Radioactive: Mobile operators' family secret - churn

'I'm promiscuous, professional and sociable.' This is not a lonely hearts ad but one of many ways mobile operators describe customers. No wonder millions are not loyal, says Futurity Media's Stewart Baines.

All the mobile world will turn its eyes to Cannes next week, when the annual beauty parade 3GSM Congress gets underway. While funky new handsets, faster-than-Billy-Whizz network upgrades and mobile TV will grab the headlines, something darker lies below the surface, something the industry is reluctant to talk about: churn.

No matter what mobile operators do, they can't stop losing customers - and they are losing them by the bucketload. 3G won't change this. For all the billions spent on licences and network build, close to a third of customers will leave their service provider this year.

Statistically, it won't be the first or last time they move operators. As many churners have been mobile users for years, it is likely they have done the full tour of UK mobile operators and are ready to start on the second tier - Virgin and 3 - or return to one of the old guard in the hope that this time they've got it right.

During 2003, churn cost European mobile operators €4.5bn in unnecessary expenses and €5.6bn in lost revenues, according to the latest figures from researchers Analysys. This equates to roughly eight per cent of total mobile revenues.

Trace back to 2000 and the picture is similar. Churn levels in the 'gang of four' (O2, Orange, T-Mobile and Vodafone) were 17 to 30 per cent. Now they are 30 to 35 per cent (excluding Orange which has not published its latest churn figures).

When voice was all that was offered, the high level of churn was caused by a lack of product differentiation, claimed the marketers. Mobile services were commoditised and operators needed data to differentiate themselves. So data services duly followed - SMS, MMS and now gaming and music downloads. But following a brief delay, most operators matched their peers with a similar service - once again making mobile services highly commoditised.

So why do people churn? Money as ever is the prime mover; lower tariffs, more minutes, more minutes at the right time of day, more minutes at the right time at the right tariff. Little changes. The subscriber numbers that 3 has managed to rack up have come largely off the back of bucket pricing for call minutes.

The same problem will be faced with 3G. It won't simply be an upgrade or an upsell to existing customers. The current high churn level is evidence of this. Each year, when contracts reach their annual renewal and handsets need replacing, millions of customers are lured by offers at the local Carphone Warehouse or by internet advertising into choosing a new service provider. With number portability now much more fluent than when it was first implemented, a new handset often means new network.

3G will put the operators back into growth stage, yet there is a desperate need to keep the retention mindset. The customers most attracted to 3 are those most likely to churn and that should be a serious concern. 3 will need to retain them with something more than price; no one stays the cheapest for ever.

That's not to say mobile operators in general are not doing well. ARPUs and profits are up; fixed-to-mobile substitution is delivering unexpected revenues and the messaging and ringtone value-adds are totting up nicely, thank you very much.

But we've been told time and again it costs five times more to win a new customer than retain an existing one. While this is something of an urban myth - TARP, the US market researchers who came up with the original idea, explain that it varies from twice as expensive up to 20 times as expensive depending on industry - it is disingenuous to put growth above retention.

As with many industries, some customers cost more to service than the revenue they bring in, so some churn can be desirable. But not a third of your customers a year. From my conversations with senior executives within the industry, churn is being viewed as a very big problem indeed.

Much is being done to make customers more loyal. Attention shifted briefly to migrating prepaid users to contracts. Stats showed the contract customers had APRUs over two to three times the prepaid and were more loyal. But Yankee Group research now shows the vast majority of prepaid customers intend to stay that way. And those most likely to churn are high ARPU youth consumers - those that are the most likely target of early 3G services.

Fixed-mobile convergence, or FMC, may prove a boon. Despite convergence services working against fixed-mobile substitution (because mobile operators share calling revenues with the fixed operator), churning from an FMC service every year is much harder than just changing your mobile handset, as an FMC service is linked to the home phone and home phone number.

Something as simple a lengthening the contract period to 18 to 24 months in return for further discounts or bundles will stem some of the churn but not all of it. It's a problem that's not going away.

Consequently, operators and vendors have devised all manner of segmentation strategies to understand, and consequently serve, us better. To some operators I'm an ABC1, to others a metrosexual, an SME, promiscuous (I churn a lot) and to Ericsson I'm an 'educated sociable'.

The chances of any of these accurately predicting my mobile purchasing patterns are as good as a horoscope predicting my future. The odds would be better picking a horse based on its rider's colours. Segmentation in marketing and product development is not keeping me loyal to my service provider.

An innovative idea has been presented by analyst Emma McClune at Current Analysis. She argues operators need to shift their attention from thinking of customers as isolated individuals to social animals with tight couplings with other people, be it friends, family or clubs. Members of these groups have different archetypal segmentation labels, yet share something in common: they call each other a lot. By tying these people together into a family VPN - or 'family circle' - loyalty could be vastly increased.

It may not be the ideal solution but the point is operators need to start thinking about more radical ways to keep their customers - otherwise they might as well burn millions of fresh bank notes on a pyre.

Stewart Baines is a freelance journalist and a director of Futurity Media.