designed to tackle and dissuade churn (see the case study at the end of this chapter). When dealing with the prepaid sector, the problem of churn is magnified by the ease with which it can occur. In many cases the end-user has no ties with the prepaid operator, other than through the service that is delivered. Because a customers participation in prepaid services is wholly voluntary, all a customer has to do to leave an operator is stop paying for that operators services. Most operators offer aggressive subsidies on prepaid handsets and little subsidy on calling rates, which also makes it easy to switch providers. In most cases prepaid tariffs are higher than postpaid. This makes any reduction in tariff price by a competing prepaid operator extremely attractive to a prepaid user and provides a high potential for that customer to churn. Interestingly, as a result of these market dynamics, in competitive markets with a large presence of prepaid accounts, the prepaid operator eventually has to compete on quality of service. Since any operator, regardless of size, can compete on a relatively level playing field when it comes to quality of service, this has made for an even more competitive marketplace in those areas where this dynamic has occurred. There is a disadvantage to deploying more advanced CRM strategies: higher costs for the operator. As an operators subscriber base increases, CRM costs will also escalate as new data services proliferate, and this threatens to financially cripple prepaid operators. In the current economic environment operators are moving away from aspirations of providing the best possible care to providing good enough levels of support as the industry undergoes an evolution from customer care to customer management. Key developments facilitating this development are the growth in IVR, customer care applications on websites (e-Care) and self-care capabilities. Self-care is of particular interest to prepaid operators, since the prepaid model already encourages users to self-recharge their own accounts. Self-care users will produce the most profit, and operators can choose to provide those users with more personal support such as CSR support at call-centers, but operators must be able to justify the immense cost associated with these CRM solutions. Operators must become increasingly skilled at defining and measuring potential customers. Under a largely prepaid model this will include consideration of the margin of profit the user delivers, which can be ascertained by comparing factors such as cost of acquisition, service use and

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provisioning costs. Without such analysis the prepaid operator risks any improvements in revenue being eaten away by increases in provisioning costs, creating a negative profitability scenario. Table 2.1 highlights the cost/benefit of churn-management software in two different scenarios. Table 2.1: Cost-benefit analysis of churn software
Number of subscriptions Churn rate % Acquisition cost ($) ARPU ($) Revenue ($) Value of customer loss ($) Cost of churn sofware license Cost of staffing ($) Cost of offers to subscribers ($) Cost of churn management ($) Savings from reducing churn by 5% ($) Savings from non-effective offers ($) Total savings from churn management ($) Net saving ($)
Source: Informa Telecoms & Media

Operator 1 200,000 20 150 350 70,000,000 20,000,000 250,000 100,000 3,500,000 3,850,000 19,000,000 2,000,000 21,000,000 17,150,000

Operator 2 500,000 20 100 300 150,000,000 40,000,000 500,000 200,000 7,500,000 8,200,000 38,000,000 5,000,000 43,000,000 34,800,000

With competition now a fact of life in many markets, operators are increasingly looking at calculating an operators average profit margin per user (AMPU) rather than solely average revenue per user (ARPU) and also using this concept as part of customer profiling and data mining. These applications and the approaches linked to them will proliferate in the prepaid environment. Already several Caribbean mobile operators, including Tricom and Verizon Dominicana, are utilizing complex tracking and profiling devices on their prepaid subscriber bases designed to identify users displaying a propensity to behave in a manner most likely to make them profitable, potential churners or targets for new services. The development of automated CRM technology can alienate the end user but if implemented effectively it can also create the perception of a better customer care experience. The empowerment created by self-care is one example of this type of perception enhancement, as the users may feel less frustrated by a problem if they can resolve it themselves and quickly. Successfully designed and implemented automated CRM solutions can be used as a market differentiator as increases in enquiries generated by next-generation services creates greater pressure on an operators CRM. In saturated markets, even the smallest factor can lead to churn. Low levels of customer service are one of these factors.

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Prepaid Strategies and Minimising Churn

Churn and Customer Retention

Other key approaches to tackling prepaid churn include: Incentive/bonus schemes including incentive schemes targeted to specified segments Strategic cooperation a separate grouping of incentive mechanisms using external partnerships to increase the impact of anti-churn campaigns Loyalty schemes with third-party partners Sponsorship including models subsidized by advertising FMCG (fast-moving consumer goods) branded devices and services Infrastructure partnerships an indirect method of dissuading churn. If a user cannot easily recharge their account but discovers that another operator does offer easy account recharge due to a proliferation of recharge points or other options, that user will likely switch over to the second operator.

Advanced prepaid customer analysis

Despite data on the prepaid user being limited by automated CRM and the anonymity of prepaid distribution, attempting to collect data is important now and will become even more important as next generation service models develop based upon data services and premium content. Generalized approaches to customer data analysis that attempt to profile prepaid users into broad spectrum groups segmented by categories including monthly spend, recharge propensity, type of content used etc. have already been seen in several western European markets. Primarily these forms of customer data analysis have been used to identify the most profitable prepaid segments. Ascertaining the value of a customer helps shed light on what potential he or she has to churn. With the value estimate already on hand, the operator is in a stronger position to decide whether to allow target users to churn or attempt to dissuade them, depending on their value to the operator. As direct contact is not always possible with prepaid end-users, operators and their service partners have approached the problem by analyzing the data that is available from prepaid accounts and mapping this data over known behavioral patterns.

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Case study: churn management at Verizon Dominicana

Prepaid operators face the challenge of supporting an ever-increasing subscriber base from a technical and quality-of-service standpoint, while also attempting to provide greater support to higher-ARPU users in order to keep these high-value accounts and avoid churn. Verizon Dominicana was one of the first operators in the Caribbean to announce that it had acquired software and data mining capabilities to help it identify its high-ARPU users. The Dominican Republics incumbent telco and mobile operator aimed to use this information to target the high-ARPU users proactively with special promotions meant to encourage their continued use of Verizon services. It is also worth noting that Verizons data-mining initiatives cross-referenced its fixed-line customer records with those of its mobile services to determine who was spending most with the company overall and not just on one service. This was crucial in the Dominican Republic, since fixed and mobile competition have been in place there for many years and Verizon faces competitors in both areas. In Caribbean markets where fixed competition is only just opening now, however, operators that offer both fixed and mobile services have the opportunity to integrate their data-mining efforts, pinpoint their highest-value users and offer promotions to keep them from switching once competition comes. Most of the Caribbeans new mobile competitors are not offering fixed-line services and not all of the new fixed-line entrants will offer mobile in the Caribbean. Therefore, the fixed/mobile incumbents have the advantage as they are able to offer fixed/mobile service bundles that provide greater value to customers if they take both services from that one operator. In its churn management project, Verizon Dominicana created a cross-functional Churn Prevention Committee that would allow the company to implement a strategy consisting of the following steps: corporate objectives and churn performance analysis customer value differentiation (LTV) churners profile by customer value churn probable reasons by customer value churn root causes by customer value churn forecasting and predictive modeling design / re-design of retention and loyalty programs execution of retention and loyalty programs

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Prepaid Strategies and Minimising Churn

Churn and Customer Retention

monitoring and assessment of retention and loyalty programs. As shown in Figure 2.1, Verizon Dominicana was able to decrease both postpaid and prepaid churn during the timeframe of the project. Figure 2.1: Verizon Dominicana mobile churn growth rate, 2001 vs. 2004

VZDR Mobile Churn Growth Rate

Jan- 200 1 VS. Jan -2004 0.0% -10.0%

% Churn Growth Rate

% Churn Growth Rate

-20.0% -30.0% -40.0% -50.0% -60.0% -70.0% -80.0%

Pre-paid

Post-paid
Post-paid Pre-paid -41.3% -69.5%

1Q01-2Q04

Source: Verizon Dominicana

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Prepaid Strategies and Minimising Churn

Churn and Customer Retention

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Conclusions
Prepaid still has the potential to grow its subscription base as well as drive overall wireless subscriptions by delivering access to a greater percentage of user segments than postpaid can do. These user segments include youth, the grey market, first-time users or persons experimenting with wireless, credit-challenged users or cash-based industry segments. Prepaid is transforming somewhat in certain markets through the offering of prepaidpostpaid hybrid accounts. These hybrid accounts offer a payment mechanism in their own right to reach important data market segments (young mobile-entertainment users) and under-subscribed demographics such as those without access to bank accounts or credit. Prepaid is still the fastest and easiest way to acquire users in under-penetrated markets such as Cuba and Haiti. Revenue growth will spring from operators successful segmentation of the prepaid subscriber base, the offering of differentiated and proprietary products, and the bundling of various telecom services together. Caribbean mobile operators should make sure that prepaid customers have access to all the same services, technologies and applications postpaid accounts can use. This will help erode the stigma of prepaid users being seen as second-class subscribers. Operators should, however, still charge a premium for prepaid services, to encourage migration to contracts. Data mining in the prepaid sector should be a priority for mobile operators. Eradicating the anonymity of the prepaid subscriber base will allow for more effective implementation of promotions and services and more targeted marketing. Caribbean mobile operators need to understand that only by making data-centric value added services available to their prepaid subscribers would they be able to justify and recoup their investments in 2.5G spectrum and/or network build out. The implementation of churn management strategies and software can allow Caribbean mobile operators to increase customer retention and improve their bottom line, as such solutions can improve an operators ROI per customer. However, operators must also be vigilant regarding CRM costs and make sure they are not eating up those profitability gains.

Conclusions

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Prepaid Strategies and Minimising Churn

Conclusions
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