Home Business News One in five newly acquired telecom customers are value-destroyers, draining 40% of profits every year

One in five newly acquired telecom customers are value-destroyers, draining 40% of profits every year

by LLB Reporter
24th May 22 9:10 am

Data solutions expert, Sagacity, has revealed that >20% of newly acquired telecom customers have a forecasted negative lifetime value and drain around 40% of company profits every year.

While the remaining > 80% of new customers turn a profit, Sagacity emphasises their value still varies widely, with the top quartile of customers bringing in over 65% of profits.

Sagacity warns this is creating a multi-million pound revenue leak and is urging telecoms companies to move away from outdated volume metrics towards more meaningful value-based models. To illustrate the benefits of a value-based approach, Sagacity has segmented a typical telecom customer base into four different categories:

  • Value-destroyers – These customers have a negative lifetime value, including elements such as high cost to serve, high cost of acquisition, and high churn rate. Often, these are the customers telecoms companies want to avoid and offering cheaper deals is rarely worth it.
  • Plodders – Barely above the value-destroyers, these customers don’t spend much, but have a lower churn rate and low cost to serve. However, there is often not much room for upselling – happy with what they have and will continue plodding on with the service.
  • Swingers – These customers sit in the middle, but with the right offers they could be persuaded into becoming money-makers. Equally, if not serviced in the right way they have a propensity to churn.
  • Money makers – These customers bring in over 65% of profits alone. Long tenures, high monthly spend, open to upgrades and bundle offerings, and with a low cost to serve, these are the kind of customers every telecoms company wants to attract and retain.

“Vanity figures, such as new volume customer acquisitions, or Average Revenue Per User (ARPU), are flawed because they make the assumption that all customers are the same – which they patently are not,” explains Harry Dougall, co-founder and CFO of Sagacity.

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“The telecoms market is saturated and there is fierce competition for customers. In response, many drop prices and offer increasingly enticing bundles and offers to net new customers. However, there is very little understanding of the impact such actions will have on profits.

It’s not always worth undercutting a competitor if the customer is going to have a high cost-to-serve, or to increase the cost of acquisition only for customers to churn in 12 – 18 months. The only way to understand these nuances and gain a true understanding of profitability is to understand customer lifetime value. By taking a value-based approach, telecoms companies can increase their number of money makers, while doing away with the value destroyers, creating a windfall worth millions.”

Adopting a value-based approach gives telecoms companies a multidimensional view of customers. It combines key metrics such as total cost to serve, cost of acquisition, tenure, contract value and churn propensity, to give a much richer insight into customer lifetime value.

By combining this data with Artificial Intelligence and Machine Learning, telecoms companies can create models that predict future lifetime value, making recommendations on next best actions. This approach helps companies to personalise and target offers that are most likely to drive profitability, helping to ensure they retain their most profitable customers while reducing the cost of retaining less profitable ones.

Sagacity named a few instances where this helped telecoms companies uncover millions in savings:

  • One client was able to achieve opex savings of £4m by eliminating a longer SIM contract that it assumed would bring in more value over a lifetime. Sagacity’s multidimensional modelling found longer contracts had higher commission rates but brought the same profits as medium term ones. So, the client eliminated longer contracts to achieve huge savings.
  • Another client delivered opex savings of £1m by reducing calls to their costly technical support team. Using the Value Based Management platform, Sagacity found that the majority of calls were coming from customers who purchased their device through a single channel, who they were able to work with to reduce complaints.

“To really compete, telecoms companies need to start making business decisions based on the value of their customers, not how many customers they have,” emphasises Dougall.

“Yet doing so is difficult. Telecoms’ infrastructures are typically very siloed, making it hard to bring all the data needed together into a single view.

“Added to this, the AI and analytics required are very specialised and many simply do not have the inhouse skills to build such a solution themselves. However, with the right expertise, it will be possible to not only understand profitability, but also make decisions about new customers, forecast demand for new services, and be an overall more resilient, proactive business.”

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