Customer Value Development

October 2009

The Delta Perspective

Customer Value

Development improves

commercial practices and

generates benefits regardless

of the operator’s level of

sophistication: 5-15%

EBITDA improvement, with

immediate payback

Customer Value Development: A fresh perspective on emerging markets’ telecom economics

Authors Rogier van Driessche – PartnerMaurício França – PartnerChristophe Costers – Manager Adriana Salabert – Head of CVD unit

Introduction

Until very recently, telecom operators

in emerging markets had a clear, single

strategy: customer acquisition. Relatively

low penetration in most markets and

benign competitive environments

meant that all players were focused on

the expansion of their networks and

the capture of market share as fast as

possible.

Today however, the situation has

changed dramatically. Many emerging

markets are reaching saturation,

competition is fierce and ARPU is

under pressure. Creating returns on

significant investments in network

deployment seems more difficult than

ever. Increasingly, operators have

realised that they do not sufficiently

understand the real drivers of value

creation – “Are my new acquisitions

profitable?”, “How does churn affect

company value?”, “How do different

segments contribute?” and “What is the

KEY HIGHLIGHTS

“Customer Value Development” • (CVD) is a process that puts rigorous customer data analytics at the basis of all major management decisions in a Telecom Operator

It is an essential capability that helps • operators in emerging markets to deal with the challenges of today’s market reality: declining growth, ARPU pressure due to multi-SIM behaviour and rotational churn.

CVD develops a new set of KPIs and • operational metrics that fundamentally alter the way operators go about their business

It further helps to optimise marketing • and sales practices and puts in place the foundation for the definition of micro-segmented marketing campaigns

To fully unlock CVD’s potential, specific • capabilities need to be built in the network, IT and marketing functions

The benefits of CVD are accessible • to all operators, regardless of their current level of sophistication: Several operators have reached EBITDA improvements of 5-15%, with immediate payback.

Delta Whitepaper Design-07.indd 1Delta Whitepaper Design-07.indd 1 11/9/09 9:28:46 AM11/9/09 9:28:46 AM

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true bottom line impact of marketing

and sales tactics?” are questions often

heard.

These questions reveal the reality of a

structural lack of well organised and

insightful management reporting that is

present in many operators and also the

uncertainty that comes with a change in

paradigm.

Two industry trends require operators to

shift their approach to ensure success

under this changed paradigm:

First, operators have gradually realised

that they no longer have an accurate

picture of what was once called “the

subscriber”. Clients have lost their

exclusive loyalty to the operator, and

use multiple SIM cards or more than

one network operator simultaneously.

This means that they take advantage of

arbitrage on pricing schemes, or they

benefit from the best offers by switching

from promotion to promotion. As a

result, operators should shift their focus:

from mainly acquisition and sometimes

retaining “subscribers” to retaining and

maximising ‘share of wallet’.

Second, as current market maturity

means that the segments at the bottom

of the pyramid are being addressed, the

concentration of value contribution in

a few “high value segments” becomes

increasingly clear. This means operators

should adopt a highly segmented and

targeted commercial approach to ensure

return on investment and positive

bottom-line impact.

To adapt to these changing rules of

the game, operators have two main

challenges:

New KPIs are required. These are •

more complex and present the need

for greater analytical sophistication

than the ones operators used to

apply. A key question is how to

organise and process data in order

to produce insightful metrics?

Newly acquired insights need to •

translate into effective actions.

Here the main challenge is how to

revise previous practices in both

commercial and technical areas of

operation.

Customer Value Development is our

answer to these new challenges. In this

paper we will try to illustrate what CVD

is all about and how it can impact the

way operators conduct their business.


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What is Customer Value Development?

“Customer Value Development” introduces a new

set of KPIs and operational indicators based on

rigorous customer data analytics. It fundamentally

alters an operator’s outlook on the economics of the

business, which facilitates improvement on ongoing

commercial practices immediately

At the core of CVD is the idea of

leveraging customer data to drive

better business decisions. As such,

CVD aims to optimise three core

value drivers (see Exhibit 1) for telco

operators: churn reduction, ARPU

stimulation and cost efficiency/ROI

improvements. The drivers are not

new, but the context of each of them

has changed significantly in emerging

markets over the last year:

Churn• is no longer just

concentrated on counting

disconnections. Firstly, it is difficult

to define a disconnection due to

the high percentage of prepaid

users. An inactive line may be a sign

of a customer that changed to the

competition, or just a lost SIM-card

that was replaced in the market

(i.e. rotational churn). In addition,

churn may also mean partial value

loss – as customers shift part of

their traffic to another provider.

As a result, churn reporting is now

focused on understanding value

loss and driving targeted actions

that remedy this loss at the source.

ARPU stimulation• is also no longer

about just cross-selling and up-

selling. This remains of course a

key challenge, and especially new

revenue streams like data or VAS

provide excellent opportunities in

this sense. However, more than

this, the ‘A’ in ARPU (which stands

for ‘average’) hints at the greatest

driver of ARPU stimulation: more

effective acquisition and retention

of high value customers in the base,

in order to skew the customer mix

towards the high end. Lastly, ARPU

stimulation is about share of wallet

optimisation.

Cost efficiencies • are no longer

about the generic benchmarking of

OPEX. There is now a requirement

for a greater focus on below the

EBITDA line. ROI is the new area

of emphasis and analysis of the

customer profiles and revenues

generated by specific investments

(e.g. BTS level) will provide insights

into the type of profitability path

operators are on.

Customer Value Development provides

the analytical underpinnings to dissect

all of these drivers. It provides new

ways of measuring and observing

these trends, on a customer by

customer basis. It introduces new

dashboards and reports that provide

fact based and enhanced insights as

to how value in the customer base is

developing. This generates immediate

commercial improvements in two

ways:


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It offers a better understanding of 1.

the relationship between a whole

range of commercial actions and

the value they create (or actually

destroy). This indicates how to

optimise commercial tactics.

It provides highly granular insights 2.

into the customer base and how

different segments contribute

value. This allows the design of

micro-segmented campaigns that

are highly effective and cost-

efficient.

At the start of the CVD

implementation, the operator embarks

on a journey of capability building,

which is not completed overnight.

Understanding the requirements is

key. The main challenge however is

to develop these capabilities while at

the same time reaping the benefits of

CVD as early as possible.

The subsequent sections will further

illustrate both of these areas, as well

as the capabilities required to effect

them.

EXHIBIT 1: HOW CUSTOMER VALUE DEVELOPMENT CREATES VALUE

Source: Delta Partners analysis


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Optimise commercial tactics based on fact-based insights

CVD focuses on different types of

analyses that consistently produce

valuable, actionable information to

improve commercial tactics. Both

the analyses and resulting actions

span a wide range, including price

plans, commission schemes, customer

care models, network deployment

adjustments, regional go-to-market

strategies, loyalty programs and

commercial KPIs.

The section below provides some

illustrative examples of how CVD has

brought new insights that changed the

way operators approach the market.

Update of churn and 1. retention tactics after understanding the true value-impact of churn

CVD reports allow for a detailed profile

of churners. After segmenting churners

by value and lifetime, operators better

understand the difference between

true churners (clients with a long

relationship with the operator that

leave) and so called “rotational” churn.


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In many emerging markets, up to 70%

of all churn is generated by customers

that either “leave” the operators,

just to buy another SIM of the same

operator, or buy SIM-cards that were

fraudulently activated. Once such an

understanding is established, the focus

of the operator on churn reduction

changes dramatically. Reducing churn

in this context is not only related to

customer satisfaction, pricing or brand,

but very much linked to the optimisation

of certain processes and the termination

of dealer fraud.

Increased localisation of 2. marketing efforts after BTS based customer analysis

Through the use of CVD analysis,

operators obtain a far better

understanding of the geographical

distribution of their segments. While

operators previously turned to BTS

utilisation to drive regional marketing

and sales efforts, CVD mines the CDR

based data to actually pinpoint the

location of a customer and profile

customer segments on a BTS level.

This allows “broad-stroke” regional

marketing and a highly segmented

local approach with offers and

communication messages specifically

tuned to the customers in the target

area. Thus, greater segmentation means

more relevance and more effective

adoption of the marketing message.

Adjustment of an 3. operator’s handset strategy after assessment of IMEI data

Analysis of links between IMEI number

(unique for a handset) and MSISDN

(unique for a SIM) over a period of

time and per BTS generates insights in

handset sharing patterns. For example,

in an African operator, this analysis

allowed the company to identify

geographical areas characterised by high

ratios of full-time handset sharers. This

information was used to target these

areas for the sale of Ultra Low Cost

Handsets, which drove an increase in

local ARPU.

Turn around a value 4. destructive marketing campaign as a result of more accurate value impact measurement

An operator was running a top-up

campaign in an attempt to exploit the

elasticity in the market. The campaign

stimulated customers to top up: ‘Top-

up for Y and get 20% free credit’.

But instead of generating additional

revenues, CVD analysis found that the

campaign had destroyed value.

To make things worse, the campaign

had inspired competition to launch

similar campaigns, which lead to overall

value destruction in the market.

As these examples show, CVD is a

powerful tool to optimise commercial

tactics. The implementation of CVD

is an eye-opener for many operators.

This is often the first time that they are

presented with empirical evidence that

certain tactics destroy value and should

be discontinued, while other evidence

indicates initiatives that can create

instant value.


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Launch highly effective micro-segmented marketing campaigns through enhanced customer base understandingAnother common use of CVD is the

development of micro-segmented

marketing campaigns. The type of

dashboards and reports that CVD

develops allows operators to easily spot

opportunities for up-selling or cross-

selling or for the reduction of client

inactivity.

Micro-segmented marketing campaigns

focus on small target segments.

Therefore, they allow for more relevant

marketing messages and offers, while

minimising communication cost and

potential cannibalisation effects. As

a result, these campaigns are highly

effective and cost-efficient.

CVD dashboards and reports provide the

necessary understanding to successfully

design these micro-segmented

marketing campaigns. They offer highly

granular insights into the customer

base and the manner in which different

segments contribute value. As a result,

opportunities for up-selling, cross-selling

or for the reduction of client inactivity

are easily identified.

In an emerging market context,

however, the biggest use of micro-

segmented campaigns is to increase

share of wallet of multi-SIM segments,

which often represent up to 70% of an

operator’s customer base. Understanding

the usage patterns and reasons for the

use of multiple SIMs (which can vary

significantly between segments) can

create immediate value. CVD helps to

develop relevant, targeted offers for

these different segments in order to

stimulate usage.

The way CVD driven campaigns are

designed and executed differs from

typical marketing campaigns in several

aspects and follow a six step cycle as

indicated in Exhibit 2:

Campaign Hypothesis: • CVD

campaign ideas are based on

analysis and hypotheses derived

from real/factual data. CVD does

not base campaign ideas on market

practices or management intuition.


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Offer:• CVD offers are micro-

segmented instead of generic and

valid for all customers. Operators

that initiate CVD normally start with

larger segments (representing 15-

30% of their total customer base),

while more advanced operators use

smaller segments (2-3% of their

total customer base per segment).

Testing: • CVD campaigns are

always tested and value impact is

measured before roll-out. This is

done via small ‘test groups’ whose

behaviour is always compared to

that of so called ‘control groups’ to

ensure deviations can be attributed

to the campaign that was tested.

Execution:• Communication is

usually below the line to ensure

proper targeting, cost savings and

the avoidance of an initiation of

competitive reactions. In advanced

operators, campaign execution can

be automated through dynamic

mechanisms that identify the

“best” offers for a given subscriber

at any particular point in time

Monitoring:• Campaign results are

tracked through simple comparison

of test groups with control

groups - whereas this is typically

very difficult in ATL (Above the

Line) and / or non-segmented

campaigns

Learning:• The ability to monitor

results and test different

approaches ensures that the

marketing team learns and evolves

over time.

EXHIBIT 2: MICRO-SEGMENTED MARKETING CAMPAIGNS

Source: Delta Partners analysis


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Essential Customer Value Development capabilities

What does an operator need in order

to deploy CVD? There are four types

of capabilities needed for CVD as

indicated in Exhibit 3. Operators may

have different levels of maturity and

a first step is to understand where

each operator is in terms of these

capabilities:

Customer value management requires certain

capabilities for full execution, although measurable

results can be obtained from the very beginning,

regardless of an operator’s starting point

People and Organisational •

Capabilities: Which team within

the organisation is responsible for

Customer Value Development? Is

there a dedicated retention and

campaign management team,

trained in the CVD methodology?

Are there dedicated MIS resources

with specialised analysis capabilities?

Which skills are present and which

are lacking? Does the team have

adequate analytical and data

analysis skills?

Systems Capabilities:• Do the

IN and billing systems have the

minimum reporting requirements?

Is the operation using separate

“wallets / dedicated accounts” in IN

to manage different promotions?

Which SMS broadcasting capabilities

are available?

Processes Capabilities:• Are the

Customer Value Development

processes in place? How well are they

known and executed by the team

responsible for CVD?

Customer Understanding •

Capabilities: Which primary research

capabilities exist in-house? Which

segmentations studies do exist?

Does the operator know of the main

complaints from customers and their

expectations from the company?

Once an operator understands where

it is positioned in terms of these four

capabilities, it should benchmark itself

with its desired outcome, taking into

account the nature of the competition

in the market and the level of

sophistication of other players.

In emerging markets in particular,

special attention should be paid to

People and Organisational Capabilities

– lack of talent is usually the main cause

for lack of results in Customer Value

Development.


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The key for success is a pragmatic

approach, focusing on the critical

aspects first and ensuring that CVD

starts producing tangible results as

soon as possible. Leveraging on our

experience in the region, we have

identified three key success factors

for successful Customer Value

Development:

Focus on obtaining results •

quickly: Too many CVD efforts get

abandoned because they fail to

deliver results quickly. A focus on

pragmatism and results is crucial.

Targeted campaigns are a good way

to show short term impact, although

it is important that CVD doesn’t

stop there. An experienced team

typically helps to gain quick results

as it can leverage experience from

similar situations to evaluate ideas

and improve commercial tactics and

targeted marketing campaigns.

Set up a multidisciplinary team •

to kick-start CVD: It is important to

involve various functional areas from

the start. The appropriate availability

of resources from all involved

departments (mainly IT, network and

marketing) is key.

Ensure management support.•

This is crucial to encourage the

vital cross-functional operation. It

can be done very simply through

providing enough management

attention, visibility and credits from

all functional areas.

Our experience with CVD in emerging

markets has proven very positive.

The results vary from client to client,

but as indicated earlier (Exhibit 2) the

improvement initiatives and marketing

campaigns were responsible for EBITDA

improvements between 5 and 15%.


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Conclusion

Delta Partners’ experience

in Customer Value

Development

Delta Partners has ample experience

in Customer Value Development in

emerging markets, having worked

with several operators on this topic.

Delta Partners can support operators

that need to start or revise their

Customer Value Development practices,

providing:

A dedicated CVD unit, with analytical •

experts specialised in telecom

customer analysis

A highly experienced team, with real •

experience in the region and a track

record of constantly creating 5-15%

EBITDA improvement in over 20

operations in emerging markets

An extensive and proven library of •

campaigns that can be implemented

quickly (for less advanced operators)

and tools to improve and automate

campaign management (for more

developed operators)

An automated “customer base scan” •

that has been utilised and proven

in a multitude of market situations,

allowing a quick run of over 50

standardised analyses that provide

insights in value development of

customer segments

Operators in emerging markets

today deal with major challenges

related to declining growth, ARPU

pressure (due to multi SIM behavior)

and rotational churn. Customer

Value Development deals with these

challenges via leveraging an operator’s

most unique assets – the data it owns

about its customer base. Detailed

analysis of these data generates the

insight required to optimise various

commercial tactics and roll-out

highly effective micro-segmented

marketing campaigns. Obviously, a

range of specific capabilities should be

developed to fully unlock the potential

of CVD. But this does not mean

that CVD’s benefits are immediately

accessible to all operators,

regardless of their current degree of

sophistication: experience has proven

that CVD can generate 5-15% EBITDA

improvement with immediate payback

in emerging markets.


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Delta Partners is the leading management advisory and investment firm specialised in Telecoms, Media and Technology (TMT) in

high growth markets. It has more than 130 professionals operating across 50 markets in the Middle East, Africa, Eastern Europe and

Emerging Asia. From its offices in Dubai, Johannesburg, Bahrain and Barcelona, Delta Partners provides three highly synergistic services:

Management Advisory, Private Equity and Corporate Finance.

Advisory: Delta Partners’ advisory professionals partner with C-Level executives in telecom operators, vendors and other TMT

players to help them address their most challenging strategic issues in a fast-growing and liberalising market environment in over 50

markets.

Private Equity: As a fund manager, Delta Partners manages a $80M private equity fund, targeting investment opportunities in

the TMT space in high growth markets. The focus is the Middle East, Africa, Eastern Europe and Emerging Asia. Delta Partners

private equity fund leverages the firm’s unique TMT industry expertise to create value for its investors throughout each stage of the

investment cycle, from deal sourcing to supporting portfolio companies in driving value extraction.

Corporate Finance: Delta Partners provides corporate finance services and has been involved in several buy-side and sell-side

telecom transactions in the region. As true industry specialists, the firm offers a differentiated value proposition to investors

and industry players in the region. Delta Partners actively leverages its close link to its private equity arm to access the investor

community as well as top-level financial talent.

Delta Partners delivers tangible results to its clients and investors through an exclusive sector, geographic focus and its synergistic

business model.

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