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January, 31st 2009
mmC GROUP Strategy Consultants Headquarters: C/Joaquin Turina, 2 · Ofﬁce 1-2-1, 28224 Pozuelo de Alarcón, Madrid, Spain T · +34 91 790 1115 F · +34 91 714 1888
ARPU stimulation in times of crisis
MMC Group’s approach in consumption enhancement and revenue stimulation strategies.
By Fernando da Costa-Cabral
2009 will not be a nice year. Fear and a severe ﬁnancial crisis will squeeze companies' proﬁts and endanger whole industries by affecting consumers’ micro buying decisions. For mobile operators, used to buoyant markets, maintaining their status quo represents a considerable challenge. Should they grind their teeth and just endure this period, hoping it will end soon? This seems to be the position of Vodafone, as CEO Vittorio Colao stated that the company’s strategy will be driven by two areas: cost cutting and execution. Or should mobile operators “ride the wave” and explore the new opportunities presented by the crisis? The answer lies in the degree to which mobile operators are hostage of downturn periods, and whether they should pursue revenue stimulation initiatives during these periods. There may be a light at the end of the tunnel after all… For European mobile operators the present importance of maintaining spending levels is critical. 2009, according to the Financial Times, will not be pleasant: ‘Recession, recovery, trade war and artiﬁcial life – welcome to 2009’. (1) With European markets darkened by fear and rising unemployment rates, consumer spending will be in the spotlight. Even consolidated industries will be driven down. Overcoming the recessionary slump is the challenge facing Europe’s main economies, such as the UK, Germany, France, Italy or Spain.
In this environment, it is necessary to ask what will be the impact of a downturn scenario to the mobile industry. The closest comparable event would be the 2001 dot.com bubble burst. During that period most European mobile markets were experiencing strong organic growth, but there was a signiﬁcant slowdown in terms of penetration growth rate. Between 2001 and 2002, this rate decreased in Germany from 16% to 5%, in Italy from 22% to 4%, and in Portugal from 29% to -2%. Despite this, mobile as a % of GDP (Gross Domestic Product) remained stable, or in some cases even grew – in Germany it went from 0.7% in 2001 to 1.0% in 2003, in the Netherlands from 1.0% to 1.4%. The most important data from this period is probably the lack of correlation between mobile usage and GDP. In Netherlands and Italy market MoU (Minutes of Use) increased despite the steep decline of GDP growth, while in Denmark and Germany they remained fairly stable and only in Portugal they decreased. This, together with the unwavering rate of mobile as a % of GDP, suggests a strong resistance of the mobile industry to economic downturn periods. Some recent surveys have, however, cast doubt on this resilience. For example, in Spain 17.7% of mobile users said they would lower their consumption immediately. (2) Another survey indicated that 76% of worldwide mobile subscribers are planning to lower their usage. (3) Nonetheless, these may reﬂect a certain hype reaction to the crisis and an intention that is yet to be fulﬁlled. But maybe it will: consumers no doubt have higher price sensitivity in severe downturn periods. In the case of mobile industry, this can translate into reduced consumer spending and, therefore, lower mobile ARPU (Average Revenue per User). Reduced consumer spending may lead to a chain effect whereby customers swap mobile voice for cheaper forms of communication. For example, part of mobile voice usage may be replaced by SMS, VoIP or even by ﬁxed-line communications. Furthermore, customers may be tempted to downgrade price plans and to migrate from contract to prepaid, driven by better cost control. Obviously, the net effect of these changes could further erode ARPU. In this context, ARPU stimulation comes as a necessity for mobile operators. This can be pursued through different actions, as exempliﬁed bellow. (Fig. 1)
In an economic downturn scenario this segment tends to shrink, allied with the effect from a maturing mobile market
Current customers will tend to lower their spending, but also shift their mobile usage patterns to find savings opportunities
Churn may have a counterintuitive behaviour in a period of crisis, with a majority of customers searching for security. Nevertheless, highvalue customers will tend to search for better deals
Initiatives (not exhaustive)
•! Target external migrations with value offers based on usage patterns learnt from own base •! Improve activation processes of high margin services •! Re-structure commissions to agents to reinforce value •! Launch new offers, possibly under a sub-brand, to address high-value segment •! Manage sales fraud •! Stimulate recharges based on targeted offers to usage related micro segmentation •! Implement CLV promotions •! Teach customers how to use services and improve channel readiness and availability •! Maximize multi-SIM behaviour •! Control debt •! Optimize migrations •! Explore web environment for up and cross selling •! Develop offers directed to exiting customers based on their CLV •! Optimize customer life-time spend •! Introduce loyalty programs based on value •! Manage channel interaction and readiness to act
Figure 1 - ARPU stimulation initiatives through the customer life-cycle
This, however, goes beyond the mere management of ARPU pressures, and calls for a strategic approach. First, there is the threat of escalated ARPU erosion. An aggressive competitive environment will heighten the volatility of this indicator to the contraction in consumer spending. Secondly, there is an eminent threat of value destruction. High exposure to pricing may lead to a misguided excess of discounts and promotions, which will endanger mobile operators' proﬁtability. However, a crisis period may also hold hidden opportunities. Consumers’ higher awareness to tariffs opens the door to market re-positioning and to a stronger impact of speciﬁc brand and value initiatives. In addition, this period represents a key moment in the life-cycle of high-value customers. Despite a contraction of penetration growth rate, high-value customers will take the opportunity to negotiate more advantageous deals (i.e. business customers).
Crisis is said to be written in Chinese with two characters, one for 'danger' and the other for 'opportunity'. (4) This has been shown not to be true, but the attraction that this idea holds is maybe more than wishful thinking, particularly in the mobile industry. Data from the dot.com bubble burst shows consumers will continue using mobile communications despite of a crisis, but will become much more price sensitive in their choices on voice communication. The danger that this will have for ARPU is clearly there, but so is the opportunity. (1) ‘Recession, recovery, trade war and artiﬁcial life – welcome to 2009’. Financial Times. 30 Dec. 2008. (2) ‘La situación económica hará reducir el consumo de móvil al 17,7% de usuarios’. Cincodias.com. 3 Sep. 2008 from ‘Colegio Oﬁcial de Ingenieros Tecnicos de Telecomunicaciones’. (3) ‘Mobile attitudes’. Getjar. 28 Oct. 2008 (4) http://en.wikipedia.org/wiki/Chinese_translation_of_crisis
More on ARPU stimulation
Marketing executives working for convergent telecom operators interested in customer’s stimulation of consumption and revenues should access to mmC GROUP’s web site (www.group-mmc.com) or corporate blog (consultantvalueadded.wordpress.com). For any inquiries about this topic, please address your requests to Fernando da Costa-Cabral at email@example.com.
About mmC Group
mmC Group is an international management consulting ﬁrm with extensive experience and a strong focus on marketing, sales and business strategy, mostly acquired in the Technology, Media, and Telecommunications (TMT) sector in engagements in more than 20 countries and 3 continents. Founded in 2003 by a group of professionals from various strategic consulting houses, the mmC Group team has extensive experience in marketing, sales and business strategy, mostly in mobile, ﬁxed line and broadband operators. The key characteristic of the team's experience has been the combination of strategy and execution in advising shareholders and management teams, strategy deﬁnition and business opportunity assessments and operations management.
About the Author
Fernando da Costa-Cabral is Senior Associate in mmC Group Telecom and High Tech practice with experience across Western & Eastern Europe, and LatAm in developing wireless operators’ market entry strategies and launching new products and services. His experience also comprises pricing strategy, operations improvement, customer value management, and telecom strategy for leading wireless operators Contact data and more info available at www.group-mmc.com and consultantvalueadded.wordpress.com
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