Churn Return

Mar 15, 2001 12:00 PM, Deborah Young, Revenue-Management Editor

Recently, a wireless exec was asked about handset churn, and he responded, “You mean when people don’t like our phones?”

Because of the negative connotations of the word churn, the exec assumed handset churn must involve somebody being unhappy about something. But the expression is much more benign than it sounds. It’s just one term for customers periodically migrating to new handsets, and there are many incentives to do that.

A customer might want a smaller, sexier, trendier phone to replace the one he bought last year. Another customer, an electrician who keeps a phone on his belt at all times, might want a more rugged model than that thin, delicate one he chose originally. Or, perhaps, the customer’s carrier now offers wireless Web service, and the customer needs a Web-enabled handset to gain access to the new service.

Carriers’ incentives to launch innovative upgrade programs, particularly customer loyalty, are old news. What’s new is that ruthless competition has kicked the pressure up a notch to market pro-active upgrade programs.

In 2000, Verizon Wireless’ “New Every Two” program peppered the contest for innovative upgrade plans (www.verizon.com) in much the same way that AT&T’s Digital One Rate plan (www.attws.com) earlier spiced rivalry to provide the most alluring national rate plan.

From a management perspective, Verizon’s plan has two substantial charms. With a $100 phone-upgrade credit every two years, the plan encourages customers to make a long-term commitment to the company. The program also applies the offer to plans priced at $35 and above, to accommodate a broader spectrum of the company’s customers — not just the big spenders.

Competing with such a plan requires finding a new spin. That’s why companies such as U.S. Cellular (www.uscc.com) are rethinking their phone-upgrade programs.

Although Verizon touted New Every Two as the first U.S. phone-upgrade plan, David Friedman, U.S. Cellular vice president of marketing, said that U.S. Cellular has been providing systematic handset upgrades for years.

“We have a program that we provide upgrades of handsets during the customer’s lifecycle,” Friedman said. “Unfortunately, we didn’t broadcast it as such.”

Handset upgrades fall under the heading of loyalty programs at U.S. Cellular. According to Friedman, the loyalty programs were conceived three years ago.

“We wanted to make sure that the customers who have good lifetime value are treated extremely well,” he said.

The first step in ensuring valuable customers’ satisfaction was asking what they wanted, and U.S. Cellular customers wanted handset upgrades included in the loyalty rewards.

As a result, the company instituted two loyalty programs, the PWR Club and The Loyalty Club (TLC).

PWR Club consists of the top 5% of U.S. Cellular subscribers, those who spend at least $100 a month with the company. For $25, these customers can purchase new handsets worth up to $500 once every year.

TLC subscribers average more than $75 in monthly subscription fees. U.S. Cellular has not finalized the phone-upgrade incentives for this group.

Bryan Curran, U.S. Cellular director of database and relationship marketing, said the industry has trained customers to battle for upgrades using contract renewal as a bargaining chip.

“That’s not the way you want to retain your customers,” he said, “especially the people who are using the phone two, three, four or five times as much as most customers.”

But what about subscribers who don’t have high usage?

“We’re looking at revamping both of the programs to try to reach down as far as possible into our customer base,” Curran said. The ideal program, according to Curran, would be one that rewards loyalty based on customers’ tenure rather than on monthly spending alone.

Also, U.S. Cellular has chosen a handset-based solution to meet the FCC’s E-911 requirements and now is mulling plans to upgrade its customers’ handsets.

Upgrade With a Twist

Alltel’s (www.alltel.com) phone-exchange program fits into the com-pany’s “Always Up2Date Guarantee” for digital plans with at least a $29.95 monthly rate. Similar to Verizon’s New Every Two, Alltel offers a $100 credit every two years toward the purchase of new handsets.

But Alltel has sweetened the pot by adding periodic rate-plan analysis to its guarantee, which applies to subscribers of the company’s Total Freedom and Regional Freedom plans. (See “Rate-Plan Analysis”.)

“With all of the mergers and acquisitions we did and the growth we had in 2000 with our Bell Atlantic merger, we wanted to standardize some of our upgrade stuff and offer something no one else did,” said Craig Kirkland, Alltel staff manager, wireless voice services.

Like U.S. Cellular, Alltel is grappling with how it will handle E-911 upgrades. Alltel has chosen a network-assisted, handset-based solution and expects handsets to be available in October or November.

Coming Together

When SBC and BellSouth merged, forming Cingular Wireless, the first order of business was standardizing the company’s handset-upgrade programs, according to Bob Burroughs, Cingular director of customer-based management (www.cingular.com). Company execs deemed this important because they knew upgrades would be a factor in 3G roll-outs and other new services, such as location-based services.

“What we tried to do was look for some commonality and standardize on that, so that we could have a very simple program that customers could understand from the day they signed up for service with us,” Burroughs said.

What Cingular settled on was a program by which customers can upgrade handsets every two years. The discount that customers receive coincides with whatever handset promotion is available in their markets at the time of the upgrade.

“We haven’t standardized our pricing by market,” Burroughs said. “So it’s kind of all over the board. Today, in our markets, we have phones promoted from free to $100 or $150.”

Cingular also has chosen a handset-based E-911 solution and will have to find a systematic way of moving customers from current handsets to the new ones. In addition, the company is planning for the addition of GAIT (GSM ANSI 141 Interoperability Team) phones, which allow automatic roaming between Cingular’s TDMA and GSM networks. Cingular plans to begin distributing GAIT phones by year-end.

The carrier’s plan for migrating customers to the GAIT phone entails analyzing customer-usage patterns to determine which GSM customers frequently roam into the company’s TDMA markets. Today, the com-pany’s GSM customers sometimes find themselves in areas where there is no coverage.

Cingular’s approach to upgrading customers to GAIT phones is similar to the approach used when customers were moved from analog to digital. Analog customers were segmented according to service areas.

“By pro-actively putting campaigns in, we were able to affect the number of customers that were either analog or digital,” Burroughs said. “By doing that, we had a better idea of what part of the base would be moving to digital during a given time period. Therefore, we could adjust our system accordingly.”

Emerging handset technologies, such as downloadable ring tones or voice-activated dialing, will create new incentives for customers to upgrade their handsets. Likewise, the technologies will create new opportunities for carriers to market new services and new challenges relative to the cost and complexity of providing handset upgrades.