Reaching beyond revenues - Achieve profitability by understanding real costs

By Ken King of SAS

In recent years, telecommunications providers have invested heavily in technology to provide new products and to lower churn. So why haven't they invested similarly to understand whether those customers and products are worth keeping?

Sure, you know if your company is profitable overall - and you have a general sense of how profitable each division is. You might even be able to tell how much each customer is spending with your company, even when some of the purchases come from different divisions or subsidiaries.

But did you know that a customer who seemingly spends more with your company each month may actually be a money loser while the "smaller" customer is extraordinarily profitable? Or that the existing customer who is considering buying a second service will likely lead to a loss since he already calls customer care so often? Or that your company is employing technicians to support a discontinued product?

The industry has dramatically improved its technology, and its marketing is more sophisticated and nuanced then ever. Yet recent financial reports indicate that these improvements aren't enough to return the entire sector to profitability. Are the companies that are pulling ahead just lucky? On the contrary: Those successful companies are investing in the technology that provides a detailed look at customer and specific product profitability.

The telecommunications industry is more competitive than ever. Connectivity and transport bandwidth have become commodities. Competitors are quick to copy your unique service offerings. Wireless number portability makes it easy for customers to hop from provider to provider. Even though new IP and Ethernet networks are less costly to manage than their TDM predecessors, the overlay infrastructures lead to high overhead. Furthermore, many accounting systems arbitrarily allocate overhead among products based on volume averages, which obscures the real per-subscriber cost of individual offerings.

To cope with the competitive environment, providers have "right-sized" their workforces, curtailed equipment purchases and vigorously focused on retaining customers since - as the industry is well aware - it costs significantly more to attract a new customer than to retain an existing one.

Not at all. And with the advent of various "unlimited" wireless plans, providers are discovering that more is not necessarily better.

The marketing plan that brought the customer to the provider, the value of retention offers and each customer's specific product choice all factor into how profitable any one customer is. Other considerations come into play as well: Customers who require a great deal of help or who regularly object to charges on their bills can be money drains. In other words, the most profitable customers are not necessarily the ones that spend the most money or buy the most value-added services.

Many providers have used customer relationship (CRM) software to find the most valuable customers, but these operational programs don't reveal the true picture. CRM software views two customers who spend exactly the same amount of money as equally valuable, regardless of how profitable each customer actually is. However, a traditional CRM system would fail to report the fact that one of those customers is a habitual vendor shopper - bouncing to the next provider right about the time that he would become profitable to you.

Suppose you could give your customers individual scores that account for everything from the number of late payments they've made to the minutes they use on their unlimited night and weekend plans. The score would also reflect calls to the service and billing centres and their patterns of purchasing or dropping services.

You can do this by employing activity-based management (ABM) software. By gathering details from multiple sources, ABM creates an individualised marketing plan for each customer. The score is translated into marketing offers and options that service reps see automatically when they access a customer's account.

So next time your marketing department is trying to figure out which customers should receive a particularly enticing new offer, the ABM application can provide a list of customers for whom the offer makes the most sense. Or say a particularly profitable customer calls in and asks for a new phone. That customer's score will tell the service rep to authorise the upgrade on the spot.

On the flip side, a less profitable customer won't get new solicitations. And when she calls for the 16th time to challenge a charge on her bill, the customer rep might be authorised to give her a smaller credit than the one offered to the person who is calling for the first time.

ABM doesn't just work to determine individual customer profitability. It also helps providers determine the most profitable products and offerings, even the most profitable way to activate customers.

By tracing and assigning costs based on cause-and-effect relationships, ABM whittles away at that accounting dumping ground known as overhead. One ABM user learned his company was paying for service technicians to maintain equipment it no longer used. ABM can even determine which method of activating a customer is most cost-efficient, an important consideration since many providers use multiple activation strategies they inherited through mergers and acquisitions. ABM helps the marketing side quickly determine the profitability of various offers.

Wouldn't you like to know if the marketing plan you're considering will really bring in profitable customers? When you know how much it costs to perform activities, you can accurately predict whether a process, new upgrade plan or technology enhancement will be profitable.

ABM takes the guesswork out of deciding which services to offer at what price and to which customers. With the right ABM software, you can understand your costs like you've never been able to before.