NEW YORK-A recent concerted industrywide effort among cellular carriers has reduced churn to an estimated 2 percent to 2.5 percent per month on average. But the battle is far from over, as personal communications services and number portability could cause cellular churn to increase.
Approaching developments may expand the marketplace but also may increase competition among wireless carriers and drive down per-subscriber revenues.
Based on experience in the United Kingdom, the advent of PCS competition “is likely to cause an upward blip in cellular churn here as well,” said David A. Freedman, managing director and senior telecommunications analyst for Bear, Stearns & Co. Inc., New York. “Unless cellular operators can lower the cost of acquiring subscribers significantly, operators in major markets may see higher operating cash flow but deliver lower operating cash flow margins in 1997.”
PCS players say they will broaden the overall marketplace for wireless communications. But whether they expand the market or simply take customers away from cellular carriers is an open question, according to Zaiba Nanji, director, telecommunications services group, at Westport, Conn.-based J.D. Power and Associates, which tracks customer satisfaction.
The coming of full-number portability also is widely viewed as a catalyst for rapid wireless telephone penetration “if consumers and businesses can cancel existing service and transfer it to a wireless carrier without changing their local phone numbers,” said David J. Roddy, chief telecommunications economist at Deloitte & Touche Consulting Group, Atlanta. But “as number portability becomes more prevalent, churn is likely to increase dramatically. … Small changes in churn can have a dramatic effect on the net present value of any wireless infrastructure investment.”
At the same time, a maturing U.S. wireless telecommunications market means the expanding customer base-growing as much as 50 percent yearly-will be offset by declining revenues per subscriber, according to Rick Kehoe, product manager at Tampa, Fla.-based GTE Telecommunications Services, which just commercially deployed its version of customer care software. In 1990, when business users comprised a larger portion of the customer mix, average monthly revenues per subscriber were $100. At the start of this year, the monthly average was $53. By early August, it was $51. Projections are it will drop to $39 by 2000.
Incremental reductions in churn generally are understood to have large positive ripple effects on revenues. For example, a carrier with 250,000 subscribers, a 4 percent monthly subscriber addition rate, a 2 percent monthly churn rate and an average per-subscriber monthly revenue of just $40 can add $2.78 million a year in revenues by reducing churn just 0.1 percent, Kehoe said.
In this environment, there seem to be two key questions. The first: How low is it realistic to go when it comes to reducing churn? Carriers say it is difficult to draw the line at a specific number.
“The higher the initial churn rate, the greater the savings, as in going from 4 percent to 3 percent,” Kehoe said. “It would be tough to effect a churn rate decrease of 0.25 percent starting at a low churn rate of 2 percent.”
On the other hand, areas with above-average churn rates may have a transient clientele, as is the case in resort communities. This leads to the second key question: Which customers are worth trying to retain?
“There are a few theories on the cellular market. One is the 80: 20 theory: 20 percent of the customers bring in 80 percent of the revenues,” said Greg Oslan, president and chief operating officer of CNET Inc., a Plano, Texas, customer care and billing software developer and provider. “The other is the empty airline seat philosophy. Even a low user, if he doesn’t churn off your system, begins to pay off if he stays on a long time.”
High-volume cellular users, typically business customers, are most likely to comparison shop and participate in so-called inter-system churn from one wireless carrier to another, according to Kehoe, Nanji and Oslan. In 1995, an estimated 1.4 percentage points, just more than half, of the average 2.5 percent industrywide monthly churn was ascribed to such customers, Kehoe said. This group is worth more attention than so-called termination churn customers, typically comprised of “convenience and safety users who say wireless isn’t for me.”
Traditionally, cellular carriers have worked to induce customer loyalty by signing users on to service contracts with termination penalties. Ironically, as the churn reduction takes on more urgency, cellular providers are dropping contractual requirements, Nanji said. To compete with cellular carriers, PCS providers have introduced no-contract incentives. This, in turn, is forcing cellular companies to respond in kind.
One way to get around this conundrum is by providing “loyalty rewards programs”-incentives for high-usage customers to stay rather than penalties for leaving, according to Kehoe and Oslan. One good way to achieve this would be the use of real-time data gathering, sharing and retrieval systems automatically link different departments-including billing, network monitoring and sales. Such capability, which is moving into the cellular arena, permits customer service representatives both to anticipate and respond to customer problems with speed and flexibility. It also permits the customer service staff to act on the spot with offers tailored to specific individuals, rather than those based on composite profiles.
However, both Oslan and Kristi Turner, customer support manager for GTE Mobilnet’s Florida region, said it probably would be difficult to determine definitively the impact of such programs on churn rates-especially as PCS makes its debut. The most reliable hindsight comes from customer satisfaction surveys like those J.D. Power prepares, Oslan said.
Whether a high-volume or low-volume consumer, “there is no such thing as a bad customer, as long as he pays his bills,” said Mark Nielsen, president of Subscriber Computing Inc., an Irvine, Calif., customer care software designer and provider. The trick, then, is how to acquire all kinds of new customers, while ensuring they pay for services rendered, in his view.
Cellular carriers have required substantial deposits to combat so-called involuntary churn where customers are dropped due to their failure to pay their bills. But this defensive measure can produce unintended negative consequences.
“Among U.S. cellular companies, 25 percent of customers are required to put down a deposit,” Nielsen said. “Of these, three quarters walk away. In many cases they are lost to the industry.”
As cellular service becomes a commodity, carriers searching for market share are trying a variety of retail outlets with prepaid metered billing to capture customers with poor credit histories. But these external outlets often perpetuate churn because they lack brand loyalty, whether or not the wireless communications devices and services they sell are prepaid.
Rather than dumping retail outlets, Nielsen said he sees two viable solutions to this problem. For retail general merchandise stores, the primary goal is to generate repeat visits by customers. “If you set up the store as the pay point” for cash refills of prepaid wireless communications devices, the merchandiser has greater incentive to promote them than if they are one-shot sales, he said.
The second approach is to restructure the retail commission contracts to encourage repeat business.
“It would be much better to set up dealer incentives on a residual basis, paying 2 percent or 3 percent of usage revenues only, for example,” he said. But admittedly this would be difficult to accomplish in a retail environment where cellular phone resellers typically demand up-front commissions.
