Telcos wasting billions replacing lost prepaid subs

20 Feb 2019

Across parts of Asia Pacific prepaid phone plans are the dominant form of mobile connection – accounting for 71% (5.7 billion) of global mobile connections and 32% ($265 billion) in service revenues in 2018.

The Strategy Analytics/Juvo study “Death by a Thousand NOs: Putting the Profit Back into Prepaid” revealed a high-margin market where billions of dollars of operator opex are being wasted annually as operators acquire and re-acquire constantly churning customers, and where opportunities to drive loyalty and launch new services are being missed.

In the four APAC markets of India, Malaysia, the Philippines and Thailand, operators wasted $397 million last year replacing lost prepaid subscribers.

Prepaid market in developing Asia

Prepaid services account for 82% of connections and 50% of revenue in developing Asia-Pacific markets.

Prepaid is a strong source of profitability for developing market mobile operators in APAC, with ebitda margins falling in the 45-55% range (aside from India where Reliance Jio cut the price of service by more than half and created significant downward pressure on pricing).

The study, however, revealed that prepaid churn in 2018 ranged from 3.8% - 6.6% per month (45% to 80% per year, compared to 16% per year for postpaid). This meant that, on average, operators have to replace their entire prepaid subscriber base every two years.

In the APAC markets analyzed, high churn is having a direct impact on operator bottom lines. In 2018, 86% of subscriber acquisition cost expenditure was devoted to replacing churning subscribers and just 14% to subscription and revenue growth.

To put that into context, subscriber acquisition costs accounted for 2.9% of prepaid opex and 1.8% of prepaid service revenue. Over that period, the operators in these markets spent $397 million on replacing lost prepaid customers.

Change prepaid strategy

The prepaid business is a constant race against time, with customers at their highest risk of churning during low balance periods. Mobile operators have to change their relationships with prepaid customers in order to change the churn dynamics. To shift from a customer acquisition mindset to a new prepaid value proposition focused on consistently and constantly driving retention, loyalty and added value.

Operators must leverage every single interaction with their customers to build more personalized, deeper identity-based relationships. This means using transaction data like topping-up prepaid airtime, repaying progressive airtime credit and rewarding positive behavior along the way to build financial identities for customers.

Consistently incentivizing customers to move up the ladder unlocks access to new, higher value products and offerings like handset financing and other financial services.

All of those benefits evaporate if a user suddenly decides to grab another SIM card and leave the operator’s network. Retention of that user not only saves money, it creates a financial identity that is the foundation for new revenue streams.

Operators that reduce churn and create a more sustainable acquisition engine can maximize their gains in one of two ways:

  1. Option one calls for operators to ‘bank’ their gains of reduced churn. Increased loyalty alleviates the never ending pressure to spend quickly, become more profitable and maintain a desired growth rate. Reducing churn by 20% means an operator’s subscriber acquisition cost expenditure would fall by 18% - a 0.5% reduction of prepaid opex – and improve prepaid ebitda by 0.8%.
  2. Option two, of specific interest to ‘early movers,’ is to maintain subscriber acquisition cost expenditure and grow market share. On average, if an operator in one of the eight markets had taken this decision in September 2017, reducing churn by 20% means prepaid service revenue would have been 4.7% higher and ebitda 4.9% higher in the year to September 2018.

“The global market opportunity here is 5.7 billion customers and over $265 billion in annual revenue. However it is hampered by huge churn and missed opportunities. As an industry, we need to talk about prepaid, we need to change our approach and we need to put identity at its heart,” said Steve Polsky, founder and CEO of Juvo.

“Prepaid customers in emerging markets consistently churn because they are constantly told NO. NO you’re out of airtime. NO you don’t have enough money. We have to start with ‘YES’,” he suggested.

Polsky postulated that establishing longtime prepaid loyalty is possible and can unlock massive financial opportunities for operators. He claimed the study highlights the economic impact that saying ‘NO’ by default is having on the operator’s bottom line.

He countered that saying ‘YES’ will mean both prepaid customers and operators win.

“Until now, the industry has been in the dark on the scale of the costs associated with prepaid mobile churn, and the portion of prepaid OPEX spent on reacquiring the same customers,” said Phil Kendall, executive director of the service provider group, Strategy Analytics, and author of the report.

“What this research allows us to do is to confidently calculate the profit that can be unlocked when prepaid churn is reduced. Success in the highly volatile, promotion-fueled prepaid market will go to those operators who can improve customer loyalty, allowing them to make strategic choices between OPEX reduction, accelerated growth or investment in service differentiation.”

The study analyzes eight prepaid-dominant markets: India, Malaysia, the Philippines, Thailand, Argentina, Brazil, Mexico and South Africa.

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