strategic channel management in the telco industry

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Strategic approach to Channel ManagementMobile industry case

1

Lecture’s objective

• Share a “hands on” approach to strategic Channel Management…

• …applied to the Mobile Telecommunication industry

2

§ Introduction§ Strategic approach to Channel Management§ Conclusions

Content

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After market valuations, segment identification, proposition development and pricing, sales channels are needed to reach potential customers

Market valuation Market segmentation Proposition development

Pricing

Go/no goregulator

Value to operator

Value to customer

Value to shareholder

Universe of services

Winning offer

Selection

Bestpractise

Creativeideas

Go/no goregulator

Value to operator

Value to customer

Value to shareholder

Universe of services

Winning offer

Selection

Bestpractise

Creativeideas

BestBestSegmentationSegmentation

SolutionSolution

Managerial DecisionManagerial Decision

Segment SizeSegment Size

Cluster Analysis Output:“Christmas Trees”


Needs ProfilesNeeds Profiles

Cluster Analysis Outputs:Cluster Analysis Outputs:Classification ErrorClassification Error

Stability TestsStability Tests

Robustness TestsRobustness Tests

Benefits Deficiency AnalysisBenefits Deficiency Analysis

2. Are segments equally supported by sample data

(statistically valid)?

3. Are segments useful and actionable?

4. Are segments descriptive and interpretable?5. Are segments statistically

distinct?6. Are the segments accurate

enough fo r future slotting?

7. Do the segments d isintegrate? Is the

solution stable?

8. Is segment membership stable? Is the solu tion robust?

9. Do segments offer actionable opportunities?

• 2-D Plots

QuantitativeQualitative

BestBestSegmentationSegmentation

SolutionSolution

Managerial DecisionManagerial Decision

Segment SizeSegment Size



Needs ProfilesNeeds Profiles

Cluster Analysis Outputs:Cluster Analysis Outputs:Classification ErrorClassification Error

Stability TestsStability Tests

Robustness TestsRobustness Tests

Benefits Deficiency AnalysisBenefits Deficiency Analysis

2. Are segments equally supported by sample data

(statistically valid)?

3. Are segments useful and actionable?

4. Are segments descriptive and interpretable?5. Are segments statistically

distinct?6. Are the segments accurate

enough fo r future slotting?

7. Do the segments d isintegrate? Is the

solution stable?

8. Is segment membership stable? Is the solu tion robust?

9. Do segments offer actionable opportunities?

• 2-D Plots

QuantitativeQualitative

BaseOperator 1

BaseOperator 4

Gross AdditionsMarket

(Hunting Pool)

BaseOperator 2

BaseOperator 3

New

comers

Churn

Ch urn -%

Ch urn -%

Chu rn-%

C hurn -%

e.g. penetration increase, youth,

etc.

Definite churnTotal marketAddre ssable market

BaseOperator 1

BaseOperator 4

Gross AdditionsMarket

(Hunting Pool)

BaseOperator 2

BaseOperator 3

New

comers

Churn

Ch urn -%

Ch urn -%

Chu rn-%

C hurn -%

e.g. penetration increase, youth,

etc.

Definite churnTotal marketAddre ssable market

Customer

Channels are needed to get in touch with the client:Transactions / SalesInformation / Communication

Service / promotions

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Mobile operators serve their customers through a large set of distribution channels

Master Dealers

Independent

dealers

Consumer Customers

Internet Call Centre GDOFlagship

stores

Key Account

managers

CorporateCustomers

. . . .

Agents

BusinessCustomers

One to One

Direct channels

Indirect channels

MOBILE OPERATORS MAIN DISTRIBUTION CHANNELS

Additional channels may be used to distribute pre-paid cards (i.e. tobacco shops)

Branded stores

(Franchisee)

Main channels (Italian case)

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What do Mobile operator sell?

§ Handsets?

§ SIM cards?

§ Traffic? Mobile operator want to sell Traffic, ie, minutes of mobile voice or data

communicationsHandsets are a mean to acquire new

clients / abilitate new servicesUnderstanding this is key to make

sensible channel decisions

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Key questions to be answered for

Operator’s channel strategy

What is the optimum mix of channels and capacity utilisation (direct vs. indirect, generalist vs. specialist)?

What channels should be grown vs. milked vs. divested?

How can we improve performance and profitability of channels?

How can channel incentives be structured to fit with Operator’s strategy?

What is the role of each channel and in particular of the Operator stores?

How can we minimise channel conflict?

What product mix should be distributed through each channel (pre vs. post-paid and voice service vs. data products)?

Therefore, channel strategy aims at delivering answers to a broad set of critical questions

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Content

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ChannelStrategy

The strategic approach to sales channel strategy is based on three pillars

§ How to calculate the value of the customer?§ What are the preferred channels for valuable customers?

§ How to calculate channel profitability?§ How to identify the most profitable channels?§ How to improve channel profitability by

optimizing the compensation scheme?

§ What to take into consideration in channel mix?§ How to optimize the channel mix?

1 Understand who are the profitable customers, and how to define profitability

2 Understand what are the highest performing channels, and how to manage them at best

3Understand how to optimize the channel mix

ApproachCustomer Value

Channel PerformanceChannel Mix

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Customer value

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Customer revenue vs. margin

§ Customer value differs notably depending whether revenue or margin is used

– In terms of margin 100EUR on-net call revenue ≠ 100EUR off-net revenue

– Additionally, the cost elements (such as handsets subsidy costs) might vary

Understanding customers’ value (CV) is the first step of a solid channel strategy…once a clear CV understanding is reached

Ultra High Value

High ValueMedium Value

Low Value

% Customers % Revenue % Contributionmargin

Loss

By using Average Revenue Per User (ARPU) as a proxy for customer value the notion of unprofitable customers is disabled.

Customer value

Life time value

Disconnect

Margin

Tenure

TodayAcquisition

Acquisition cost

Handset upgrade

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Margin based calculations gives a different view from customer’s breakdown charts and provides an analytical base to select channels

Contribution margin should include only costs attributable directly to the customer, as cost allocation will distort the results.

4%

19%

33%

22%

1%-2%

-6%

6%

32%

18%

37%

14% 11%

10%

100%

100%

Customers

Con

trib

utio

n m

argi

n

10% of customer base 51% of Contribution margin

50%

50%

Example: Postpaid consumer base Pareto analysis based on Contribution margin

21% of customer base -8% of Contribution margin

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Channel performances

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Acquisition costs can strongly diverge among channels and over time, driven by the different commercial frameworks agreed

Channel 1

Channel 2

Channel 3

Channel 4

Channel 5

Channel 6

Channel 7

Contribution excl SAC and retention

205% difference in the acquisition cost of the

same customer

Example: The cost of acquiring the same customer on the same tariff with same usage across channels

Higher compensation can be justified, if the channel takes part of the churn risk and/or provides more profitable customers

Some channels prefer to get the whole compensation upfront

Time

EUR

Upfront SAC

Revenue share

Loyalty payment

for a channel varies in • The acquisition costs vary widely across channels• The perception of the value of the client for a channel varies in

function of the time horizon applied.

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Channel performance measured by Sales, SAC and ARPU (European Operator)

Traditional measures of channel performance often give conflicting channel priorities

0

4 000

8 000

12 000

16 000

200

300

400

Q1 Sales

SAC

Sale

s -i

llust

rativ

e SAC

per sales

0

20

40

60

80

Mon

thly

Rev

enue

per

Use

r

§ The Specialist channel is the best performing channel according to sales volume

§ In terms of acquisition costs, Own Stores are the cheapest way to buy a subscriber due to lowest SAC

§ However, neither of these channels make it into the top three in terms of revenue generation and ARPU

– Own stores are 3rd lowest– Internet is last

Examples of conflicting priorities

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Differences in SAV Across ChannelsWhat is SAV

Sales Acquisition Value (SAV) is a superior measure to understand channel value

§ Definition:

Lifetime value of a subscriber contract net of all the sales

acquisition and channel specific costs

0

50

100

150

200

250

300

350

Retail

Specialist

s

Independen

ts

Distrib

ution

Internet

Own Stores

Mass M

kt

SAV

per u

ser -

€

Highest sales

Most expensive SAC

SAV per user - European operator

Note: Measuring channel value is largely dependent on data availability / data comparability and level of sophistication

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Channel mix

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Combining the Customer value with Channel profitability enables to evaluate profitability across the channel mix

Channel profitability

Customer value across channels

Ultra High Value

High ValueMedium Value

Low Value

Loss

Customer value

% Customers % Revenue % Contributionmargin

EUR

Time

Electronic retailers / Multiples

Operatorstores

Low Value Medium Value High Value Ultra High Value

WebIndependent

retailersTelecom

specialists

Direct Indirect

SAV per channels and customer segments

SAV mix

Cus

tom

er s

egm

ent m

ix m

ix

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The AS IS situation is compared to the client’s strategic objectives in order to identify the key changes to implement…

AS IS Channel value vs. volume

Profit growth

Volume growth

Golden corner

Value

Client’s sales VolumeHigh

High

LowLow

Acquisition can be steered to channels that deliver both value and volume, or to ones that are strong on a strategically important segment.

Over-representedUnder-representedNo significant difference

Ow

n sh

ops

Web

Ret

aile

r 1

Ret

aile

r 2

Ret

aile

r 3

Ret

aile

r 4

Ret

aile

r 5

Prepaid Segment 1

Prepaid Segment 2

Postpaid Segment 1

PostpaidSegment 2

PostpaidSegment 3

SMESegment

AS IS versus TO BE Channel customer mix

Channel 1

Channel 2Channel 3

Channel 4

Channel 5

Channel 6

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…considering that the competitive environment will dictate the growth opportunities and the investment required within a channel

Market distribution by channel by operator

Electronic retailers / Multiples

Operatorstores

WebIndependent

retailersTelecom specialists

Direct Indirect

Operator 1 Operator 2 Operator 3

Drivers:§ Size of competitors

acquisition payments§ Customer mix required

(prepaid consumer, postpaid consumer, business)

§ Complimentarily to own physical footprint

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In order to limit costs and maximize effectiveness, financial and qualitative tools have to be managed in a coordinated way

§ Yearly agreements with channels§ Bonuses

• Volume related• Value related• Net base related• Churn related

§ Commissions• Acquisition related• Retention related• Up-sell• Cross-sell (e.g. VAS)

§ Co-advertising• An operator will pay an amount (e.g. Per new subscriber) to the channel which can be used by the channel to finance communication efforts (e.g. folder)

§ Lump sum fees§ Incentives for shop personnel

§ Point of Sales material• Promotion materials

§ Account managers• SPOC for channel with operator• Supports channels and optimize relation with operator

§ Sales promoters• Support on shop level

§ Dealer helpdesk§ Exclusiveness deals

• Sometimes with 3rd party supplier§ Be a reliable business partner

• Pay commission in time

Indirect Channel

Management

Qualitative toolsFinancial tools

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Content

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Conclusions

• Mobile operators continuously assess and develop channel strategy to proactively control distribution of sales budget, new products and services and target certain segments

• Channel strategy benefits are increased profitability and / or customer growth― New products / services must be pushed through specific channels― Gross adds per segment must be proactively steered to maximise customer value / CLV― ROI of sales budget can be significantly improved through optimisation of CTC and increased lifetime

• Large operators, i.e. Vodafone and Orange, are expanding direct sales in order to decrease cost to connect and increase control over customer relationship

• Emerging channels can dramatically change the market― Internet drastically reduces acquisition cost― Customer care costs and expectations are dramatically changed― Discount market will drastically reduce prices and commoditise consumer market