Recall. 2011, N17 Transition to digital in high-growth markets

Telecommunications, Media, and Technology

RECALL No17

Transition to digital in high-growth markets

RECALL No17

Transition to digital in high-growth markets

RECALL No 17 – Transition to digital in high-growth markets

5

Transition to digital Welcome to the 17th issue of RECALL, a publication for leaders in the telecommunications, media, and technology (TMT) sectors. In it, we pull together insights gathered from our extensive studies, market observations, and conversations with industry leaders on the transition to digital with a particular focus on high-growth markets. We begin by looking at the physical infrastructure that is making digital possible in the Asia-Pacific region and discussing exactly how the return stacks up to the major investment. We then take a deep dive into mobile data in particular and the risk of price erosion going hand in hand with a steep increase in mobile data traffic in emerging markets. Moving from mobile to fixed, our third article explores the investments made in fiber and the urgency with which operators must develop commercialization strategies in order to reap the rewards of their investments. The face of emerging markets is changing. Operators in this space are now employing new and innovative ways to sustain profitability. Specifically, as penetration is now quite high in many of these markets, our next article describes how operators in high-growth markets are turning to pricing as a strategy. Following this, we discuss yet another post-acquisition strategy that is now also important in high-growth markets – customer lifecycle management techniques more in line with the challenges and opportunities of the digital age. We continue with an article on customer satisfaction as another customer-centric approach to increasing wallet share and decreasing churn.

While customer acquisition is no longer the “name of the game” in many emerging markets, as in developed markets, it is still an integral part of operations. In our seventh article, we take a nuanced approach to boosting acquisition in increasingly saturated markets by focusing more granularly on customer segments. One subset of consumer activity is B2B, and our next article touches on current ICT in B2B trends and the unique advantages operators in high-growth markets have. In a brief departure from revenue to expenses, we then focus on the widely varying capital outlays from operator to operator and chart the course for optimizing these expenses. In the final article, we go back to revenue and discuss call centers as profit machines. As is our tradition with RECALL, the final word goes to a leader whose finger is on the pulse of the industry’s most current trends. Sanjay Kapoor, CEO of Bharti Airtel Ltd., India and South Asia, shares his experiences of the transition to digital and offers his perspective on its implications for operators in emerging markets. We hope that this issue of RECALL sheds light on the industry in ways that spark ideas or launch discussions about the challenges and opportunities your organization may be facing. As always, we welcome your feedback on these articles and any ideas on topics you would like to see covered in the future. To download a PDF copy of the articles or the entire brochure, please register at http://telecoms.mckinsey.com.

Jürgen Meffert Leader of McKinsey’s EMEA Telecommunications, Media, and Technology Practice

Daniel Boniecki Leader of McKinsey’s Eastern European Telecommunications, Media, and Technol­ ogy Practice

Paulo Fernandes Leader of McKinsey’s Latin American ­Tele­commu­ni­cations, Media, and Technology Practice

André Levisse Leader of McKinsey’s Southeast Asian Telecommunications, Media, and Technology Practice and Editor of this RECALL issue

RECALL No 17 – Transition to digital in high-growth markets

7

Contents 01

Big pipe, little payoff? The mobile data paradox

9

02 0.1 cent per MB: Ensuring future data profitability in emerging markets

15

03

FTTC – fiber to the cash: Making fiber investments pay off

21

04

Minding the gap: Customer perception and pricing reality in prepaid

27

05

CLM 2.0: Digital innovations in customer lifecycle management

33

06

Satisfaction guaranteed: Customer experience in mobile emerging markets

37

07

New customer overdrive: Turbocharging the acquisition engine

43

08 B2B 2015: The future role of telcos in ICT markets

51

09

Capex 2.0: Benchmarking network performance

59

10

For twice the value press “1”: Getting more from your call center operations

65

11

Digitally united: An interview with Sanjay Kapoor

71

Appendix 75

RECALL No 17 – Transition to digital in high-growth markets Big pipe, little payoff? The mobile data paradox

9

01 Big pipe, little payoff? The mobile data paradox

Asia-Pacific could soon see a data deluge. But without some key changes, operators could find that their big pipelines only deliver tiny profits. Telecoms operators have been working hard to push mobile data usage globally. In Asia-Pacific, this has held true not only in developed markets – such as Korea and Japan – but also in more emerging markets like China and India. Although there have been substantial investments in the deployment of mobile data networks, the question still remains: will it all be worthwhile?

Growing data puts pressure on ­economics Mobile data demand in Asia-Pacific is reaching a tipping point that will likely generate exploding data traffic. Unfortunately, the economics behind the massive network deployment investment have become uncertain. The rise in flat-rate pricing in some markets versus aggressive tiered pricing in others coupled with an inability to monetize mobile applications could turn the anticipated broadband boom into a profitability bust. McKinsey analysis shows that as little as 400 MB of average monthly data consumption per single user could be the break-even point for operator economics – for network costs alone – under current flat data pricing structures (Exhibit 1). The uptake of smartphones in the region will definitely put pressure on this consumption threshold and increase the threat of unprofitability. These economics will obviously change as network technologies become cheaper and telcos find other levers to improve their margins per user.

When investigating the options available to mobile operators in emerging markets, it is helpful to examine the entry strategies of different industry players. Such analysis can help operators understand which strategies pose threats and where these threats occur along the value chain. Players can then study the competitive battles and trends that will likely shape the Asia-Pacific mobile data market going forward – focusing specifically on emerging markets. Finally, it also makes sense to look at the internal choices operators need to make regarding the future roles they will assume and how they design the offerings they position on their markets.

Pursuing different data value chain strategies While go-to-market approaches do vary by region, McKinsey’s analysis of the mobile data value chain in emerging markets reveals that one aspect seems relatively constant: mobile network operators (MNOs) and OEMs have a strong starting position. These particular players could still emerge as value chain leaders if they pursue the right strategies. MNOs can readily control key pieces of the value chain because of the fragmented nature of Internet and value-added service (VAS) ecosystems in most emerging markets coupled with their unique billing presence (i.e., they typically “own” the subscriber). The best case is that they can control the handset, the network, content, and distribution. MNOs in the Philippines, for example, have attempted to exert greater control over the value chain by buying up local content providers and aggregators and by ­commissioning global vendors to develop back-end platforms for them. Operators in China have been actively

10

01

Flat-rate pricing impacts subscriber lifetime value Flat-rate pricing impacts subscriber lifetime value Lifetime value for smartphone consumers1 USD

India Philippines

3,000

China

2,000 1,000 0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200 2,400

2,600

2,800

3,000

Usage MB

-1,000 -2,000 -3,000 -4,000 -5,000

Low usage  Avg. usage: 200 MB per month  Use mobile data for – E-mail – Web browsing

Medium usage  Avg. usage: 800 MB per month  Use mobile data for – E-mail – Web browsing – Some video

Heavy usage  Avg. usage: 3,000 MB per month  Use mobile data for – E-mail – Web browsing – Entertainment (music, video, games)

1 Assumption: HSPA costs of 5 US cents per MB SOURCE: McKinsey

involved in value chain consolidation with large stakes in content aggregation, end device operating system customization to safeguard the user experience and service boundaries, and the deployment of core services (e.g., social networking, instant messaging). Device OEMs (such as Nokia) and possibly chipset players (such as MediaTek) could on the other hand also have a significant impact on the market, providing integrated offerings that bypass the MNO in everything but network access. Having said that, their movements have been quite tentative to date, and their ability to execute remains in question.

The mobile data “battles” in emerging markets McKinsey’s interviews and research into Asia-Pacific’s mobile data industry in emerging markets revealed a number of insights. First, several markets remain significantly behind levels in developed economies in terms of infrastructure readiness. Stated simply, the networks aren’t “ready.” Many have little 3G coverage – some, such as India, have only just started to deploy 3G. Still others have insufficient Wi-Fi networks. Beyond this, certain markets remain dominated by basic and low-end handsets. The high risk associated with providing credit in many markets prevents MNOs from push-

2010 ANALYSIS

ing harder to sign up postpaid subscribers or to offer handset subsidies linked to prepaid. Interviewees saw this situation as something that will be resolved over the coming years, not as an enduring structural issue. On the plus side, markets where operators have already launched HSPA (high-speed packet access) networks typically experience ­dramatic growth in data penetration and consumption. Malaysia, for instance, saw its average data consumption per user double in one year, even as operators were attracting increasing numbers of users. These markets also e­ xperience strong sales growth in high-end feature phones and smartphones along with PCs and laptops. China is expected, for example, to become the world’s largest smartphone market by sales volume in one to two years. Given this profile, McKinsey has identified five key mobile broadband battles under way in Asia-Pacific emerging markets. User interface – unified versus customizable experience. While advanced and individualized user experiences are taking off, there may still be room for a simple user experience strategy in mass-market offerings. Such a split could cause fragmentation in underlying platforms and application ecosystems, thus increas-

RECALL No 17 – Transition to digital in high-growth markets Big pipe, little payoff? The mobile data paradox

ing costs. Yet it might also lead to a further role for both operators and OEMs in creating more bound user experiences that have a wider appeal to consumers. Billing – operator billing versus other solutions. MNOs currently dominate customer billing but face increased pressure from leading vendors (e.g., Nokia Money) along with local retailers. The result: operators risk being disintermediated at one of their core assets. This is a fundamental battle where the operators currently have the upper hand. Still, over-the-top players have found innovative mechanisms to circumvent this in several emerging markets, e.g., MXit in South Africa. Device – branded versus unbranded. Strong brands such as Nokia have traditionally dominated the handset markets. However, “white boxing” by operators has emerged with strength. Consequently, players farther back in the value chain – such as chipset makers or original design manufacturers – could gain additional power. Furthermore, this challenges the effective value of large awareness-building marketing efforts. This device analysis does not include a “doomsday” scenario, where VoIP and other services would effectively lead to a stronger erosion of the core operator revenues, skewing marketing dollars to above-the-line campaigns. Data pricing – prepaid versus bundles. Markets are placing increased importance on bundles – either timebased or linked to specific categories – for data pricing versus mostly event-based prepaid monetization. This development adds new layers of complexity in data pricing, both from a technical and business perspective, but remains the key to cracking data usage. Players in China have created tiered data bundles that are offered to prepaid users and paid in advance on a monthly basis. They have also linked some handset subsidization to actual service usage, whereby users pay the full price of the device up front but get free data, voice minutes, and/or texts for each month they use the service. Value-added services – voice versus data. In many emerging markets, a large portion of VAS activity is still driven by voice- and IVR-enabled services such as ring-back tones and radio, among many others. Although the pricing for data consumption is decreasing and some of the services can be fully replaced by data, the innovation in voice VAS (such as ad-sponsored ringtones) and the lower literacy rates in markets like India, Pakistan, and Bangladesh may prevent full uptake of data consumption in some VAS categories.

11

As a result, voice VAS still cannot be neglected in future service ­deployments. This may also become a lever to fully utilize both circuit-switched and packet-switched networks instead of putting the entire burden on the packet-switched side.

Choosing roles and designing offers To some degree, mobile data’s external challenges are relevant to all that operate in this sphere. There is, however, no one-size-fits-all solution. Mobile data players in Asia-Pacific’s emerging markets need to clearly establish the roles they will assume and choose the market offerings that make the most financial sense for them. MNOs in particular should be mindful of five internal choice levers: building cost-advantaged infrastructures, choosing the right pricing strategy, managing the content ecosystem, determining the type of involvement in applications, and expanding into adjacent areas. Operators have a number of plays available to them that are linked to the roles and offerings they choose to pursue, any of which could rise in importance depending on market and business realities (see table). When discussing these levers with emerging market players, three stood out as the ones most commonly being explored: Pricing. Operators need to evaluate the current product portfolio along with the customer mix to carry out the right pricing strategy and to enable the uptake of ­content and services to further drive mobile data revenue streams. Bundling a hit content service like music with data traffic, for example, has proven successful both in developed and emerging Asian markets. In some cases, it may make sense to create price plans around specific services that would otherwise not be monetized, e.g., Facebook access. Although there is wide commercial appeal in several of these bundling options, some of the interviewees in emerging markets mentioned that various technology limitations still exist within their companies – e.g., no deep packet inspection, no IMS (IP ­multimedia subsystem) – that will hinder the widespread short-term adoption of more “intelligent” bundling. Content ecosystem. Leveraging the subscriber relationship, players are thinking of moves at three levels to tap into the content value chain. Aggregation play pushes the operator into a role of extending service provision-

12

MNO roles and offerings in emerging markets hinge on internal choices in five areas Decision areas

Strategic options

Underlying beliefs

Cost

Build a cost-advantaged structure

Gold-plated data access provisioning is not a must

Pricing

  Provide fair use flat rates and usage-based prices

 Competition will be rational in its responses

  Monetize services

  It is possible to charge for premium services, even if they used to be free

  Offer service-bundled pricing

  Users value “all you can eat” data packages at­ tached to specific categories, such as music or social networking

  Own/control key content to make it a choke point

 Unique content drives acquisition and retention and can be monetized

  Create end-to-end (E2E) experience with device, content, and network

 Telcos can build a compelling and optimized experience for premium offers

  Create core content aggregation

 Telcos can build or deploy an aggregation plat­ form and be the key content aggregator locally

  Allow OEMs to own apps

 Getting exclusivities with superior OEMs drives acquisition, and, in the long term, there will be enough competition among OEMs

  Create own app platform

 Platform is key to controlling monetization vehicle for apps

  Enable network hooks

 Unique network hooks can be used to avoid “free trap” for apps

  Control/own E2E platform

 Superior experience/premium offering can be achieved via E2E control of all aspects of apps and services

  Partner with social network players

 Social networking is likely to become the center of gravity for consumers on mobile

  Address industry verticals

 There is value to be captured in vertical niches (e.g., health)

  Ensure interworking beyond social networking

 Interworking with existing services and com­ munities beyond social networking, e.g., instant messaging or music, is valued

Content

Apps

Adjacent services

ing into content bundles in partnership with content players and can be a natural fit with the ability of MNOs to serve end users via billing integration. Wholesale information play makes key operator information visible via APIs (application programming interfaces) and other methods. This is a way to enable content providers to build on that information. Finally, end-to-end plays are being pursued by players that wish to control core service assets (social networking, music, and others) and key enablers (operating systems, middleware, etc.) as a way to provide a unique and distinctive user experience to their end users. Historically, SK Telecom has

pursued this strategy in Korea – and now China Mobile seems to be pursuing it in China. Application ecosystem. Under the Wholesale Appli­ cations Community (WAC) alliance, many operators are now reassessing their roles in the application ecosystem vis-à-vis Apple and Google. However, there are still very few signs that these strategies are being deployed. With the exception of announcements by Smart in the Philippines regarding their Android proposition using WAC-enabled widgets, very few have offered any signs of going to market.

RECALL No 17 – Transition to digital in high-growth markets Big pipe, little payoff? The mobile data paradox

13

   While emerging market mobile data players share many aspects in the fate of developed market mobile data players, they operate in an environment that presents a number of unique opportunities and challenges. To avoid the rapid commoditization of mobile broadband, MNOs in emerging markets need to explore new roles and product offerings that resonate with the market realities in these arenas. The core value drivers for operators, however, remain deeply linked to the battles that lie ahead: in particular, the fight for the billing relationship and the right data pricing execution. These should not be mere afterthoughts and definitely not taken for granted. Precisely these value drivers should form the basis upon which operators build their strategies.

Nuno Goncalves Pedro is a Senior Expert in McKinsey’s Beijing office. [email protected]

Ken Kajii is an Associate Principal in McKinsey’s Tokyo office. [email protected]

Eeleen Tan is an Associate Principal in McKinsey’s Taipei office. [email protected]

Lei Xu is a Knowledge Specialist in McKinsey’s Shanghai office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets 0.1 cent per MB: Ensuring future data profitability in emerging markets

15

02 0.1 cent per MB: Ensuring future data profitability in emerging markets

Can mobile data players in emerging markets secure the full profit potential from their significant 3G network investments? Or will the rapid price erosion accompanied by traffic volume explosion necessarily result in lower return on investment? Revenues in the worldwide mobile data market will likely double between 2010 and 2014 (Exhibit 1), providing plenty of new growth opportunities, several relating to new product categories that have been largely untapped in emerging markets so far. Mobile residential broadband services could, for example, outcompete the laggard fixed broadband infrastructure, or a low-end smartphone market could emerge, making mobile data services accessible to the mass market.

Explosion of (wireless) broadband: Profitability at risk? This growth, however, has a downside. Network capacity requirements increase rapidly as network traffic doubles every 16 to 18 months for most operators in developed markets. Such traffic escalation will most likely be even more pronounced for emerging market operators for three reasons. First, emerging markets start with far lower data traffic per user at the moment, and they are likely to catch up if not constrained by high prices. Second, fixed Internet access is much less common in emerging markets, so more people depend on mobile broadband as their exclusive way to access the Internet. And finally, lower affluence levels among subscribers in emerging markets increase price sensitivity, compelling customers to exploit flat rates and prepaid pricing, thus pushing the boundaries of their fair use policies.

As a result, fast-growing broadband could ironically cause operators to fall into a profitability trap. Heavy price competition with flat-rate offers coupled with a lower willingness to pay among customers saps revenues, while the customer base and data usage continually expand. Furthermore, after factoring in the typical network cost to serve, more and more mobile broadband customers are already unprofitable, and operators are on a trajectory to face even more red ink customers as usage rises relentlessly. With typical 3G implementations, the average network cost per MB will be roughly 0.8 to 1.2 US cents for an average operator. Network cost is usually cushioned by about 1.5 to 2.5 cents in service revenues less cost of sales, leaving room for the current data service profitability. The revenue stream, however, will come under siege from intensifying competition, i.e., the landgrab for the growing customer base and increased usage by customers in flat-rate pricing structures. As a result, revenues will likely plunge by 50 percent annually to approximately 0.2 to 0.4 cents by 2012/13 in a number of emerging markets (Exhibit 2). In this market environment, operators will be forced to put their mobile broadband production cost on the same reduction trajectory to retain the current level of service profitability or accelerate it if profitability is already negative today. In 2012/13, this would mandate the aspiration of a network cost per MB of about a tenth of a cent, or 0.1 cent. While undeniably an enormous task, we believe that it will be feasible if operators in emerging markets focus on three things: smart networks, smart costing, and smart pricing.

16

01

Mobile broadband will double between 2010 and 2014 and Mobile broadband will double between 2010 and 2014 and become become a growth engine for the entire industry a growth engine for the entire industry Global mobile broadband market USD billions, voice and messaging not included

226 27

Residential Internet via long-term evolution (LTE) mobile networks1

199

Traditional mobile broadband offers2

x2 114

114

2010

2014 (forecast)

1 Servicing residential Internet needs by mobile broadband via LTE on attractive frequency bands, e.g., 800 MHz 2 Including smartphone, e.g., iPhone, and data card offers SOURCE: Yankee Group; Merrill Lynch; Morgan Stanley; Credit Suisse; McKinsey

Smart3: Meeting the “0.1 cent per MB” ­challenge To achieve this “0.1 cent per MB” transformation, emerging market operators need to pursue a Smart3 program of continuously reducing cost per MB. As ­stated before, these three key elements are smart networks, smart costing, and smart pricing. Smart networks: Boost mobile broadband capacity while lowering network cost. Network capacity can be expanded primarily by launching successive network technology upgrades and by rethinking strategies for mobile broadband spectrum application. For example, technology upgrades to HSPA+ (evolved high-speed packet access) or even LTE (long-term evolution) can open up large amounts of additional capacity to operators, while significantly reducing their cost of capacity (Exhibit 3). McKinsey analysis reveals that such network technology enhancements could drive up ­c apacity fivefold from HSPA (with 7.2 Mbit/s) to a parallel HSPA + and LTE network infrastructure, while ­simultaneously reducing cost per MB by 70 percent or even more. Since demand for mobile broadband is currently lower in emerging markets than in developed markets, the

challenge in emerging markets centers on the operators’ ability to convince customers to take advantage of the new capacity without triggering price wars and intensified competition fueled by this excess capacity. A potentially more cost-effective way to increase network capacity involves adding more spectrum dedicated to mobile broadband through new spectrum auctions or by refarming existing 2G spectrum bands (i.e., reassigning the spectrum to different uses). This could make it possible for operators to migrate to LTE sooner and tap into the residential broadband opportunity with an even more competitive offering. Furthermore, operators need to redouble their efforts to drive down the costs of their sites, harnessing lean operating principles while keeping technology upgrade costs to a minimum. In addition, they can plan for a network transformation alongside network technology upgrades, e.g., a broad modernization of their site and network infrastructure or managed service contracts. Furthermore, LTE offers new opportunities for active and passive network sharing. These could translate into significant value creation for operators. Among others, the advantages of active network sharing are that it offers greater flexibility in spectrum application and it could address the political rural coverage objectives.

RECALL No 17 – Transition to digital in high-growth markets 0.1 cent per MB: Ensuring future data profitability in emerging markets

02

17

Operators need to reduce their network cost to 0.1 US cent per MB Operators need to reduce networkprofitability cost to 0.1 US cent per MB by 2012/13 to maintain mobiletheir broadband by 2012/13 to maintain mobile broadband profitability Expected revenue and cost evolution US cents per MB 2.5

2.5

Revenue drop fueled by 2.0

 Competition-driven price reductions (mobile, fixed) – Battle for gross adds – Fixed substitution

Revenue

1.5

1.5

-50% p.a.

1.2 1.0

 Usage increase per user – Increased adoption – New applications

Network cost 0.8

Need to lower cost

0.5

0.4 0.2 0.1 cent per MB

0 Status quo 2010

Expectation/aspiration 2012/13

SOURCE: McKinsey

Smart costing: Exploit network capacity utilization to the fullest. As operators attempt to use their networks more fully, employing a combination of smart costing measures can help them reduce their cost per MB (without new investments) by boosting network capacity utilization efficiently. To succeed, operators use smart costing to bridge the common gap between network operations and marketing. Historically, network costs have played only a minor role in pricing services for mobile operators. However, with future mobile broadband and its struggle for profitability margins, emerging market operators will be forced to adopt a more granular costing approach. The first step in this process focuses on gaining complete network cost transparency and understanding its key cost drivers at a high level of granularity, e.g., peak traffic demand in congested site locations caused by data-hungry applications. With this network cost transparency, operators are equipped to understand the causes of their usually poor network capacity utilization in detail and manage them with a set of technical and pricing initiatives. On the technical side, mobile data traffic demand distribution usually requires a targeted sectorization approach different from the one employed for 2G voice in the past. With data networks, sectors carry the same capacity, and sectorizations should be

adapted to balance traffic load and to achieve a more effective use of the existing capacity. Smart pricing: Employ granular network cost structures to define better pricing schemes. Discovering a new approach to mobile data pricing, rate structures, and offer design will be another crucial step toward achieving and sustaining a profitable mobile data offering. Based on granular network cost driver data, emerging market operators are equipped to review their mobile broadband offering to achieve two objectives. First, driving traffic away from peak hours at congested locations will free up network capacity to be monetized. Embedding incentives for customers to adapt their traffic profile can free up 35 to 50 percent more network capacity and could enhance the network quality experience of the average customer. Examples of these pricing actions include targeted off-peak usage incentives like relaxed traffic caps outside of busy hours (usage after 10 p.m. only counts half on traffic cap) and peak-hour speed reductions for low-end users. For the prepaid space, mobile data promotions can be restricted to times and areas in which capacity is abundant. Creative approaches in this regard are endless, and operators should deploy resources to test these pricing options to drive more efficient use of network capacity.

18

03

New technologies make additional capacity available to operators, New technologies additional offering a reduction inmake the cost per MB capacity available to operators, offering a reduction in the cost per MB Usable capacity for data traffic of one site GB per month1 LTE

LTE+

7,000

10,500

4G

2x10 MHz UMTS

HSPA (7.2 Mbit/s)

HSPA (14.4 Mbit/s)

HSPA+ (28.8 Mbit/s)

500

2,000

2,700

3,700

3G

2x10 MHz GPRS

EDGE

50

250

2G

1 Based on a 2x10 MHz spectrum, 3 sectors, and realistic assumptions on capacity utilization

OUTSIDE-IN ESTIMATES

SOURCE: McKinsey

Second, smart pricing also entails identifying unprofitable customers and managing them toward profitability. Some operators in extreme situations observe that less than 1 percent of their mobile data customer base accounts for 50 percent of the traffic, while contributing significantly less to their service revenues. Operators need to proactively start managing this unprofitable customer base with measures like upselling fixed broadband access at favorable rates to offload traffic, offering attractive off-peak usage promotions, applying quality of service differentiation, and forcing migrations to rate structures with more rigid fair use policies as a last resort. With these combined pricing actions, getting to the desired network cost level (and the subsequent profitability) of mobile data becomes achievable. A 90 percent unit cost reduction for mobile data service during the course of just a few years requires consider-

able corporate transformation – spanning the network, IT, marketing and sales, and finance divisions. The complexity involved in such an undertaking should not be underestimated. Only a concerted, targeted effort will bring about the smart network, smart costing, and smart pricing that will preserve the profitability of mobile data services into the future.    Although the emerging market mobile data arena will prove to be a sizeable growth engine for most telecoms operators, preserving its long-run profitability could become a significant challenge and priority for operators in emerging markets. Only a targeted set of initiatives that address network capacity, cost, and pricing will set these players on the course toward the objective of 0.1 cent per MB.

RECALL No 17 – Transition to digital in high-growth markets 0.1 cent per MB: Ensuring future data profitability in emerging markets

19

Arne Jeroschewski is an Engagement Manager in McKinsey’s Singapore office. [email protected]

André Levisse is a Director in McKinsey’s Singapore office. [email protected]

Alexandre Ménard is an Associate Principal in McKinsey’s Paris office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets FTTC – fiber to the cash: Making fiber investments pay off

21

03 FTTC – fiber to the cash: Making fiber investments pay off

After massive investments in infrastructure, fiber networks have become a reality in many markets. Now operators need an effective commercialization strategy to quickly transform fiber to the curb/home into cash. Launching next-generation high-speed networks is a once-in-a-generation transformational change in operators’ technical capability. Unfortunately, many operators fail to convert this into an appropriately exciting pitch to their customers and fall short of realizing potential revenue upside along with adequate return on investment. For companies operating in high-growth markets, fiber represents an opportunity to drive step change increase in ARPU and significantly accelerate take-up of broadband and additional services. Revenues from fiber services are not only an attractive target for nimble attackers but can also reverse declining fixedline revenues for entrenched incumbents and drive 20 to 30 percent fixed top-line growth. Given the immense challenges involved in designing and launching a fiber network, telcos can be forgiven for thinking that the job is virtually complete when they light the fiber. However, the real challenge – transforming top-performing technology into bottom-line value – has just begun. An effective fiber network commercialization approach is needed to accelerate subscriber uptake of new fiber offers, drive penetration of additional services, and quickly build revenues. Critical success factors include (1) designing a winning fiber value proposition and product portfolio that promotes upselling – particularly by using new TV services; (2) achieving excellence

in a new go-to-market and sales approach that targets attractive neighborhoods through high-touch door-todoor (D2D) selling; and (3) delivering against the service promise by ensuring that customers face minimal issues from the point of ordering through to installation and use in their homes.

Positioning fiber as a revolution Introducing fiber is a rare opportunity for telecoms operators to delight their customers. To capture the full fiber opportunity, operators need to develop portfolio strategies that lead existing subscribers to upgrade to higher offers (e.g., from low-speed limited to high-speed unlimited broadband or from single to multiple services), drive penetration of additional services (primarily IPTV), and attract new subscribers with innovative offers relative to existing market options. Hitting the sweet spot in product design can boost ARPU by 20 to 50 percent and spur strong subscriber acquisition. Offer a lot more for a little more. This is the most effective philosophy to drive upsell. It can take the form of making high-speed products affordable (e.g., 8 to 16 times the speed for a 20 to 40 percent price increase) and offering bundled solutions to meet multiple needs and increase customer value (e.g., double- and triple-play products that combine voice plus Internet, and voice plus Internet plus television, respectively). However, to design these portfolios, it is essential to understand not only the impact on the new contribution margin but also the impact on overall product profitability. Case in point: offering additional speed without optimizing cache mirrors and the content delivery net-

22

01

Select services appeal to consumers across multiple markets Select services appeal to consumers across multiple markets Average willingness to pay USD per month 10 Services with 9 future potential 8

School services Computer management

Total home equip. maint. Home management Advanced fixed voice Archive Control Multiplayer games backup point Karaoke Games Picture sharing Lottery

7 6 5 4

Gambling

3 2 1

Niche services

0 0

Video sharing One-on-one videoconference TV shop Multiple videoconference Voting

High-priority services

Personal video recorder (PVR)

Video on demand

TV on PC

HDTV

Shift TV Catch-up TV Advanced elec. program guide (EPG)

Information portal Instant news flashes 10

Key services for the short term

Video surveillance

Interesting services; difficult to monetize 20

30 Households interested Percent

SOURCE: 2nd Edition Survey “What do Customers want over High Speed Broadband,” 2009 – McKinsey proprietary data

work can multiply the cost of international connectivity for the telecoms operator. Introduce innovative services. This can help drive both penetration and acquisition. While fiber enables a host of features (including fast broadband and home management), consumers consistently converge across markets on a select feature set that increases willingness to pay – advanced TV services such as DVR, video on demand, and HDTV (Exhibit 1). Delivering a highquality TV experience with a rich selection of content and effective service delivery can win new customers and make it hard for competitors to steal subscribers (propensity to churn declines significantly from singleto double- and from double- to triple-play customers). And in most cases, these offers go beyond “the home” as bundles with mobility components (e.g., wireless broadband, Wi-Fi hot spots), which will become increasingly important in a converged world where customers demand seamless experience across fixed and mobile and across multiple devices. Bundle packages for different segments. Bundled packages targeted to meet specific customer segment needs can include: providing easy access to services for less tech-savvy users, offering low-cost, “feature light” alternatives for price-sensitive subscribers, and adding

innovative advanced features for tech-savvy, high-end subscribers. The art lies in bringing different offers together into a portfolio that, by design, drives upselling. One emerging market incumbent, for example, identified data limits as the most important buying factor for customers, then introduced a fiber portfolio with a consciously designed gradient of data limits for various speeds. In the process of migration to fiber, the operator managed to shift a subscriber base that had 90 percent of subscribers on packages below 1 megabyte per second (Mbps) on the old DSL-based broadband portfolio to over 90 percent of subscribers on fiber packages of 8 Mbps or higher after migration. This operator saw an ARPU increase of USD 25.

Buzz and door-to-door selling: The high-touch way On the one hand, the business case for fiber hinges on the cost of rolling out fiber to a locality. On the other, it is dependent on what penetration new fiber offers can achieve. Just as it is a transformation on the network side, fiber rollout needs to be treated as a market discontinuity for sales and marketing. A telco’s fiber go-to-market approach needs to have immediate and major impact in terms of creating “buzz” and signing up subscribers. Experience across markets shows that

RECALL No 17 – Transition to digital in high-growth markets FTTC – fiber to the cash: Making fiber investments pay off

operators have a 12- to 18-month window to capitalize on initial buzz and capture price premiums. Beyond this period, the higher speeds offered by fiber become the “new normal” and subscriber willingness to pay premiums dissipates. What telcos may not anticipate: this is anything but business as usual for their sales channels, and a new go-to-market approach can boost fiber sales significantly – in some cases, seven to ten times. Create market buzz. This is the foundation for a successful fiber launch. Great campaigns are designed to generate excitement and anticipation even before fiber becomes available. Fiber is enough of a discontinuity to warrant the launch of a new sub-brand. Telecoms operators worldwide have used new sub-brands and “disruptive” slogans to capture subscriber imagination. From Verizon’s declaration “This is FiOS. This is Big” to Orange’s “The broadband revolution,” bold messages can set the stage for maximal fiber sales. For wide-scale fiber rollouts, new fiber sub-brands need to be supported by above-the-line multimedia advertising campaigns and below-the-line localized targeting, e.g., e-mail and viral marketing techniques. To further encourage adoption, telcos can use short-term tactical levers such as free trial periods and free installation. Coach the customer and set expectations. It is important to coach customers on what to expect in the fiber migration process and also on how to use new fiber services to be able to enjoy the full benefits and avoid frustration. The process starts with creating awareness for why telco teams need to visit localities and homes to install fiber. Setting up demo stations at high-traffic locations, flagship stores, and kiosks in locations where fiber is being rolled out can create excitement, while enabling customers to experience the tangible benefits of high-speed broadband firsthand. During the sales and installation process, sales agents and technicians should demonstrate how customers can use new features (e.g., DVR). Beyond this, it helps ensure there is adequate how-to support in the form of literature left with the customer, help/demo channels in the TV lineup, online FAQs, and a responsive customer care helpline. Build selling skills and launch high-touch D2D selling. Following the period of creating market buzz and customer awareness, winning telcos put a major emphasis on signing up fiber subscribers and driving sales using their own stores, call centers, and – most importantly – with proactive, high-touch D2D selling. To ramp up their own sales channels, telcos must recognize that

23

fiber services are often as new to their own staff as they are to customers. Providing sales staff with proper training and coaching is important to enable them to effectively pitch these new services. The need to put enough “feet on the street” often means partnering with external firms. Done right, high-touch D2D visits can generate far higher conversion rates and amplify the buzz surrounding the rollout in the process. The challenges faced in making D2D an effective channel are unique. Thus, continuously iterating the sales approach based on street learnings becomes all the more crucial. This can include fine-tuning the sales pitch based on what specific subscriber segments find compelling, pairing low-performing sales agents with stars for on-the-job learning, and refining hours of field visits (e.g., “young singles” neighborhoods to be covered after office hours to increase chances of finding subscribers at home). For one leading telco, the D2D teams were contributing fully a third of total fiber sales within three months of the channel being launched. Motivate the team with the right incentives. Across channels, successful companies establish clear sales guidelines and migration paths that provide ample opportunities to upsell the existing customer base as they transition to fiber service. Sales incentives are then designed to disproportionately reward upselling and long-term contracts. Some players have innovative incentive schemes such as rewarding sales “seeding” and linking compensation to the sale quality (e.g., rewarding successful installation organization and/or penalizing early terminations). Track performance. A final key element of ramping up sales is to establish an effective performance tracking and monitoring system that covers all sales channels at a granular level (e.g., by store and agent). This provides management with the enabling tool to reach tactical decisions, replicate and reward successful cases, and address any issues or areas of weakness. One company saw a dramatic increase in same-store sales within days of implementing training and performance management systems, with daily fiber sales jumping sixfold.

Making the transition work A telco realized within the first couple of months of its fiber launch that a 30 to 35 percent gap existed between the initial fiber sales booked and the number of orders actually closed by swamped field technician teams –

24

with order backlog continuing to rise week after week and customer wait times creeping up even more. Transitioning to fiber entails at least three challenges. First, technical issues and teething problems are likely. Second, a successful sales campaign generates a sharp rise in demand for technical teams to provide downstream services that may be difficult to manage. Third, a subscriber learning curve is associated with new services. In some markets, up to 80 percent of migrated subscribers may face challenges in switching to fiber. Understand the end-to-end customer experience. To avoid, identify, and address such issues, telcos need to be fully aware of their customers’ fiber experience in its entirety. The exercise of mapping the process using a funnel from the point of receiving customer applications for service can be a real eye opener. One telco discovered that for every 100 sales orders received, over 20 were never entered into the system, more than 20 more were unilaterally cancelled by technical staff due to installation problems after work orders were issued. Five were cancelled by customers frustrated with the long wait. As a result, only about 55 percent of the telco’s fiber applicants were converted to invoiced fiber subscribers. Such gaps can occur for a number of reasons: incomplete or inaccurate data on fiber availability in specific locations, failure to fully update legacy sales order systems to adequately handle fiber subscription requests, and technical issues caused by faulty fiber connections. Experience shows that some issues are predictable and can be mitigated proactively. Context-specific issues

that can arise at any given telco, however, are inevitable. One telco, for instance, experienced that the higher speeds on migrated broadband connections required an ONT/modem reset after all technical tasks had been completed. This issue was only identified after a deluge of customer complaints stating that no change in broadband speeds was apparent at all after migration. Set up a dedicated office. The pragmatic approach to addressing such hurdles is to ensure end-to-end transparency in the customer experience. This makes it possible to identify issues early – and then implement a mix of temporary quick fixes and longer-term solutions to minimize impact on customer experience. Setting up a dedicated fiber-to-the-home monitoring office and SWAT teams has paid off for operators with ambitious fiber migration targets. Equally important is to ensure that customer care channels are well equipped to address subscriber queries and complaints, to provide solutions and support, and to address root causes by feeding recurring issues back into the organization.    The most critical and possibly toughest part of launching a fiber network often takes place after the build-out is complete: unless a telco crafts an effective commercialization strategy, the huge capital investment required might remain underutilized – and unprofitable – for decades. Paying particular attention to the product portfolio, marketing, and customer care can help operators dramatically shorten the time it takes to translate fiber to the curb into cash to the bank – and establish the foundation for future growth.

Saleha Asif is an Associate Principal in McKinsey’s Dubai office. [email protected]

Sanjeev Kohli is a Principal in McKinsey’s Dubai office. [email protected]

Wim Torfs is a Principal in McKinsey’s Dubai office. [email protected]

Alfonso Villanueva is a Principal in McKinsey’s Singapore office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets Minding the gap: Customer perception and pricing reality in prepaid

27

04 Minding the gap: Customer perception and pricing reality in prepaid

The world of prepaid telecoms is rife with signs of maturity, even in emerging markets. Rapidly decreasing yields or revenue per minute of use, increasing incidence of multiple SIMs per customer, price-volume elasticity well below one across the customer base, and declining ARPUs are the major culprits. In such a context, it’s hardly surprising that many forward-thinking telcos are looking to pricing as an important way to help them grow (or at least maintain) revenues. McKinsey’s experience across more than two dozen emerging ­markets shows that sophisticated pricing techniques can unleash 3 to 10 percent in revenue growth.

as volume uplifts and cost reduction. Many real-world examples show how the pricing lever can be used effectively. In the Middle East, for instance, one company found that 90 percent of its customers believed that usage was billed in one-minute increments when in fact 75-second units were the actual basis. Aligning reality with perception increased revenue by 10 percent, while keeping net additions to the base high. In Southeast Asia, a player chose to differentiate its offer to the existing customer base by giving more minutes for a slight ARPU increase, while competing for new customer additions with an aggressive SIM package in selected markets. This led to a 5 percent revenue increase over two years. In Eastern Europe, an integrated player decided to revise its data plans by differentiating smartphone usage from desktop-based broadband, which earned it a 9 percent higher product revenue and nearly 20 percent more new customers.

Extracting more from existing customers

Margin per day versus price per minute

Telcos recognize the need for better pricing to compensate for the industry’s slowing growth. McKinsey has seen that in many countries wireless telcos generate a wide range of revenue per base transceiver station (BTS): from USD 500,000 in Africa to USD 200,000 in Southeast Asia and USD 50,000 in India on average. Differences in GDP per capita can hardly explain such a wide range; it is sooner the result of industry structure and pricing behavior.

Telcos generally look to maximize margin per BTS per day, while customers tend to value something close to price per minute of voice or per megabyte of data. This, however, does not necessarily imply that telcos would have to sacrifice margins (by offering cheap price plans) in order to appeal to existing or potential customers and drive up their usage. Put another way, a price-up of calling minutes for more margin per BTS per day does not necessarily translate into fewer calls or a smaller customer base from higher churn. Just like wines and perfumes, the price consumers pay for making a call and the costs incurred (or margins captured) by a telco can have very little to do with each other.

Emerging markets were once exceptionally fertile ground for revenue in prepaid when acquisition was the name of the game. As even these regions begin to show signs of maturity, telcos are turning to pricing as a strategy to return to the path of profitability.

Sophisticated pricing is one of the quickest ways to improve revenue growth and generate EBITDA. It is the single biggest improvement lever relative to others such

28

01

A gap always exists between perception and monetization A gap always exists between perception and monetization Product positioning for two companies (CMax and XComp) and potential pricing moves for CMax

XComp

Perception price Index 200

CMax CTalkMore North Star

180

XComp Basic

CMax

XComp XSuperValue

Best plan at current perception Target premium

160

140

CMax CHappy Best plan at current monetization

120 80

100

120

140

160

Monetization Margin captured, indexed to 100 SOURCE: McKinsey

Telcos can simultaneously create positive price perception and maintain or even increase margins by leveraging a wide range of pricing elements (on-net or off-net, peak or off-peak, data versus SMS versus voice) to develop targeted offerings to address customer segments with different price preferences and elasticities. If an oversimplified, single plan is implemented, this fails to tap into the benefits of segmentation. If pricing is too complex, it could be confusing – confounding even one’s own marketing team – and might be misread by competitors, unnecessarily increasing the risk of a price war. The challenge is to strike the right balance.

A unifying framework: Perception and ­monetization To achieve this proper balance, it is helpful to have a unifying framework that allows managers to objectively determine how the pricing level and structure of an offer are positioned vis-à-vis the competition in terms of perceived value and actual value capture. Importantly, managers can check whether the positioning of the offer in the market is consistent with their intended pricing, brand strategy, and desired market conduct. A helpful tool toward this end is a single map of the market tariff portfolio – one that portrays the two dimen-

sions of any tariff – customer price perception and telco margin monetization. The perception axis is what a given customer perceives as the product price and is derived from primary customer research, including focus groups and statistical techniques such as conjoint analysis. Only a few items really matter in customer perception, and these items vary by market and customer segment, e.g., on-net peak voice price, peak SMS price, and denomination of the top-up voucher. The monetization axis measures what telcos actually earn from a given customer. This is the average of all price components, weighted by usage, plus the revenue associated with unused minutes. There is often a gap between perception and monetization of 20 to 30 percent – positive or negative. A disguised actual case proves helpful in illustrating this approach in more detail (Exhibit 1). In this case study, the competitor’s plan, XSuperValue, is monetizing about 15 percent higher than CMax’s current plan, CTalkMore, yet the customer perceives it as 14 percent less expensive. An analysis revealed that this gap between perception and reality was mostly driven by three elements: XSuperValue package would expire in five days, while CTalkMore would last seven (lower monetization for CTalkMore); XComp’s claim

RECALL No 17 – Transition to digital in high-growth markets Minding the gap: Customer perception and pricing reality in prepaid

02

29

Using the full spectrum of pricing elements is the key to success Using the full spectrum of pricing elements is the key to success Pricing elements by level of perception/monetization

Exclusively perception

Exclusively monetization

Free night minutes

Number of minutes in a pack

“Unlimited”

High off-net premium

Roaming

CLM below-theline offer

Number of SMS in a pack

Pack denomination

On-net peak

GPRS

Short validity (use minutes or lose them)

Registration for promotion

Dynamic discount level

Per-second billing

SMS peak

International

International SMS

Quota on promotion

SOURCE: McKinsey

of “0.1 cent per minute,” which it charged only after the first 40 seconds that were charged at 15 cents per minute (better perception for XSuperValue); and XComp’s offnet SMS were charged at 30 percent higher than on-net, which went unnoticed by most customers (higher monetization for XSuperValue). A Monte Carlo simulation – a method for estimating outcomes – of all possible plans under reasonable validity and technical constraints revealed a set of efficient plans that would best balance perception and monetization. Plans on this line either maximize monetization at a given perception or minimize perception at a given monetization. An analysis of the unifying tenets of these plans reveals that they maximize the price of invisible elements, have relatively short validity, and use simple headlines to “shout” and gain positive perception. CMax chose to converge toward an offer (North Star) that would maintain a 15 percent premium over the competitor (thus avoiding a price war) and was on the efficient frontier, with a potentially 35 percent higher monetization than CTalkMore. Given technical constraints and to smoothly transition the marketing communication, the company introduced the offer in three steps. This same approach was taken for four segments, creating four lifestyle plans.

The CMax marketing team considered a wide-scale launch of the CHappy plan, but determined that it would be highly value-erosive (monetization of 25 percent below XSuperValue’s current level) and likely induce a price war. CMax ultimately launched CHappy as an aggressive offer, but restricted it to new SIM cards for a period of two months, certain geographical areas, and a monthly quota (i.e., cap on the number of customers who could benefit from the offer at any one time) that could be revised. This framework allows leaders to have a productive dialog on pricing by answering several strategic questions: „„ What should our premium over our competitor’s be? „„ Are all of our plans aligned with this strategy (optimized monetization and perception)? „„ Do we have any leakage? „„ Are our competitors playing a smarter game? „„ Do we risk a price war? The value map also helps filter out opinions and realitycheck “gut instincts” on pricing strategy by showing if

30

these would either have no impact at all (often) or be very costly (even more often). Finally, this can also help drive a real reflection around customer perception: “How can we increase our brand premium?” and “How can we influence customer perception?”

Using all the pricing elements Once the perception-monetization framework to assess price plans is in place, the creativity of the marketing team can be unleashed to employ price elements from the full spectrum. Here, it is important to consider many elements, even if only some of these are actually used in the final packages. Naturally, each price element has a different profile on the perception-monetization spectrum (Exhibit 2), which varies by market and customer segment. Balanced perception and monetization. Some elements play equally on the customer price perception axis and on the telco monetization axis. For instance, on-net peak minutes and SMS are important to both customers and telcos. Per-second billing and “unlimited” offers also fall into this category: customers like them, but they are costly to suppliers. In general, players choose to be competitive on these elements and either match their competitors or levy a slight premium justifiable by brand, network, or community. Perception-heavy. Some elements play mostly on perception, with limited impact on telco margins. This

The value in validity Which top-up voucher is a customer better off purchasing? 100 minutes for USD 8 valid 8 days or 120 minutes for USD 7 valid 6 days? No straightforward answer? This is the tension at the root of the value of validity: telcos mostly care about revenue per day (here, USD 1.0 and USD 1.1 respectively), while customers care more about price per minute (8 cents and 6 cents respectively). This makes it possible for telcos to give more to customers and increase revenue. Shorter validity can be seen as a way to force elasticity.

category would include attention-grabbing headlines. For example, promoting “1,000 SMS for the day – only USD 1” would capture more attention than “120 SMS per day,” yet would have limited impact on margin, since an SMS costs next to nothing and most subscribers use fewer than 100. In a similar manner, night minutes often have negligible margin impact but can capture the imagination of young customers. Monetization-heavy. Some pricing elements definitely contribute more to monetization. Roaming, ringtones, off-net, and off-peak go virtually undetected by consumers but are well known by marketers. A hidden gem is the factor of validity: customers do not value a shift of one day to top-up validity at its true economic value (see example in text box). Since customers care more about price per minute, the more lucrative second offer is an easy sell. Sophisticated players may use mechanisms such as registration (e.g., dial #123* to get the offer) or quotas (e.g., first 100,000 customers to send an SMS get the offer) to allow for self-selection by price-sensitive customers. Some players may go even further and modulate these quotas by geography and period of the month to fine-tune their competitive position.    A wealth of pricing elements is available to marketers, who must in turn maintain simplicity for customers. Experience shows that this is more a matter of communication (perceived simplicity) than a matter of actual simplicity. Lifestyle packages, in which several pricing components are bundled in order to be attractive to students, rural homes, or heavy data users, are a good way to combine simplicity with the sophistication of a full array of elements.

RECALL No 17 – Transition to digital in high-growth markets Minding the gap: Customer perception and pricing reality in prepaid

31

André Levisse is a Director in McKinsey’s Singapore office. [email protected]

Ali Malik is an Associate Principal in McKinsey’s Dubai office. [email protected]

Samba Natarajan is a Principal in McKinsey’s Singapore office. [email protected]

Shaowei Ying is an Associate Principal in McKinsey’s Singapore office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets CLM 2.0: Digital innovations in customer lifecycle management

33

05 CLM 2.0: Digital innovations in

customer lifecycle management

As customers’ lifestyles evolve, so must the way operators manage them. Mobile operators in emerging markets can now adopt new customer lifecycle management techniques more in line with the challenges and opportunities of the digital age. Digital marketing innovations are rebooting customer lifecycle management (CLM) just in time to help operators in developing economies cope with their newly maturing markets, where the focus is shifting from attracting to retaining customers. Marketing directly to subscribers based on their individualized usage behavior has increasingly become the industry’s standard approach toward postpaid customers. Now, some leading operators are attempting to move prepaid CLM to the next level of sophistication and impact.

How next-generation CLM can help Sophisticated CLM is not just for postpaid customers in developed economies anymore. As the profiles of prepaid customers in emerging markets become more nuanced, some operators are beginning to reap the benefits of applying sophisticated, individualized customer management techniques to this segment as well. The tools that operators now have at their fingertips can enable them to capture new benefits in a number of powerful ways. First, these next-generation CLM tools can equip operators with the ability to make intelligent business decisions at a more granular level. These decisions can be based on aggregated trends such as the overall decline in the prepaid subscriber segment, or the ability to drill down into performance trends to acquire

new insights and take actions such as targeting prepaid subscribers who are also heavy SMS users. Second, CLM innovations can better empower marketers to design improved visibility into their actions, providing them with rapid feedback regarding marketing campaign effectiveness. Finally, the leading operators already employing CLM 2.0 are establishing structured and rigorous performance management routines that are driven by focused discussions on specific issues of the day rather than overall business performance.

Five CLM innovations To reap these promising benefits, some mobile oper­ ators have begun to explore new CLM tools and approaches that can enable them to react more quickly and more personally to the needs of individual sub­ scribers. The innovations these players are pioneering span five major categories. Using CLM as a customer insight factory. McKinsey research reveals that best-in-class operators often imbue their CLM departments with a variety of powerful tools and techniques that make it possible for them to gain new insights into the evolving needs of prepaid mobile customers. These players, for example, establish enterprise-wide “data marts” that can deliver virtually real-time data updates and use business intelligence tools to engage in granular analytics, data mining, and trend analysis. They also acquire the capabilities they need to build CLM “dashboards” full of key performance indicators that allow teams to monitor progress in meeting the needs of prepaid customers.

34

Social network analysis improves CLM through enhanced modeling, evaluation, and marketing Conventional approach

Approach with social network analysis

Improved churn modeling

 Determine churn probability based on sub­ scriber’s usage behavior, e.g.  - Low outbound call usage  - High frequency of calls to service center  Churn defined as SIM switching (in most cases, not necessarily subscriber leaving)

  Churn probability modeling using social ­network indicators  - Number of links within operator’s network vs. competitor’s network  - Loss of nodes within network   Churn defined as subscriber leaving network

More precise customer ­valuation

 Evaluation of subscriber value based on  - Average revenue from outbound usage  - Average revenue per month from both outbound and inbound usage

 Taking the subscriber’s network into consid­ eration when evaluating value  - Size of subscriber’s network  - ARPU of subscriber’s network

Better targeted marketing campaigns

 Targeting subscribers with cross-selling and upselling offers based on current usage ­patterns, e.g., free data campaigns to nondata users

 Viral campaigns targeting influencers in the network  Targeting use of new products within cliques

Establishing real-time channels. While SMS messaging remains a major channel for CLM campaigns, operators are also developing new and potentially more effective ways to complement regular text messages. New outbound channels include interactive voice response (IVR) systems; unstructured supplementary service data (USSD, a protocol that enables GSM handsets to communicate with an operator’s computer system); and application-based notifications. These solutions both complement and could potentially replace SMS. In one market with limited SMS usage, IVR delivered seven times the response rate for the same campaign compared to traditional text messaging. Some operators are also in the process of developing “trigger-based” and inbound channels. Trigger-based channels allow operators to dispatch real-time, targeted offers when subscribers perform specific actions, such as topping up minutes or making balance inquiries. Offers like these improve take-up rates because the targeted messages arrive when the subscriber’s attention is focused on their mobile device. Inbound channels such as automated incoming IVR are less intrusive and work particularly well in emerging markets. They deliver better take-up rates for abovethe-line marketing campaigns and build subscriber trust in the offers – an important element in many emerging markets where SMS fraud is prevalent.

Introducing “Analytics 2.0.” Operators continue to enhance their sophistication in how they apply analytic firepower in two primary ways. First, they use analytics beyond the regular focus on churn prediction. Second, they incorporate more sophisticated derived and external data sources into their analytical modeling. The move beyond churn helps operators deal with new customer developments. The increasing prevalence of consumers with multiple SIM accounts and the subsequent rotational SIM churn are two particular emerging market problems that some operators are beginning to manage with analytics. Operators attempt to identify multi-SIM users based on their on-net versus off-net calling behavior and then launch campaigns to capture a larger “share of wallet” from them. They also employ analytics to “fingerprint” subscribers based on their calling patterns and network use to identify the same subscriber regardless of SIM. The new data sources used in analytics include social network information culled from both call detail records and external social networks. Social network information improves traditional churn prediction models, better identifies high-value subscribers, and allows for more precise campaign targeting (see table). Other new sources of data are the campaign responses themselves, helping indicate a subscriber’s propensity to respond to different types of campaigns or messages.

RECALL No 17 – Transition to digital in high-growth markets CLM 2.0: Digital innovations in customer lifecycle management

Pushing data and value-added services (VAS): Word of mouse. Related to this increased analytical sophistication, operators are focused on the push to drive data and VAS usage within the subscriber base. Experience shows that “word of mouse” – especially in the form of recommendations on social networks – drives significant amounts of data and VAS take-up. In fact, this approach works far more effectively than direct campaigns. To make subscribers aware of available VAS content, operators need to build holistic databases capable of aggregating customer content preferences across multiple content providers. This then positions customers for the next “product to purchase” recommendation – a process similar in effect to strategies developed by Amazon and other Web retailers. Sales and distribution: Stimulating the micromarket. Operators can use their more granular subscriber data to direct sales and distribution activities more effectively. They can, for example, better determine micro-

35

market performance from subscriber usage information by mapping subscribers to their base station locations. Marketers can also match CLM data to retailers, particularly in prepaid environments where electronic minutes recharging dominates. Doing so allows operators to segment retailers based on subscriber base. For example, an operator could identify retailers where subscribers have low VAS usage and launch direct cam­ paigns that provide incentives to them to push VAS usage among customers. Similarly, retailers who are not selling enough SIMs could be targeted with direct ­c ampaigns to boost sales.    While mobile operators may consider these capabilities advanced, many are standard practices among online and digital Web content providers. As operators roll out CLM 2.0, they will be developing digital marketing capabilities on par with the broader competitive landscape of digital content providers.

Jia Jih Chai is an Engagement Manager in McKinsey’s Singapore office. [email protected]

Asbjørn Hansen is an Associate Principal in McKinsey’s Oslo office. [email protected]

Noppamas Masakee is an Associate Principal in McKinsey’s Bangkok office. [email protected]

Pradeep Parameswaran is a Principal in McKinsey’s Delhi office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets Satisfaction guaranteed: Customer experience in mobile emerging markets

37

06 Satisfaction guaranteed: Customer

experience in mobile emerging markets

After a decade of explosive mobile subscriber growth, acquisition in emerging markets is beginning to plateau. As “grow-with-the-market” acquisitions dissipate, operators need to shift focus toward truly satisfying customer needs in order to continue adding customers, to improve share of wallet, and to decrease churn. In the rough and tumble early days of emerging markets, the primary goal of most mobile operators was simply to sign up as many customers as possible. Other elements – such as providing an ongoing positive customer experience – were understandably secondary. Following this strategy led to explosive growth that far exceeded that of local GDP. At the same time, it resulted in downsides, such as annual churn that now tops 40 percent in many markets. Times are changing. Two developments are now be­ginning to define mobile markets in emerging econ­ omies – saturation of traditional voice services (e.g., SIM penetration of over 150 percent) and increasing customer sophistication. Learning from their Western counterparts, successful emerging market players are starting to recognize the strong link between customer satisfaction and the ability to attract and retain customers better than the competition. McKinsey analysis confirms this correlation and further demonstrates that ensuring a positive customer experience has become just as important in developing markets as it is in developed economies (Exhibit 1). The up-and-coming focus in emerging markets on improving customer satisfaction raises major new questions for operators (e.g., actions and investments to

enhance customer satisfaction), but also promises oversized rewards for those who get it right early (Exhibit 2).

Four key touch points In developed markets, satisfaction depends on strong performance across a wide variety of touch points – from network to retail to call center performance and beyond. Key satisfaction drivers in emerging markets, in contrast, typically concentrate on only a few touch points. In one recent emerging market survey, four touch points accounted for over 95 percent of total customer satisfaction: pricing (i.e., perceived value), connection quality (i.e., network quality), customer lifecycle management (CLM; including below-the-line communication and loyalty programs), and billing (Exhibit 3). The top three touch points of pricing, connection quality, and CLM drove over 80 percent of overall customer satisfaction. The concentration of impact within these few top touch points highlights the straightforward customer demand for solid execution of core voice and text ­products and “simplifies” the customer satisfaction improvement strategies operators should pursue. Heavy attention (and smart investments) should go toward ­outperforming competition on these four aspects. Improvements to the remaining touch points are, in contrast, unlikely to move the needle on an operator’s overall customer satisfaction. Among these lower-importance features, focus should lie on delivering good “hygiene,” i.e., removing the largest customer dis­satisfiers (satisfaction “killers”) that can drag down the overall experience.

38

01

Customer satisfaction also matters in emerging markets, where it correlates Customer satisfaction also matters in emerging markets, highly with gross gains and churn where it correlates highly with gross gains and churn Gross gains and satisfaction

Churn and satisfaction

Customer satisfaction Index

Customer satisfaction Index R2 = 0.5

R2 = 0.9

Each dot represents the company’s performance in one (sub-)market 15

20

25

30

Each dot represents the company’s performance in different calendar quarters 35

40

45

Gross adds share Percent SOURCE: McKinsey

The following sections explore some elements of the largest drivers behind positive customer experience in emerging markets – pricing, connection quality, and CLM – in greater detail.

0.09

0.10

0.11

0.12

0.13

0.14

0.15

Churn rate Percent DISGUISED EXAMPLE

30 percent – experience the impact of above-the-line pricing campaigns (e.g., television, radio, newspapers, billboards). As a result, the massive, price-focused above-the-line and storefront campaigns often generate less impact than expected and may in fact hurt overall market price levels and profitability without appreciably improving customer satisfaction. In reality, CLM and below-the-line activities using SMS messaging, direct mail, and other targeted options (such as customized offers at stores and call centers) are the real forces of influence for the existing customer base. Excelling at CLM and below-the-line marketing becomes a core winning competency that can allow an operator to simultaneously increase customer satisfaction and meaningfully improve customer lifetime value – through higher ARPU and longer customer lifetime.

Pricing: Lowest is not necessarily best. Pricing stands apart as the most important driver behind customer satisfaction in emerging markets, but one key finding is that low prices alone do not guarantee high satisfaction levels. Even though emerging market customers often face real budget constraints, offering the lowest effective price (i.e., total cost per traffic profile) is not necessarily the best solution. The research indicates that an operator might have the highest effective price plans by far and be the satisfaction leader in pricing. An operator can also have the lowest effective price plans but lag in pricing satisfaction. The key is to manage expectations and perception in creative ways – for example, by offering on-net minute bundles for a fixed fee. This can enable a low headline price (due to a low average price if all bundle minutes are used) but a higher real price since most customers do not use the full bundle – resulting in higher overall ARPU from increased usage.

Connection quality: Find the cliff, fix the micromarkets. The mobile network itself continues to be a major differentiator for operators worldwide. Perhaps nowhere is it more important than in emerging markets, where lively word-of-mouth recommendations quickly emphasize networks that offer high, reliable performance.

Another key consideration: as markets mature and a large part of the subscriber base “stabilizes,’’ only a small portion of subscribers – often no more than 20 to

Experience shows that a few operational metrics matter most when it comes to satisfaction. Operators should seek to gain experience leadership on precisely these

RECALL No 17 – Transition to digital in high-growth markets Satisfaction guaranteed: Customer experience in mobile emerging markets

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Operators delivering a superior customer experience enjoy a premium inOperators the marketdelivering a superior customer experience enjoy a premium in the market Premium relative to average market satisfaction Percentage points

Vodafone, Portugal

+8.6

+5.6

O2, Great Britain

+5.2

Vodafone, Italy

SFR, France

+7.0

+7.3

Telenor, Denmark

Vodafone, Spain

Premium relative to average local market ARPU Percent

+4.2

+10.8

+4.5

+10.3

+3.0

+2.6

+3.9

SOURCE: Company data; McKinsey

metrics. Still, experienced leaders do not neglect any network parameter with a direct impact on customer experience, and “hygiene” or parity levels should be the target for these metrics. Furthermore, operators need to recognize that the importance of elements in the customer experience formula will change over time as markets mature. In many emerging markets, for instance, as outside coverage in urban areas becomes less of an issue, customers typically grow more sensitive to call drop rates (especially when driving) and to indoor coverage (which can differ significantly among players). Beyond urban areas, outdoor coverage is still important to customers in many developing markets and can drive their choice of operator. In terms of targeted levels for network parameters, operators should consider the existence of satisfaction “cliffs” – break points in real and/or perceived coverage, quality, or other factors beyond which customer satisfaction plummets. Operators should manage key network parameters considering these discrete cliffs, since attempts to improve satisfaction beyond them tend to deliver diminishing returns. Once key network parameters and their levels have been defined, these need to be delivered locally and consistently over time. This means individual customers

should experience the target levels where they use their mobile phones personally. Achieving country-wide performance – with possibly wide local variations – will result in a poor customer experience for many, and “unnecessarily good” experience for many others. Operators should, therefore, ensure that call drop rate performance, for example, is measured and maintained for individual base transceiver stations consistently at least on a monthly and potentially a weekly basis. When designing a connection quality strategy, operators need to determine whether a specific gap is only perceived or if it is rooted in real performance issues (or both). The former will require a focus on subscriber communication and expectation setting up front, while the latter will call for real operational fixes. Based on this assessment, the solution will differ by area and have a significant impact on the investment required. CLM: Control the below-the-line beast. Customer lifecycle management can help operators effectively manage price perceptions, especially in markets with maturing penetration. In effect, CLM enables emerging market operators to step beyond the frenzied activities involved in signing up as many subscribers as possible and introduce the processes needed to attract and retain their most valuable customers.

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03

In emerging markets, just a few touch points truly matter In emerging markets, just a few touch points truly matter Touch point

Customer experience net importance Percent

Pricing

32

Connection quality

26

CLM

22

Billing Retail

15 1

Roaming Mobile devices IVR Call center Web site Mobile Internet

Key messages  Approx. 95% of overall satisfaction driven by top 4 touch points – perhaps highlighting the simple “voice and text” focus of the overall market  Pricing and network quality drive around 60% of overall satisfaction  Drivers of low satisfaction on other touch points should be addressed to ensure “hygiene” levels – but this will not result in significant satisfaction improvement across the base

Self-service Complaints DISGUISED EXAMPLE

SOURCE: McKinsey

Clumsy CLM attempts can backfire, especially if customers react negatively to excessive below-the-line campaigns or view overly aggressive third-party services as “spam” or an abuse of trust. In one case, an operator wanting to boost short-term revenues inadvertently increased its CLM-related SMS messaging frequency to between 10 and 20 “advertising” texts per day. This resulted in message overload, diluting impact and infuriating many customers. Since the operator had no gateway or single control point for the different messages it was sending, such overkill was almost inevitable. Poor targeting in terms of response rate or group size can also result in customer dissatisfaction. Another operator targeted very large subscriber groups for its SMS campaigns, often involving over half of all customers. These massive initiatives typically generated response rates of 1 percent or less, while best-practice campaigns often net reply rates in the range of 3 to 5 percent or more. A much more focused approach targeting specific segments of fewer but more similar customer groups would likely have yielded better results.

One size fits most: Emerging market caveats The quest to improve customer experience involves a few caveats. Operators should be wary of relying on

averages in the context of larger, more heterogeneous emerging markets. This is because satisfaction drivers, and the current satisfaction situation in particular, can vary by geography. Such variations are often driven by different competitive starting points and the prevailing competitive situation. They require operators to take a more granular approach to looking at customer satisfaction as it is in their particular market. Within emerging markets, McKinsey research also reveals that lower-income regions often concentrate even further on a smaller number of more basic touch points, while higher-income areas such as major cities embrace a wider variety, reflecting a broader set of customer needs. In fact, the most affluent and urbanized regions of emerging markets often bear a striking resemblance to mature EU markets, with customers concentrating on a longer list of touch points, requiring operators to achieve excellence on multiple fronts.    As the customer landgrab in emerging markets comes to an end and the focus shifts from acquisition to retention and from volume to value, operators with a clear understanding of their customer’s experience – and how to optimize it – are positioned to win.

RECALL No 17 – Transition to digital in high-growth markets Satisfaction guaranteed: Customer experience in mobile emerging markets

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Daniel Boniecki is a Director in McKinsey’s Warsaw office. [email protected]

Conor Jones is an Associate Principal in McKinsey’s Dublin office. [email protected]

Nicolas Maechler is a Principal in McKinsey’s Paris office. [email protected]

Radim Rimanek is an Associate Principal in McKinsey’s Prague office. [email protected]

RECALL No 17 – Transition to digital in high-growth markets New customer overdrive: Turbocharging the acquisition engine

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07 New customer overdrive:

Turbocharging the acquisition engine

As markets mature and service ranges become more complex, mobile operators’ attempts to boost customer acquisition using traditional functional approaches have had limited success. Operators now need holistic programs that focus on multiple elements and are tailored to specific segments and micromarkets. Historically, two broad themes have dominated the customer acquisition efforts of most mobile operators in high-growth markets. First, mobile marketing and sales efforts have largely emphasized simplicity (in contrast to most consumer businesses), with few differences among customer segments aside from pre- versus postpaid. Second, activities have mostly been functionally oriented, such as optimizing pricing, improving distribution management, and launching new advertising campaigns. In a world enabled by 3G and smartphones, the fight is on for every incremental subscriber as markets mature and the breadth of products and services on offer rises by the day. In such a context, an acrossthe-board approach is no longer the best choice. Several operators have also found that a significant increase in customer acquisition is possible only if multiple functional levers are used simultaneously in specific micromarkets to help them shift into a higher gear.

The stalled acquisition engine Marketing and sales professionals spend most of their waking hours either engaged in customer acquisition initiatives or thinking of ways to innovate the process. Approaches include new product launches; distribution revamps to improve reach, capillarity, quality, and trade along with consumer promotions; new advertising

campaigns; plus improvements to network coverage and quality. These traditional initiatives are, however, becoming increasingly blunt. McKinsey research reveals that attackers and late entrants often struggle to make inroads into high-ARPU pre- and postpaid segments in most emerging markets. Generic interventions such as launching new rate plans for high-ARPU subscribers usually fail to help an attacker gain share, since their channel remains weak and retailers lack sufficient confidence to push the new plans. Even increasing channel commissions or launching promotions to support the new products prove ineffective because negative brand perception hinders stronger consumer pull for the products launched. Similarly, incumbents may find their share of customer acquisition flat or declining in markets with high competitive intensity. If a new player takes a very focused and aggressive approach, it can eat away share in a particular segment or geography, which it then starts to own. Incumbent attempts to match the attacker’s rate plans often fail to restore market share in that region. A new equilibrium with lower market share results. These kinds of constellations require a new approach to customer acquisition. First, levers must be tailored to each segment in which a player wishes to drive up acquisition. Second, several functional levers need to be used simultaneously for operators to see a leap in their level of customer acquisition. Successful operators using this new approach have ensured that the organizational effort devoted to this is similar to that of a new operator or market launch in terms of focus, investments, and

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01

Turbocharging customer acquisition engines is having significant impact Turbocharging customer across high-growth marketsacquisition engines is having significant impact across high-growth markets Gross subscriber additions/month – after 12 months of the program Indexed to 100 South Africa

India

SMBs/SOHOs

130

HVIs1

130

Affluent youth

200

SMBs/SOHOs

200

Data dongles Mass market

1,000 120

Philippines

Mass market

Mexico

Data dongles

130

Affluent youth

130

1 HVIs = high-value individuals

125

Baseline: 100 EXAMPLES

SOURCE: McKinsey

resourcing. Third, since this intensive effort usually requires a high budget (often increasing below-the-line marketing spend by a factor of two to three), it works best if initially only conducted in the micromarkets with the greatest potential for improving market share, and tailored to these. This approach has the additional benefit of testing the strategy before a national rollout.

particular interventions. The following chapters outline the important elements of this new customer acquisition approach for two high-ARPU segments: affluent youth and SMBs/SOHOs (small and medium-sized businesses, plus small offices/home offices). Similar approaches are available for data dongles, the mass market, and the c­ orporate sector.

McKinsey research indicates that turbocharging customer acquisition can lead to an increase of 20 to 100 percent (and sometimes a great deal more) in the segments and micromarkets targeted (Exhibit 1). Before launching a multilever, segment- and market-specific customer acquisition approach, it is important for operators to identify and address any structural or systemic hurdles, such as a significant rate plan disadvantage.

Attracting young, affluent users

The turbocharged acquisition engine at full throttle Turbocharging the customer acquisition engine requires the use of multiple functional levers simulta­ neously to target a particular customer segment, often in specific micromarkets. McKinsey’s approach includes consumer insight-led, segment-specific strategies ­illustrated below for each segment, including multiple tools/templates that can be used to design and execute

In most emerging markets, the affluent youth segment accounts for 20 to 25 percent of market revenues. Customers often have top-quartile prepaid ARPU – two to three times the overall ARPU in most emerging markets. This segment is driven by content, applications, and handsets. Such customers are attractive for acquisition programs following the market launch of 3G services. Small-screen 3G data is often the hook that players weak in the affluent youth segment use to gain share. Sadly, most such efforts fail. Simply designing a few attractive 3G data plans and getting the starter packs distributed to existing outlets is frequently insufficient to overcome these customers’ barriers to adopting 3G data services or switching to a weak brand that leading stores might not carry. Gaining substantially more market share in the affluent youth segment requires a more holistic approach. Strategies specific to the affluent

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Data packages for the affluent youth segment must be affordable Data packages for the affluent youth segment must be affordable yet adequate yet adequate Data share of total ARPU, March 2011 Percent

Minimum usage allowance MB per month

Vietnam

25

Colombia

21

Malaysia

21

Argentina

20

Mexico

19

Brazil

19

Chile

Video on demand App store/portal 200 - 240 MB/ month needs to be provided at 12 - 25% of ARPU

Video streaming Songs Push mail

90 - 100 90 - 100 5 - 10 10 - 20 5 - 10