Insuring Your Bottom Line

"We don't make money if customers don't have our equipment in their hands, using airtime," said Nathan Otiker, Cellular One project manager, Kansas City.

Keeping phones in customers' hands and keeping customers happy has become an increasingly difficult challenge in today's wireless market that goes straight to the bottom line. Industry averages show that providers spend $400 to $700 to win a customer and an average of $225 to save a disgruntled one.

At the same time, the average customer bill declined to just $52 in 1996. Complicating the problem, most markets now have four to six competitors waging war in the wireless marketplace. As providers scramble to keep their existing customers and grow their businesses, some are turning to insurance. It's an option that's not new but certainly has improved.

INSURANCE'S EVOLUTION When cellular phones were first introduced, business was simple. Customers who wanted service paid for the equipment, at a cost of several hundred dollars.

"This all changed about six years ago," said Kevin Hagan, vice president and wireless insurance team leader at Willis Corroon. "With the advent of better technology and the daily battle for market share, the phone no longer had to be purchased. Part of the promotion was that the customer got the phone for one dollar."

Suddenly the perceived value of equipment was eliminated. Customers didn't value phones, and providers didn't offer insurance because customers wouldn't insure a so-called "1-dollar phone." It turned into a provider's nightmare.

"A customer with no insurance would call and ask how to replace a lost phone," Hagan said. "The provider would answer, 'You can purchase a new one at our retail location at a cost of $100 to $150.' The customer would get mad and want another phone for a dollar, like the first one."

After hearing threats to cancel service, the provider would often take it on the chin, either by subsidizing all or a portion of a new phone or by devising a special rate plan to save the customer.

Then technology and the evolving market sent equipment prices higher with the onset of digital and PCS equipment. That development sparked new interest in equipment insurance. Today, 85% of wireless service providers offer some type of insurance program.

REDUCING CHURN With increased competition and slower growth, providers are focusing more on building customer loyalty. Savvy providers are seeing insurance as a valuable tool in that effort.

"Providers are beginning to see that insurance is a tool to reduce churn and manage retention," Hagan said. "It's also a loyalty product because it helps secure the existing customer base, eliminating a major reason for the customer to leave or even shop around. It can actually eliminate three areas of churn for subscribers who are insured: lost, stolen and damaged equipment. The net present value of this customer segment alone easily can be in the six figures."

Not long ago, customers with lost, stolen or damaged phones were out of service for an extended period of time while claims were processed. But a well-structured insurance program, Hagan noted, can have a customer (who pays the deductible) back in service in an hour.

"For example, all of Willis Corroon's wireless insurance programs to date have been placed with Royal Insurance," Hagan said. "They have written a copyrighted software package called Hands Free, exclusive to our program, that works that quickly. If I lost my phone and called their 800 number, I'd be able to file my claim in 15 minutes or less. The claim would be faxed to the local service center immediately where I could go and pick up my new phone."

Willis Corroon offers a direct fulfillment vehicle. This is attractive to resellers and carriers that don't carry a wealth of inventory or that want to reduce foot traffic in their stores, Hagan explained.

Many providers say they don't worry about churn; they simply absorb the cost of the replacement phone in order to retain the customer.

"Each company has a customer-retention budget," Hagan said. "But the goal is not to spend all of those dollars. For them, this program isn't churn-reducing; it's retention spending reducing. It allows more money to be allocated and used for acquisitions, and lets the retention budget focus more on high-end users and less on infrequent, emergency users."

Not only can a provider save money from churn reduction and reduced retention-spending, there also is an added revenue-generation possibility.

"Unlike many of the early insurance programs, you can now generate revenue on the back end through profit-sharing and on a monthly basis through management fees, depending on what your state regulations are," Hagan said. "It's a product that can be a revenue generator."

Cellular One's Otiker takes it a step further. "This insurance program is one of the few added features that make money," he noted.

FEATURES TO SEEK Otiker said a good insurance program offers "technology that is current, electronic data-transfer capability, vendor access to the billing system and a broker who understands your business."

According to Hagan, insurance programs should have:

*Same-day replacement for customers

*The option of retail and direct fulfillment

*Fraud-deterrent measures

*Revenue opportunities with profit-sharing or management fees

*A call center with licensed agents that is willing to mirror your call-center standards

*A fair premium and deductible

*Flexibility so your underwriter and broker work together to bring you marketing ideas.

There also are certain questions you should ask, Hagan said. Ask to tour the call center, and find out if the agents are licensed. Also, ask what the underwriter or broker's best- and worst-performing programs have been, the experience of the account team and how often the team will come to your office. Does it provide training, or do you have to do it?

Then, you may want to re-think your approach to what a wireless insurance program can do for you as a provider.

"I firmly believe that a wireless insurance program should reduce churn and retention spending, too," he said. "If you use insurance that way, it could be a big win for you."