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Avoiding the Prepaid Death Spiral

Steve Polsky

Imagine a situation where the active roster of every American football team, or the first-team squad of every Spanish soccer team, changed in its entirety every two years. No more Tom Brady and his six Superbowl successes for the Patriots; no more Lionel Messi and his 33 trophies with Barcelona.

Now, while some sports fans might like the idea of sharing those superstars around, imagine how the costs involved would continue to spiral as all the teams chased all the players all the time. No stability, no loyalty, no long-term relationships or planning -- just a constantly changing cast of characters.

It's no way to run a sports franchise, or indeed a business, where certainty and stability is usually required to make a real success of an enterprise. Amazingly though, that very scenario is being played out in prepaid mobile markets all across the world.

Prepaid is the great mobile market we don't talk about, yet its 5.7 billion users dominate the industry -- representing 71% of all mobile connections and accounting for 32%, or $265 billion, of global mobile service revenues.

New insight
Research carried out by Strategy Analytics has lifted the lid on the death spiral sitting at the heart of the prepaid market. The report -- "Death by a Thousand Nos" -- showed that, on average, operators in emerging markets must replace their entire prepaid subscriber base every two years; in some markets, the annual churn rates touched 80%. Imagine that in a region like Africa, where the prepaid market represents 94% of the continent's connections and 80% of its mobile revenues.

This never-ending cycle of churn and replace sees billions of dollars of operator opex being wasted annually, as operators chase their tails acquiring and re-acquiring the same constantly churning customers. In the eight markets that Strategy Analytics focused on for the research -- Argentina, Brazil, India, Malaysia, Mexico, the Philippines, South Africa and Thailand -- the operators collectively spent some $670 million in 2018 replacing lost prepaid subscribers.

It gets worse. In many cases, existing telco business models are actually geared towards trophy-hunting the same churning prepaid customers. In the last year, 90% of the cost of prepaid subscriber acquisition was devoted to replacing churning customers. Just 10% of the spend was focused on retention and revenue growth. In most businesses, this would be seen as folly and unsustainable. In the mobile market it is considered normal.

However, the truth is that the current telco prepaid business model is not sustainable -- especially when the introduction of e-SIMs is going to make the whole process of switching operators even easier for everyone. This includes that highly valued and protected species of customer known as "post-paid."

Breaking free
So how do operators go about breaking the death spiral? What tools can reduce churn, build relationships and encourage loyalty? It can't be about airtime incentives or larger data bundles, because that's what every operator is doing, and is the key factor underpinning and encouraging the churn in the first place.

According to the Strategy Analytics data, one answer could be for operators to put an end to the culture that says "No" when a customer hits a zero balance -- something that occurs for the average prepaid customer once every week. Two things happen when a prepaid customer hits zero balance -- the first is that they stop using their phone; the second is that they start looking for a deal. Neither of these developments is good for their current operator.

Short-term thinking, a lack of trust, and an economy characterized by an aversion to risk that manifests itself in a tendency towards saying "No" rather than "Yes" are all part of the churn problem. A customer hitting zero balance should be an opportunity for the existing operator to retain them and encourage their loyalty, rather than a chance for a rival operator to acquire them.

A positive strategy
A prepaid customer proactively offered a low-risk, short-term credit facility, so that they can carry on making calls and accessing data services, will be deterred from shopping around for a better deal. The short-term credit is repaid when they top up. Saying "Yes" to that customer, at that time, can also mark the beginning of a longer-lasting, and mutually beneficial relationship -- one in which the customer gets access to more services, and the operator gets to learn more about that customer's identity.

Currently, prepaid users are virtually invisible to their operators. Many of them do not have any formal financial identity and this only encourages the "No" culture. But the operator that says "Yes" to a small interest-free airtime credit extension can then start to build a picture based on payback behavior, using machine learning to determine individualized lending criteria based on real-time data.

Using this model, customers can continue to borrow and pay back larger and larger amounts of credit. This will slowly build trust, reducing risk and forging a financial identity that creates a compelling reason to stay with their operator. Their SIM card has effectively become their first "formal" proof of financial identity and reliability, providing access to more sophisticated financial services.

Simply by saying "Yes" and meeting their customer's needs at the right time, operators can benefit from improved engagement, increased subscriber lifetime value, and ultimately, reduced churn. It turns out that saying "Yes" more often is the way to stave off "Death by a Thousand Nos" and to escape the prepaid death spiral.

— Steve Polsky, CEO, Juvo

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