Customer Churn

*This case study has been designed for iCreate 2016 and is for illustrative purposes only

With high phone penetration levels, the era where growth of the firms is secured because of customers
approaching the company is a thing of the past.

Market leaders across industries are facing the most disruptive market conditions in decades. Competition
has accelerated; large rivals continue to compete by aggressively buying market share, new entrants are
more nimble, and substitute products seem to pop up at almost every turn. These competitive forces
particularly apply to the telecommunications industry where competitors slog it out for increasingly
demanding customers and in a space where products and services are almost commodities making price
the only differentiator. Aggressive efforts on acquisition, especially of quality customers, becomes
important for all telcos.

The Indian Telecom Market

India is the second most populous nation, one of the emerging economic powers, and the second largest
and fastest growing mobile market in the world with nearly one billion subscribers. With a lack of physical
infrastructure, evidenced by a low penetration of fixed telephony, most in India regard mobile
communications as a critical element in todays environment.

India has 15 mobile carriers in a highly competitive, predominantly pre-paid market that is largely driven
by the subscribers unremitting efforts to secure better pricing. About 96% of all mobile subscribers elect
for a prepaid service, and those subscribers are constantly transitioning between mobile service providers
to realize incrementally lower prices. Moreover, the excessive competition in the market further fuels the
trade channel incentive war to garner the larger chunk of gross additions.

The Company

Celltalk Limited is a reputed telecommunications company with a customer base of over 200 million in
India. The company offers services all over India, and their product offerings include 2G, 3G and 4G
wireless services. The company has been putting concerted efforts towards tackling the current hyper
competitive scenario resulting in high churn and an aggressive trade strategy witnessed by the industry.
Being a market leader, an aggressive tariff reduction strategy as that adopted by new entrants is neither
a sustainable nor advisable.
Over the last quarter, the Operations Director (OD) of Celltalk pressed on the need for concerted efforts
to continuously drive acquisitions, which is particularly essential albeit challenging in the wake of the
current telecom scenario in India with the following factors significantly impacting the market dynamics:
- High mobile penetration most customers in urban areas have a phone
- Hyper competitive market local players indulging in aggressive price wars
- Mobile Number Portability
- Easy availability & high uptake of low cost Dual-sim handsets fueling multi-simming behavior.
- New entrants incentivizing trade channel to garner jumps in market share.

In the recent review of the performance of the last quarter, Celltalk performance indicators show that
while it had managed to ramp up subscriber gross additions substantially, the increase in the overall
customer base and revenues was significantly lower than the expected growth from additions. The
Operations Director (OD) asked his team to get to the root cause of the issue and also look at the
competition and overall telecom market performance on this account.

While the team highlighted to the OD that the overall churn in the market increased over the last
quarter and that Celltalk was able to sustain its churn at significantly lower levels than the rest of the
telecom market in India as can be seen from the chart below, a deeper dive on the increase in our churn
levels was imperative to control the issue going forward.

The marketing manager reiterated that the team had devoted significant efforts on retention and usage
enhancement but they are not able to arrest the churn rate to the extent they would wish to. Certain
key characteristics of customer behavior noted in this regard by the team are included below:

Many attractive promotional schemes and packages had been offered to retain the prepaid customers
as the cost of acquisition is very expensive. These measures have been found to be not completely
effective
The offers given to customers is based largely on the criteria of ARPU (average revenue per user).
Lower the ARPU of a customers, better is the offer to the customer
Customers have become highly choosy and they are hopping from operator to operator, since they
dont have any commitment in terms of contract with respect to prepaid services. They have scattered
needs and switching behavior fuelled by dual sim phones.

Basis the above insights, the sales manager in the team insists on further incentivizing trade to match
competition payout structure, mitigate the impact of churn through higher gross additions as well as by
giving more promo discounts and free talk time offerings to the customers, this time to a larger base to
reduce churn.

It is essential to note here that Churning is a costly process for the company, as telecom firms are
spending a high percentage of their operation cost on acquiring the customers. Winning back a churned
customer is considered to be a very expensive proposition payout to the trade channel for getting the
same customer back plus customer needing something extra to come back.

As the finance manager, you realize that the issue to manage is not just driving additions to base, but
ensuring that the base being added is a quality addition. To address the issue, the team initiated a deep
dive into the customer segmentation and profiling. A further drill down on the age of the customers on
the network and the churn trends gave a greater perspective to the team on the issue.

The customer service manager gathered that a larger portion of the churn base this quarter was from
the customers who had been newly acquired by the telecom operator, i.e. customers in the 0-3 month
age bracket. He presented the observations to the entire team.

The team realized that the push to add customers, with a lack of sufficient filters to ensure quality of
acquisitions, is a key cause of poor business performance. Aggressive commission payout and target
achievement bonuses to trade partners had led to Celltalks increasing payouts if not matching that of
competition over the last few months.

It is highlighted by you that the solution proposed by the marketing manager is more likely to further
proliferate the issue and result in higher selling expenses with a negligible upside to the revenue. The
drive to push acquisitions had resulted in poor quality customers joining your base. This could have been
brought about by several factors a few of which are enlisted below:

- Trade fraud to achieve target based payout

- Dual simming by price sensitive customers resulting in split in customer ARPU (average revenue
per user) amongst players
- Poor customer profiling, e.g. Since trade earns a higher commission on postpaid, it may
sometimes push an undecided customer who would predominantly fall in the prepaid target
segment to take up postpaid connections thus resulting in a higher bad debt and churn risk of
such customers.
- Rotational churn of customers due to certain new acquisition products being more cost-
effective than the existing plan of the customers.

You emphasize the need to undertake the following initiatives to address the issue:
- Framework for Trade channel wise analysis of the quality of customer additions, to enable
identification and targeted action program which will penalize the fraudulent partners
- Structuring payouts and incentives to trade to ensure they dont have arbitrage opportunities of
buying the sim and still have a net positive inflow.
- A churn management system which attempts to identify customers who are likely to churn, and
the value of such customers. Once identified, at-risk customers may be offered loyalty
incentives based on the value of the customer to the carrier.

You share the importance of a more stringent acquisition process as given below.
1. Importance of a stringent acquisition process

With a well monitored and stringent acquisition process a firm can

Ensure real revenue generating subscribers enter the system.

Reduce acquisition costs.
Maximal control through accurate and up-to-date monitoring and evaluation of trade partners.
Mitigating any incidence of fraud in the future.
Better overall health of the business and performance on key subscriber indicators.

As a conclusion firms have to ensure getting the right customers on board and avoiding unnecessary
inflation of customer base and linked costs. Clearly, a solution that lets organizations achieve this goal
can contribute directly, and considerably, to a telco's ability to survive in today's deregulated and highly
competitive telecom industry.

2. Case Evaluation

In order to substantiate your points above, you are left with the following questions to be answered to
further devise a more tangible proposition

a) What are the effects of poor quality subscriber additions in financial and non-financial terms?
b) What analytical and fraud management capabilities need to be developed in the area of new
customer acquisition and towards prevention of trade channel fraud? What are the associated KPIs
to be monitored?
c) What features can be used to build a predictive model for customer churn?
d) How would you build a financial model on cost of churn for business?
ANNEXURE 1:

Definitions:

Acquisitions / Subscriber gross additions New customers added by the telecom operator.

Penetration Percentage of users to the total population.

Mobile Number Portability - Mobile number portability (MNP) enables mobile subscribers to retain their
mobile numbers when changing from one mobile network operator to another.

Churn - Number of customers that leave a telecom service provider over a given time period. It is
calculated as a monthly number by dividing the total number of disconnections during the relevant
period by the average customers; and dividing the result by the number of months in the relevant
period.

Retention and usage Initiatives undertaken by telecom service providers to avoid and mitigate
customer churn and also increase the average revenue generated from each subscriber.

Trade The sales and distribution partners/channel, i.e. distributors and retailers driving subscriber
acquisitions and revenues through recharges, etc.

Customer segmentation and profiling Segregation of customer base on the basis of their behavior, age
on network, revenue generated, etc. for better offerings and strategies to ensure longevity and higher
Average Revenue per User (ARPU).

Trade fraud Distributors, retailers, etc. doing fluff acquisitions adding no benefit to a telecom service
providers revenues despite adding to the subscriber base. This phenomenon is noticed in situation like
when the trades purchase price of getting a new connection is less than the commission he will get paid
on that acquisition.

Dual / Multi - simming - Customer are increasingly actively using more than one mobile subscription
simultaneously. Therefore, the total number of mobile subscriptions is significantly larger than the
unique number of individuals that have a mobile subscription. This behavior of using multiple
sims/mobile numbers by one individual is termed as dual or multi-simming.

Revenue generating subscribers - Customer who contribute to the revenue of the telecom service
provider, i.e. customers who made at least one revenue generating call or a data session of more than
zero Kbs on the network in the last 30 days.