Fire and Brimstone can't stop the fury of churn: Strong customer relations should be a priority for PCS players

It's preachin' time at the wireless pulpit. Today's sermon is on the evils of customer churn and its treacherous ways of bleeding the financial lifeblood out of a company.

Cellular carriers have heard this sermon before, yet how much they understand it is still questionable. Now, carriers of personal communication services are at a pivotal age to heed these warnings. They are old enough to be hotly competitive with their wireless brethren and young enough to avoid the pitfalls of churn. But will these upstarts learn from the missteps of others, or are they destined to repeat the sins of their cellular elders?

Early days of churn Churn is a phenomenon commonly attributed to cellular carriers, although the practice of switching to alternative providers initially was legitimized during the post-divestiture long-distance battles. Regardless of its lineage, churn is a painful albatross that costs cellular carriers in North America and Europe more than $4 billion each year, according to a recent study by Andersen Consulting (Figure 1).

The tremendous success of cellular helped fuel customer defection because it brought widespread competition into the market. That competition spurred attractive incentives for price-conscious subscribers to switch to other carriers. And with few barriers to block defection, churn proliferated and its financial effect snowballed.

"Historically, churn has always been there. But when you're growing at 50% and you have a duopoly, you don't really have to worry about it," says Richard Siber, worldwide managing director of wireless consulting practice for Andersen Consulting. "When you have new entrants coming into the market, and the Wall Street community is keeping a keen eye on many of the incumbents and start-ups, then there's heightened awareness of financials."

Companies become much more sensitive to areas that can have a positive effect on their bottom line. Churn clearly is one such area.

"If you think about a 1% or 1.5 % churn problem on the 10 million subscriber base in 1992, it's no big deal," Siber adds. "But today, when you get to 50 million subscribers and churn grows to an average of 2.5% to 3% a month, that's a big deal. And when you add the dollar amount to it, then it becomes striking."

One example of a cellular carrier with 1.5 million subscribers. The company grows at an annual rate of 30% and struggles with 20% churn. By decreasing that churn just 1%, the company can increase its valuation by approximately $150 million, according to the Andersen study (Figure 2). If churn is reduced by 5%, the average wireless network operator could increase shareholder value by 15% to 20%-a huge financial motivation to change the ways of customer care.

It may be a popular assumption that churn stems completely from the relationship between the subscriber and the carrier. In reality, though, much of the fault lies hidden in the layers of management or mismanagement between carriers and their agents.

As the price of a cellular phone fell from around $3500 in 1984 to virtually zero today, agents lost much of their lucrative equipment incentives. The margins on those pricey phones ranged from $500 to $1000. The primary means to make up that difference was by increasing the number of subscribers, or loading the system, which became easier as cellular became more popular.

In this numbers game, agents sign up a subscriber who probably had insufficient credit in earlier years. After a few months of not paying, the subscriber leaves the system in a carrier-initiated churn. By then, of course, the agent has already received the commission for signing up the subscriber. Credible subscribers also are unwittingly snared into this fraudulent trap.

In addition, the agent might lure them into another pricing plan with the same carrier by baiting them with a newer phone. The subscriber would just have to give another name, under which the "new" service would be listed. Again, the agent nets the commission by fooling the system and adds another number to the churn total.

"It happens every day, and it happens to the tune of hundreds of millions of dollars by the time it's all said and done," Siber says. "There are some cases where the carriers are switching the rate plans and they don't have the internal systems sophisticated enough to recognize that they're signing up the same customer."

Customer migration is not always the result of fraudulent practices. It may simply be due to an upgrade from analog to digital. But the result is similar, with mounting acquisition costs that average $337 per subscriber.

Internal switches like this are particularly prevalent in Europe, where 40% of churn is caused by moving from one plan to another with the same carrier. Only 5% of customer migration is attributed to switching to a new provider.

Lessons learned The crusade to stop churn may be easier preached than practiced. PCS hit the major markets with a pricing frenzy that stunned other wireless providers while it delighted potential subscribers.

In 29 U.S. markets that offer at least two forms of wireless service (cellular, PCS or enhanced specialized mobile radio), prices fell between 31% and 43% in a nine-month period ending in September. Paul Kagan Associates reported the steep drop in its recent study of the 100 largest metropolitan statistical areas in the U.S.

While wireless competition is at a fevered pitch, PCS carriers have the additional concerns of paying for their recent system buildouts and working toward profitability. The result is a fierce battle to gain and retain elusive customers.

"PCS carriers are going to be encouraged to take as many customers as possible," Siber says. "Unfortunately, that means getting into the same churn trap. Now, if they have the ability to bundle services with long-distance and local, and take their time loading the system with a customer that [they] want, they are so much farther ahead than just getting any customer."

Historically, 30% of all customers are turned down because they are credit-challenged. While that figure may start to drop with carrier uptake of quick-and-easy prepaid wireless strategies, the benefits of gradually building a strong customer relationship are clear. "When you cross-market using some other products, such as long-distance or local, you're getting a customer you want because you're using different types of filters," says Siber.

Timing is another critical factor in sustaining a long-lasting relationship with subscribers. Andersen Consulting found that more than 30% of customers churn within the first six months of service. Knowing when to approach customers is just as important as knowing how to approach them.

"By using predictive modeling, you can start to project when that customer is likely to churn. You can [provide an incentive] or reward them at that point before they're likely to churn and keep them on the system," explains Siber. "You can perform data mining techniques when you sign the customer up. What that ultimately means is getting to know the customer as a person and understanding their habits."

Siber suggests lowering the cost of customer acquisition and inaugurating programs that reward loyal customers-similar to the airline industry's frequent flyer programs. "Coverage is king, but customer care is critical," he says. "We need to start to look at other industries and how they provide care."

A world without churn Today's market may be thick with wireless options, but don't expect that to always be the case. Inevitably, competition will weed out the weaker in favor of the stronger in terms of their ability to deliver premium service at the lowest possible price.

"You can't be everything to everyone," says Siber. "You want to cut costs and grow revenue. You want to handpick the best customers. You want to manage your churn. It's no easy task.

"All of this is part of enterprise transformation, where you have lots of concurrent initiatives. You're re-engineering your company and making it more streamlined and efficient. And those that don't keep pace, we absolutely expect to go away."

Although these are the days of market explosion for wireless, Siber expects a market implosion to follow in which lower-tier carriers are weeded out of the competitive mix. Battlefields also will gradually shift to the ground between wireline and wireless forces within the next several years. "We're really reaching a point where this is starting to look like a commodity service that's going to displace wireline," says Siber.

Wireline is roughly 95% to 97% of total phone usage minutes, and wireless represents 3% to 5%. Yet during the next five to seven years, wireless is anticipated to grow to between 25% and 40%.

"To reach that, you need to have the capacity to provide that capability," Siber says. "But you also have to be in business to provide the service."