Optimizing your contract renewal offers making a case for a new way of segmentation

Budapest, December 2008

This presentation is about one of many details around retention business in postpaid mobile

Topic of this presentation

Not todays topics How to optimize retention in prepaid? How to optimize the approach to end customer at the end of the contract duration in order to balance churn against sleeper potential?

How to decide upon which postpaid customer should be offered which level of subsidy for his potential contract renewal?

Whom to address when? How to leverage direct mail versus outbound versus reactive? How to deal with partners especially retail? How to incentive organization? How to optimally score churners/sleepers in order to avoid waking up potential sleepers? How to leverage retention business with upselling? Etc.

Source: Solon

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Key hypothesis in a nutshell: Retention business in mobile industry would allow for offer discriminations

Status quo
Optimization of contract renewal offers is one of the most relevant levers in order to optimize churn as well as investments into existing customers In order to optimize offers for contract renewals, MNOs follow a segmented approach At the end of their contract duration, customers are divided into several classes Level of renewal offer vary along these classes from 75 EUR to 270 EUR Currently the decision criteria for the segmentation of customers is their ARPU/margin So, MNO is willing to invest more in valuable customers

Key hypothesis
However, in order to optimize payback, the level of offer should be based on individual willingness to accept the renewal, i.e. one should pay as much subsidy to the end customer necessary to make him accept the offer - but not more Unlike sales, the retention business would allow for consequent price discrimination Already today, market accepts different offers to end customers also different to sales offers Infrastructure to guarantee consistent offers along all channels is already established Data gathered over customer lifecycle provides possibility to score for willingness to accept renewal offers Thus decision on level of renewal offer should be based on individual minimum level to avoid churn, rather than on ARPU/margin

Source: Solon

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Analogy of price discrimination and offer discrimination

Price discrimination in sales Price discrimination is to offer customer specific prices based on individual willingness to pay in order to maximize return per customer Price discrimination in sales does not work, because Offerings can not vary for different customers due to marketing & communication Offerings are transparent among competition There is only limited to no information about the willingness to pay of specific customers

Offer discrimination in retention business Offer discrimination for contract renewals is to offer segment specific level of subsidy based on customers level of acceptance in order to optimize retention investment and reduce churn Offer discrimination in retention business works, because infrastructure to segment specific offerings is in place market is already accepting different offerings (due to limited transparency) Due to existing relationship there is information to score individual acceptance levels

Defining the renewal offer to customers based on their ARPU is like defining your sales offering based on costs

Source: Solon

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There are three hypothesis to verify EBITDA-potential of offer discrimination

1 Based on a single-customer payback logic, higher renewal offers are justified Compared to sales offers, renewal offers are rather low Payback over 24 month would allow for significantly higher offers for most customers, if thereby single churn is avoided 2 Offer elasticity is existent, but limited Willingness to accept even lowest renewal offer is widespread along all ARPU classes Increased renewal offers effect churn behavior, but of very few customers only

Scoring methods based on customer specific information can identify level of renewal offers for specific customers Currently, scoring methods are used to define churn/sleeper probabilities Scoring methods can be enhanced to define level of necessary renewal offer to avoid churn

Source: Solon

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If avoiding churn of a single customer, significant higher renewal offers are justified along almost all customer segments
EXEMPLARY End customer invest vs. ARPU / month (in EUR)
500 End customer invest 450 400 350 300 250 200 150 100 50 0 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120 ARPU per month

1
Renewal offer that allows for payback after 12 months

Sales offer

Current renewal offer

Source: Solon

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Customer behaviour along levels of renewal offers show upside potential of offer discrimination
EXEMPLARY Customer behavior vs. renewal offer (in % of potential-to-churn, renewal offer in EUR)
50%

2 Significant part of the customer base is accepting even lowest renewal offers Comprehensive increase of renewal too costly due to limited churn reduction effect

Renewals

40%

30%

20%

Sleeper Churn

10%

If individual acceptance is determined, savings on anyway-prolongators can be used to increase offerings to low number of tough nuts
50 100 150 200 250 300

0%

Renewal offer

Assumed customer behavior to be validated in comprehensive testing

Source: Solon

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Replacing retention classes by offer acceptance classes to determine the renewal offer will significantly reduce overall churn
EXEMPLARY Customer behavior by retention classes vs. customer behavior by offer acceptance classes (in % of potential-to-churn, Invest in EUR)

Churn

26%

Churn

25% 5% 8%
Sleeper

Sleeper 270 240 210 175 125 75 Invest / customer

7% 5% 24%

Renewals Invest / renewal Invest in m EUR 75 125 209 175 210 240 270 327

* Calculation based on 5 m relevant customers Source: Solon

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Scoring methods are already used today to identify churn/sleeper probabilities and can be adopted to scoring for acceptance levels
EXEMPLARY

Status quo
Scoring methods based on existing customer data are already successfully implemented to decide on prevention activities as well as upselling activities

Example: Quantification of sleeper probability (Size of sample versus sleeper probability in sample)

Baseline for successful scoring (i.e. availability of data, relationship with data mining provider, etc.) already in place Effort to setup scoring algorithm fairly limited Open issues: Realization of multidimensional scoring

100% 75% 50% 25% 0% 0% 25% 50% 75% 100%

Source: Solon

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Using the new churn management method will significantly reduce churn and increase the cumulated ARPU contribution
PRELIMINARY Today (Customer behavior in %, Invest & ARPU in m EUR) An optimized model based on perfect knowledge (Customer behavior in %, Invest & ARPU in m EUR)
907 100% 781 41% 100% 26%

Churn

Churn Sleeper

25% 327

Sleeper

29% 209

Renewals Renewals
30%

49%

Customer behaviour

Invest

ARPU / 12 months

Customer behaviour

Invest

ARPU / 12 months

Significantly reduced churn figures Comparable invest per contract renewal

Calculation based on 5 million customers Potential-to-churn Source: Solon

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Next steps: What to do on Monday morning

Business Case
Update of Business Case on the basis of company actuals (Customer behaviour along product structure) Verification/assessment of assumptions on scoring efficiency (potential with data mining partner) Updated model to calculate overall financial potential of offer discrimination (based on companies assumptions)

Testing of scoring method

Setup scoring algorithm for testing (based on historic data) Setup comprehensive testing (including control groups)

Implementation
Rollout of offer discrimination Ongoing optimization of scoring algorithm based on tight reporting and control groups

Tasks

Verified model based on test results Decision paper including rollout plan and timetable

Change management/project office

Potential Solon Support

In parallel: initiate quick-wins on offer discrimination (e.g. incentives to outbound agents/partners to lower investment budget)

Source: Solon

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Solon Management Consulting Bt.

Budapest
Andrssy t 2. +36 1 88033-00

Munich
Kardinal-Faulhaber-Strae 6 +49 89 210388-0

London
2nd Floor, Berkeley Square House Berkeley Square W1 +44 20 7887 6596

www.solon.hu

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