Churn Alert

Customer-loyalty programs may help stem churn’s rising tide.

In 2000, U.S. wireless carriers lost a record number of customers to churn. Although wireless subscription rates still are rising, so are churn rates — by 4% annually, according to Cahners In-Stat (www.instat.com) research. And that's not all. The 2000 In-Stat study, “Stemming the Rising Tide of Wireless Churn,” found that the churn rate for U.S. wireless providers actually exceeded the new-subscriber add rate by 150% last year, for the second consecutive year. In other words, analysts said wireless carriers added 20 million new subscribers in 2000, but lost about 30 million to churn.

Mickey Freeman, Alltel (www.alltel.com) director, relationship marketing, said most carriers, including Alltel, are not in a negative-subscriber situation.

“Our experience has been that we do have periods when churn has exceeded our adds, but it certainly doesn't all the time,” Freeman said. “Churn spikes; it's somewhat seasonal. We all have churn battles, but I don't see a time when churn growth is exceeding add growth.”

But today's environment may be encouraging more battles.

“We have an awful lot of competition, some very strong, large competitors,” he said. “There's a group of six large competitors that account for about 80% of the wireless subscribers. They can themselves create a great deal of competition, and then certainly those that are outside of those six are fighting very hard to keep their customers. All that puts us into a very dynamic marketplace.”

David Friedman, U.S. Cellular vice president of marketing (www.uscc.com), said wireless is probably the most heavily advertised industry today, and all of those TV, radio and print ads scream “deal” to consumers, offering free phones, minutes, weekends and wireless Web.

“But customers don't know if they're getting the best deal,” he said. “And if carriers don't get in touch with customers on a regular basis and reinforce the best deal, or the customer has a triggering event — bad service, dropped calls, or the carrier won't give them an upgrade — they will look elsewhere.”

According to Friedman, price and perceived value relative to price probably represent more than 50% of the reasons why people churn.

“Consumers are very well-versed today, there's a lot of information, (and they know) that they can get a deal wherever they turn,” he said.

This creates an even bigger problem because on average, U.S. companies spend an average of $250 on marketing and advertising to attract one customer. Most need to retain these new customers for up to four years just to break even, according to McKinsey & Co. (www.mckinsey.com).

Carriers clearly aren't breaking even today. So, with the U.S. wireless subscriber base expected to grow at an average annual rate of 17 million subscribers over the next five years, you need to focus more on customer loyalty and retention programs if you want to survive.

Loyalty Vs. Retention

Ken Hyers, Cahner's In-Stat wireless strategies analyst, said it's debatable whether carriers are sufficiently aware of the problem presented by churn because it's not high on the priority list of upper-level management.

“For most, the priority is to maintain high customer-acquisition rates, often at the expense of customer retention, even when the cost to keep a current customer is a fraction of that to acquire a new one,” he said in the report.

But Friedman said carriers do realize the problem.

“In the early days, the industry really had a steep increase in subscribers. When you're going after as many customers as you can get, you don't pay attention to the leakages,” he explained. “But over the past couple of years with more competition and subscribers, you see an increase in the number of subscribers, but it's increasing at a decreasing rate.”

This means you have to pay a lot more attention to customers and generate many more loyalty programs or advantage programs.

“There's a group of customers out there who are maturing in their use of wireless,” Freeman said. “They need to be moved to better rate plans or better equipment or understand more about how wireless can help them.”

Alltel focuses on retention and loyalty efforts, but there's a big difference between the two, Freeman said.

“To use a medical analogy, the retention effort would be going to a doctor or emergency room when you're sick. A loyalty effort would be getting a flu shot to keep you from getting sick,” he explained. “If you go to the doctor's office or emergency room with the flu, the doctor can only treat the symptoms. That's what we do when we're working on retention. At that point, we've already determined there's a high likelihood that certain customers are going to churn.”

Or, in some cases, he said, subscribers call and tell customer service they're leaving. Then Alltel applies retention efforts, such as direct mailings, to encourage them to stay. A better approach, however, is focusing on loyalty efforts, Freeman said. Like preventive flu shoots, loyalty programs try to pro-actively build that relationship over a period of time. Then, if customers have concerns or account problems, they can call to discuss it, or if a carrier has a new or better plan, it can make the customer aware of it.

“It's a 2-way relationship we're trying to build, and the loyalty effort is by far the cheaper of the two, and more effective; it just has to be started earlier,” he said.

Increasing Loyalty, Reducing Churn

Carriers of all sizes are beginning to realize just how important customer-loyalty strategies are, and they are employing new or revised programs.

For example, EarthVision Cellular (www.earthvisioncellular.com), a prepaid reseller that has enrolled new wireless customers via online stores exclusively since 1995, began a loyalty program last summer. William Evans, EarthVision Cellular CEO, said after subscribers become members, they earn bonus points for being customers and for referring others to EarthVision's site (1 point) or newsletter (2 points). In addition, subscribers receive 2 points for each purchase under $40 and 4 points for purchases over $40. With 100 points, customers receive a $20 store credit, for example, or a $100 credit with 500 points. Subscribers are notified of their total points each month via e-mail, and they can cash them in for new phones or accessories at any time.

“You have to give people incentive to want to come back,” he said. “The content we carry on the Web site brings a lot of people back, but it doesn't necessarily give them incentive to purchase. The loyalty program gives them that incentive.”

According to Evans, carriers “absolutely” need more incentives for customers to stick with them. “Our program is successful in that it does reduce the churn,” he said. “Does it entice everyone to join our service? No, it's not everyone's incentive. There are different incentives for different demographics.”

Rate plans can be loyalty incentives themselves if they're targeted toward specific consumer segments and their needs, Friedman said. For example, U.S. Cellular's Farm Flex plan offers special rates to the farming community, which often has a higher need for wireless in the planting season than in the off season.

Before implementing loyalty programs, Freeman said, carriers must first consider the two major reasons people churn.

“They see us talk about price, price, price, and they have this overwhelming concern that they may be on a rate plan that's not competitive,” he said. “The other big issue is that not only the carriers talk about new-phone availability, but the manufacturers also advertise their phones. It's an ever-changing technology atmosphere. Customers have the second worry that they may have a phone that's old and outdated, and there's something better out there.”

To combat those concerns, Alltel created the Always Up-To-Date Guarantee, which consists of two parts: a rate-plan analysis and a $100 equipment-upgrade certificate. The rate-plan analysis is completed and mailed to customers every six months, advising them whether their current plan is right for their lifestyle and recommending a better plan if it doesn't seem to be. Subscribers who stay with Alltel for two years receive a $100 certificate for a new handset or accessories. The guarantee is available to customers on rate plans beginning at $29.95.

“We did not hold it out for the top-tier customers; instead we applied it to a rate-plan family,” Freeman said. “We applied it to all levels of plans because there's churn in all of those, and the churn was stemming from the same two concerns all customers have.”

AT&T Wireless (www.attws.com) recently introduced a comprehensive customer-service and loyalty program to attract and retain subscribers through calling-plan flexibility, equipment upgrades and enhanced customer care. Through feedback, the carrier found that subscribers wanted a multidimensional approach to customer loyalty, including key components such as the ability to change calling plans without fees, discounts for new technology and more customer-care accessibility.

The AT&T Wireless Customer Advantage program, open to all subscribers except prepaid, also includes free rate-plan analyses to help subscribers find a calling plan to fit their needs. After 12 months, qualifying customers renewing annual service plans can upgrade to a new phone at a discounted rate based on length of service and level of calling plan.

“We'll reward customers with the technology of the future because they've been with us in the past,” said Bob Johnson, AT&T Wireless executive vice president, in a press release.

Friedman said U.S. Cellular also offers rate-plan analyses and may automate analyses so subscribers can complete them online in the future. It also is revising loyalty programs that were price-point oriented.

“We've traditionally looked at high-value customers as those above a certain price-point plan, but that may not be the case going forward,” he said. “A customer that has been with us for five years, consistently pays bills on time, doesn't call customer service all the time, uses our geography and is a $25 customer is probably as good a customer as one who gives us $75-to-$100 a month, calls us every day with a problem, always demands rebates and roams all over the country.”

U.S. Cellular won't offer 1-size-fits-all loyalty incentives to subscribers.

“We use judgment, depending on the customer,” he said. “There's a certain group that wants upgrades on phones. Others don't care about phone upgrades, but they want a replacement battery, so we give them that.”

As many people subscribe to wireless service to keep up with their own relationships, many carriers said family plans also help engender loyalty.

“Family plans have been very effective to create customer loyalty,” Freeman said.

Alltel's rates vary by market, but its family plan generally offers a pool of minutes to be shared by multiple family members. The plan is not new, but the realization that it helps increase loyalty is. Currently, Alltel is increasing efforts to promote its family plan.

It's not the only one. Family-calling plans will explode in popularity in the next five years, according to The Strategis Group (www.strategisgroup.com), reaching 18 million subscribers by 2004.

Verizon Wireless' Family SharePlan (www.verizonwireless.com) provides up to four lines of service for one family. The program includes free long distance and unlimited calls between family members, as well as a bundle of shared minutes to use each month. AT&T Wireless' Family Plan enables up to five family members to have their own wireless numbers when they sign up for one of three calling plans that includes unlimited wireless-to-wireless calls and free long distance for members within the family calling area.

Friedman isn't sure that U.S. Cellular's Share Talk family plan or any other ensures customer loyalty in and of itself. But he said such programs help carriers build a relationship with customers, and that's essential to reducing churn.

“We can say, ‘I know you just got married and want to keep in touch with your husband; we have a program that may work for you — Share Talk, which allows him to share the bundled minutes at a reduced rate for monthly access on that second phone,’” he said.

True-Blue Subscribers?

Are today's wireless consumers demanding more for their loyalty? You bet, Freeman said.

“We in the wireless industry have taught them to demand more by concentrating on pricing, free phones and by not addressing the primary issues that the consumers have: peace of mind and simplicity in the service,” he said. “We certainly always want to have price as a competitive tool, but sometimes we tend to approach it in a way that it's the only tool we have.”

If wireless carriers offer incentives that other industries rely on to create loyalty, such as frequent-talker points or cross-promotion coupons for minutes of usage, it will only create an environment of deal-making and switching, Friedman said.

“We've asked that question in our research, and there is a group of customers that would like it. But other customers say ‘we don't really want you to buy our loyalty,’ because they understand what has happened in the long-distance wars,” he said. “Buying loyalty means whoever has the deepest pockets wins, and it's not good for carriers. What customers want is fair treatment and a great product that fits their needs.”

But Friedman added that most consumers like surprises such as discounts on accessories, bonus minutes upon service renewal or free minutes on holidays.

“If we do our job in listening to customers and give them what they want, (including) a high-quality product in a trustworthy manner, we will have fewer problems making sure we have loyal customers,” he said. “They demand to be satisfied; they have a right to be satisfied. It's an opportunity for carriers to build our franchise through customers.”

But other carriers think it will be a while before churn rates decrease.

“Individual carriers can make a difference in their churn, but it's going to take working in the emergency room to deal with the current situation,” Freeman said. We must “invest in flu shots or loyalty programs to keep customers from feeling that they do not have a relationship with us.”