Finding a FORMULA for success

Branding and bundling are two of the most frequently discussed marketing concepts in telecommunications today. Some analysts believe that all a local exchange carrier has to do to be successful under the new legislation is mount a massive ad campaign offering a basket of services. Others claim that because of the tremendous amount of money that interexchange carriers have already spent on their advertising, the LECs can never catch up.

Over the next few months and years, we will see and hear a barrage of ads from different service providers touting all types of service and every bundling configuration imaginable. As we can already see from current ad campaigns, every carrier is extolling its name, reputation and products. The question is, which one will ultimately capture the consumer? Although both branding and bundling are important elements in developing a marketing strategy, neither will guarantee success in the complex telecom market. Brand recognition is just one element that influences a person's choice of telephone service provider-and consumers will only want one-stop shopping when it is valuable and convenient.

Regulatory issues such as potentially predatory pricing, local number portability, and local loop unbundling and pricing are surrounded in controversy. A legal loophole enables competitors to buy unbundled elements of the local loop from LECs, rebundle them the way they were and get a lower price. Clearly, these are important issues that will affect the relative profitability of LECs and IXCs. The marketing concepts discussed here, however, apply under various scenarios.

Awareness: part of the equation AT&T, MCI and Sprint have invested billions of dollars in their brand names and brand images, and their investments have paid off. Anyone who has ever made a phone call knows AT&T's name. And with more than 80% consumer awareness, MCI and Sprint are not far behind.

On the other hand, only a few LECs have national brand awareness-largely because of the "Bell" name-but this awareness is nothing compared with their long-distance competitors. IXCs have a clear advantage in brand recognition that will be difficult to unseat.

Is the solution for LECs to fight back with massive advertising campaigns of their own? Should they blitz the market with commercials touting their brand names and services? According to Advertising Age, the top three IXCs spent more than $1.2 billion in media advertising in 1995. AT&T alone spent $673 million, making it the top advertising spender in the nation.

Because the LECs have a smaller revenue base than the major IXCs, it would be infeasible for them to attempt to match or exceed IXC advertising expenditures. Nynex was the top media advertising LEC in 1995, spending $66 million, while Sprint, third largest IXC, spent $213 million.

For companies operating in a previously regulated monopoly market, heavy advertising is often beyond budget, and a huge media campaign could reduce future profits with little effect. One of the main benefits of advertising is brand awareness. Brand recognition is crucial in situations where decisions must be made with little information.

An example of brand awareness is political advertising. Candidates plaster their names everywhere, not necessarily even linking it to their platform. The theory behind this practice is that, in the absence of other information, we will vote for the name we are most familiar with. Although a positive impression is preferred over a neutral one, the important thing is creating an impression.

Brand image embodies the attributes associated with the brand name. It carries with it connotations of quality, service and reliability to consumers. This may come from advertising, a long-standing reputation or from personal experience. Personal experience is by far the most powerful aspect of brand image because it can lead to brand loyalty.

No shortcuts to loyalty When consumers have had a positive experience with a brand, they become brand loyal. This does not come from mere advertising. Brand loyalty means that consumers will choose one brand over others because a certain standard of quality is associated with that name. Generally, consumers only rely on brand recognition when they have little experience with the underlying products themselves.

While the LECs' brand recognition is not as high as that of the IXCs, their customers have all had firsthand experience with them. Tacitly, LECs may even have brand loyalty; if consumers have been satisfied with the current service, they will need a reason to switch. LECs need to make sure their customers are satisfied so they will have no reason to switch.

Another consideration is that local phone service is quite simplistic. To the consumer, it consists of a working phone line, prompt dial tone, a monthly bill, and possibly additional features such as caller ID, call waiting and voice mail. For the business customer, it may be prompt customer service, some additional features and pricing.

Competitors would have to offer some added value to get satisfied customers to switch. Advertising or brand awareness alone is not likely to get a consumer to switch, but the quality of the offer presented to them by a competitor might. A quality offer requires an approach entirely different from merely touting one's brand name.

Instead of spending substantial dollars on advertising that attempts to reach all consumers, LECs need to take a more focused approach and target their most profitable customers. Some are already doing this.

The Pareto Principle, also known as the 80/20 rule, broadly applies in the telephone industry. It means that 80% of one's revenue comes from 20% of one's customers. According to data from one telephone company, 60% of its revenue on both the residential and business side was generated by the top third of its customers. These top-tier customers need to be targeted.

Although they can be reached through a massive media campaign, it is not the most effective approach. Top-tier customers are more savvy, have greater needs and will not buy based on a marketing campaign that uses brand recognition alone. The key issue should not be whether customers know the company but whether the company knows its profitable customers.

Generally, the most profitable customers have the highest long-distance bills and therefore generate the highest access fees. Although LECs gather this customer information for the IXCs, they are prohibited from using this information directly for marketing purposes. They can, however, use proxies for this information such as looking at the number of lines for business customers, looking at affluent zip codes for the residential market and using their own information on intraLATA long-distance usage.

LECs need to closely examine this information and target their most potentially profitable customers. They must look at both the estimated revenues generated by these customers and the associated costs to serve and retain them. Basically, they need to understand which customers are the most valuable and then fight to keep them.

The distillation process How can a carrier retain customers? The individuals and businesses that promise to be the most profitable should be contacted directly, not through a media channel.

This may include putting surveys in top customers' phone bills with a credit on their next bill when returned. These surveys can gauge clients' satisfaction, uncover hidden needs and discover current or potential problems. They should be designed to uncover problems and complaints if any exist.

These surveys alone should not determine action steps and market segments; each respondent should also be contacted directly. Taking the time to respond to a customers' specific needs will generate loyalty, which is far more powerful than brand awareness.

LECs that have not already done so need to act quickly to develop these programs before local competition becomes a reality. In addition, they should offer special incentives to customers who inform them of a competitor's program and should try to exceed the competitor's offer if possible. It may be expensive to retain these customers now, but it will be well worth it in the future. On average, it costs a company five times more to get a new customer than to retain an existing one.

The airline industry gives us a good example of how to effectively target high-volume customers. The top two levels in frequent flyer clubs are generally reserved for the top 1% to 3% of heavy travelers who fly as far as 25,000 to 50,000 miles a year. These flyers get extra mileage, recognition, special privileges and added convenience that make them eager to remain loyal to one airline. In addition to earning mileage for free travel, they get free upgrades to first class, different check-in counters and baggage handling, and dedicated reservation lines. All these perks make them feel valued by the company, instilling tremendous loyalty.

The same principle applies to the rental car industry in which the top 0.2% of the population does 25% of the total business. It is much more effective for rental car agencies to target these customers individually, rather than through a massive ad campaign. Frequent renter programs such as National Car Rental's Emerald Club provide the same type of services and perks-and foster the same kind of loyalty-as the airline frequent flyer programs.

LECs must devise their own reward programs, targeting their lucrative and much-sought-after top-tier customers. In doing so, they increase their customers' switching costs-the tangible or intangible costs to customers of changing providers. Switching costs can be in the form of direct monetary charges, but in this case, they are perks that the customer would forgo by switching. These perks greatly enhance the value of the service and are designed to outweigh the benefits of switching carriers.

The scientific method In addition to magnifying the importance of widespread brand recognition, many people are overestimating the power of bundling. Some companies are pinning the future on bundling, believing that merely providing their services on one bill is going to entice consumers to switch providers.

Consumer focus groups show that, given a choice, consumers would rather have one provider with one bill for several services. This preference implicitly assumes that in doing so, they are getting the best deal on all the services. In the consumer's mind, bundling should save them money. If consumers realize they can put together a better array of services themselves, they will switch providers quickly and carriers will lose customer loyalty in the process. Sophisticated customers want to ensure they are getting the best deal they can.

The computer industry is a good example. Most computer purchasers buy their hardware components separately-they may have a Seagate hard drive, a Samsung monitor and a Hewlett-Packard printer. As long as all the elements work together, customers are more than willing to shop around to get the best value. Manufacturers would be happy to bundle all the components, but consumers want to ensure they are getting the best deal. When in conflict, getting the best value outweighs the convenience of one-stop shopping.

Bundling may work for some consumers but not necessarily the most coveted ones. The most profitable customers will bundle their services only if it represents a better value than subscribing to each service separately. If that is not the case, consumers will be unbundling as rapidly as they bundled, in search of a better offer.

The Telecommunications Reform Act of 1996 opened many new doors. The distinctions between LECs and IXCs are blurring as we move to a completely competitive telecom market. Competition can be daunting for some, particularly because regulation often favors new entrants. Incumbents need to adapt and adjust, but there will also be more opportunity for everyone.

Branding and bundling are not a quick formula for success. Instead, carriers must carefully craft a marketing strategy that targets key customers. To flourish in the new environment, LECs need to focus on retaining their most valuable, profitable customers instead of competing directly on brand name with IXCs. LECs already have a relationship with the customers-they simply need to engage them before the competition does. Local telcos must target their key customers and develop programs to keep these customers satisfied. The real success formula will require listening to customers, retaining focus and capitalizing on existing strengths.

Vaneetha Demski is a Consultant at Rendall & Associates, Raleigh, N.C. Her e-mail address is demski@rendalls.com.