Customer Value Development - October 2009

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October 2009

The Delta Perspective

Customer Value

Development improvescommercial practices and

generates benets regardlessof the operators level of

sophistication: 5-15%EBITDA improvement, with

immediate payback

Customer Value Development:A fresh perspective on emergingmarkets telecom economics

Authors Rogier van Driessche Partner Maurcio Frana Partner Christophe Costers Manager Adriana Salabert Head of CVD unit

Introduction

Until very recently, telecom operatorsin emerging markets had a clear, singlestrategy: customer acquisition. Relativelylow penetration in most markets andbenign competitive environmentsmeant that all players were focused onthe expansion of their networks andthe capture of market share as fast aspossible.

Today however, the situation haschanged dramatically. Many emergingmarkets are reaching saturation,competition is erce and ARPU isunder pressure. Creating returns onsignicant investments in networkdeployment seems more difcult thanever. Increasingly, operators haverealised that they do not sufcientlyunderstand the real drivers of valuecreation Are my new acquisitionsprotable?, How does churn affectcompany value?, How do differentsegments contribute? and What is the

KEY HIGHLIGHTS

Customer Value Development(CVD) is a process that puts rigorouscustomer data analytics at the basis ofall major management decisions in aTelecom Operator

It is an essential capability that helpsoperators in emerging markets todeal with the challenges of todaysmarket reality: declining growth, ARPUpressure due to multi-SIM behaviourand rotational churn.

CVD develops a new set of KPIs andoperational metrics that fundamentallyalter the way operators go about theirbusiness

It further helps to optimise marketingand sales practices and puts in placethe foundation for the denition ofmicro-segmented marketing campaigns

To fully unlock CVDs potential, speciccapabilities need to be built in thenetwork, IT and marketing functions

The benets of CVD are accessibleto all operators, regardless of their

current level of sophistication: Severaloperators have reached EBITDAimprovements of 5-15%, withimmediate payback.


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true bottom line impact of marketingand sales tactics? are questions often

heard.

These questions reveal the reality of astructural lack of well organised andinsightful management reporting that ispresent in many operators and also theuncertainty that comes with a change inparadigm.

Two industry trends require operators toshift their approach to ensure success

under this changed paradigm:

First, operators have gradually realisedthat they no longer have an accuratepicture of what was once called thesubscriber. Clients have lost theirexclusive loyalty to the operator, anduse multiple SIM cards or more thanone network operator simultaneously.This means that they take advantage ofarbitrage on pricing schemes, or they

benet from the best offers by switchingfrom promotion to promotion. As aresult, operators should shift their focus:from mainly acquisition and sometimesretaining subscribers to retaining andmaximising share of wallet.

Second, as current market maturitymeans that the segments at the bottom

of the pyramid are being addressed, theconcentration of value contribution in

a few high value segments becomesincreasingly clear. This means operatorsshould adopt a highly segmented andtargeted commercial approach to ensurereturn on investment and positivebottom-line impact.

To adapt to these changing rules ofthe game, operators have two mainchallenges:

New KPIs are required. These aremore complex and present the needfor greater analytical sophisticationthan the ones operators used toapply. A key question is how toorganise and process data in orderto produce insightful metrics?Newly acquired insights need totranslate into effective actions.Here the main challenge is how to

revise previous practices in bothcommercial and technical areas ofoperation.

Customer Value Development is ouranswer to these new challenges. In thispaper we will try to illustrate what CVDis all about and how it can impact theway operators conduct their business.


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It offers a better understanding of1.the relationship between a wholerange of commercial actions andthe value they create (or actuallydestroy). This indicates how tooptimise commercial tactics.

It provides highly granular insights2.into the customer base and howdifferent segments contributevalue. This allows the design ofmicro-segmented campaigns thatare highly effective and cost-efcient.

At the start of the CVDimplementation, the operator embarkson a journey of capability building,which is not completed overnight.Understanding the requirements iskey. The main challenge however isto develop these capabilities while atthe same time reaping the benefits ofCVD as early as possible.

The subsequent sections will furtherillustrate both of these areas, as wellas the capabilities required to effectthem.

EXHIBIT 1: HOW CUSTOMER VALUE DEVELOPMENT CREATES VALUE

Source: Delta Partners analysis


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Optimise commercial tacticsbased on fact-based insights

CVD focuses on different types ofanalyses that consistently producevaluable, actionable information toimprove commercial tactics. Boththe analyses and resulting actionsspan a wide range, including priceplans, commission schemes, customercare models, network deploymentadjustments, regional go-to-marketstrategies, loyalty programs andcommercial KPIs.

The section below provides someillustrative examples of how CVD hasbrought new insights that changed theway operators approach the market.

Update of churn and1.retention tactics afterunderstanding the truevalue-impact of churn

CVD reports allow for a detailed proleof churners. After segmenting churnersby value and lifetime, operators better

understand the difference betweentrue churners (clients with a longrelationship with the operator thatleave) and so called rotational churn.


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In many emerging markets, up to 70%of all churn is generated by customersthat either leave the operators,

just to buy another SIM of the sameoperator, or buy SIM-cards that werefraudulently activated. Once such anunderstanding is established, the focusof the operator on churn reductionchanges dramatically. Reducing churnin this context is not only related tocustomer satisfaction, pricing or brand,but very much linked to the optimisationof certain processes and the terminationof dealer fraud.

Increased localisation of2. marketing efforts afterBTS based customeranalysis

Through the use of CVD analysis,operators obtain a far betterunderstanding of the geographicaldistribution of their segments. Whileoperators previously turned to BTSutilisation to drive regional marketing

and sales efforts, CVD mines the CDRbased data to actually pinpoint thelocation of a customer and prolecustomer segments on a BTS level.This allows broad-stroke regionalmarketing and a highly segmentedlocal approach with offers andcommunication messages specicallytuned to the customers in the targetarea. Thus, greater segmentation meansmore relevance and more effective

adoption of the marketing message.

Adjustment of an3.operators handsetstrategy afterassessment 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 identifygeographical 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 value4.destructive marketingcampaign as a resultof more accurate valueimpact 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 rst 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 effectivemicro-segmented marketingcampaigns throughenhanced customer baseunderstandingAnother common use of CVD is thedevelopment of micro-segmented

marketing campaigns. The type ofdashboards and reports that CVDdevelops allows operators to easily spotopportunities for up-selling or cross-selling or for the reduction of clientinactivity.

Micro-segmented marketing campaignsfocus on small target segments.Therefore, they allow for more relevantmarketing messages and offers, whileminimising communication cost andpotential cannibalisation effects. Asa result, these campaigns are highlyeffective and cost-efcient.

CVD dashboards and reports provide thenecessary understanding to successfullydesign these micro-segmentedmarketing campaigns. They offer highlygranular insights into the customer

base and the manner in which differentsegments contribute value. As a result,opportunities for up-selling, cross-sellingor for the reduction of client inactivity

are easily identied.In an emerging market context,

however, the biggest use of micro-segmented campaigns is to increaseshare of wallet of multi-SIM segments,which often represent up to 70% of anoperators customer base. Understandingthe usage patterns and reasons for theuse of multiple SIMs (which can varysignicantly between segments) cancreate immediate value. CVD helps todevelop relevant, targeted offers forthese different segments in order tostimulate usage.

The way CVD driven campaigns aredesigned and executed differs fromtypical marketing campaigns in severalaspects and follow a six step cycle asindicated in Exhibit 2:

Campaign Hypothesis: CVDcampaign ideas are based on

analysis and hypotheses derivedfrom real/factual data. CVD doesnot base campaign ideas on marketpractices or management intuition.


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Offer: CVD offers are micro-segmented instead of generic andvalid for all customers. Operatorsthat initiate CVD normally start with

larger segments (representing 15-30% of their total customer base),while more advanced operators usesmaller segments (2-3% of theirtotal customer base per segment).

Testing: CVD campaigns arealways tested and value impact ismeasured before roll-out. This isdone via small test groups whosebehaviour is always compared tothat of so called control groups toensure deviations can be attributedto the campaign that was tested.

Execution: Communication isusually below the line to ensureproper targeting, cost savings and

the avoidance of an initiation ofcompetitive reactions. In advancedoperators, campaign execution canbe automated through dynamic

mechanisms that identify thebest offers for a given subscriberat any particular point in time

Monitoring: Campaign results aretracked through simple comparisonof test groups with controlgroups - whereas this is typicallyvery difficult in ATL (Above theLine) and / or non-segmentedcampaigns

Learning: The ability to monitorresults and test differentapproaches ensures that themarketing team learns and evolvesover time.

EXHIBIT 2: MICRO-SEGMENTED MARKETING CAMPAIGNS

Source: Delta Partners analysis


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Essential Customer ValueDevelopment capabilities

What does an operator need in orderto deploy CVD? There are four typesof capabilities needed for CVD asindicated in Exhibit 3. Operators mayhave different levels of maturity anda rst step is to understand whereeach operator is in terms of thesecapabilities:

Customer value management requires certaincapabilities for full execution, although measurableresults can be obtained from the very beginning,regardless of an operators starting point

People and OrganisationalCapabilities: Which team withinthe organisation is responsible forCustomer Value Development? Isthere a dedicated retention andcampaign management team,trained in the CVD methodology?Are there dedicated MIS resourceswith specialised analysis capabilities?Which skills are present and whichare lacking? Does the team haveadequate analytical and dataanalysis skills?

Systems Capabilities: Do theIN and billing systems have theminimum reporting requirements?Is the operation using separatewallets / dedicated accounts in INto manage different promotions?Which SMS broadcasting capabilitiesare 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 theirexpectations 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 pragmaticapproach, focusing on the criticalaspects rst and ensuring that CVDstarts producing tangible results as

soon as possible. Leveraging on ourexperience in the region, we haveidentied three key success factorsfor successful Customer ValueDevelopment:

Focus on obtaining resultsquickly: Too many CVD efforts getabandoned because they fail todeliver results quickly. A focus onpragmatism and results is crucial.

Targeted campaigns are a good wayto show short term impact, althoughit is important that CVD doesntstop there. An experienced teamtypically helps to gain quick resultsas it can leverage experience fromsimilar situations to evaluate ideasand improve commercial tactics andtargeted marketing campaigns.

Set up a multidisciplinary team

to kick-start CVD: It is important toinvolve various functional areas fromthe start. The appropriate availabilityof resources from all involveddepartments (mainly IT, network andmarketing) is key.

Ensure management support.This is crucial to encourage thevital cross-functional operation. Itcan be done very simply through

providing enough managementattention, visibility and credits fromall functional areas.

Our experience with CVD in emergingmarkets has proven very positive.The results vary from client to client,but as indicated earlier (Exhibit 2) theimprovement initiatives and marketingcampaigns were responsible for EBITDAimprovements between 5 and 15%.


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Conclusion

Delta Partners experiencein Customer ValueDevelopment

Delta Partners has ample experiencein Customer Value Development inemerging markets, having worked

with several operators on this topic.Delta Partners can support operatorsthat need to start or revise theirCustomer Value Development practices,providing:

A dedicated CVD unit, with analytical experts specialised in telecomcustomer analysis

A highly experienced team, with real

experience in the region and a track record of constantly creating 5-15%EBITDA improvement in over 20operations 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 moredeveloped operators)

An automated customer base scan that has been utilised and provenin 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 marketstoday deal with major challengesrelated to declining growth, ARPUpressure (due to multi SIM behavior)and rotational churn. CustomerValue Development deals with thesechallenges via leveraging an operatorsmost unique assets the data it ownsabout its customer base. Detailedanalysis of these data generates theinsight required to optimise variouscommercial tactics and roll-out

highly effective micro-segmentedmarketing campaigns. Obviously, arange of specic capabilities should bedeveloped to fully unlock the potentialof CVD. But this does not meanthat CVDs benets are immediatelyaccessible to all operators,regardless of their current degree ofsophistication: experience has proventhat CVD can generate 5-15% EBITDAimprovement with immediate paybackin emerging markets.


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Delta Partners is the leading management advisory and investment rm 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 ofces 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 rms 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 nance services and has been involved in several buy-side and sell-side

telecom transactions in the region. As true industry specialists, the rm 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 nancial talent.

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

business model.

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Customer Value Development - October 2009