Knowing Angels from Demons

by Kevin McShane, Entiera -- Multichannel News, 3/8/2010 10:02:00 AM

Used as terms to describe proftable and unprofitable customers, “Angels” and “Demons” are very much alive in telecommunications today. Knowing one from another is crucial to marketing success, but all too often, the Angels aren’t getting the attention they deserve, while the Demons tear a destructive path through companies’ profitability. Success relies on telling them apart, and that demands a change in telecommunications marketing practices.

Executive leaders across all industries continue to face the most disruptive market conditions in decades. Increased competition has only accelerated: Large rivals continue to compete, aggressively buying market share; new entrants are more nimble; and substitute products seem to pop up almost at every turn. These forces particularly apply to the telecommunications industry, where competitors continue to slug it out for increasingly demanding customers who treat products and services as commodities; price, unfortunately, becomes the only differentiator. Faced with eroding pricing power, telecommunication executives find themselves in a downward spiral of price deflation and profit pressure.

The blurring of traditional lines, with operators offering new products and crossover into new categories, has created a highly competitive industry. A result of this change is signifi cantly higher customer churn as providers and operators “exchange” subscribers on a monthly basis. As one executive said, “My customer today is your acquisition target tomorrow and vice versa.” The CEO and senior executives are left wondering how they can break out of flat-to-moderate growth and begin to once again deliver shareholder value despite this trend.

Most telecommunication providers are organizationally designed as “inside out” structures that put products, not customers, at the center of the organization. Sales, marketing, service, operations and finance rarely align on how to measure true value and select the most appropriate, product-oriented measures. So it’s hard to tell the angels from the demons.

For example, a mid-tier cable operator acquired about 3,000 new residential cable-TV subscribers per month. The sales leader and general manager always achieved their monthly acquisition quota. Marketing was spending dollars on mass advertising (TV, radio, print and billboards) to create awareness and drive leads into the channels. All seemed well until further analysis revealed that the cable operator was acquiring exactly the wrong type of customers — demons — and didn’t even know it. Across the three major product off erings, cable TV is by far the least profitable due to associated fixed costs, including labor, set-up, truck roll and hardware. Analyzing the acquisition results produced a startling fact: The majority of churners are cable TV buyers! Turns out, this one-productonly subscriber had a tendency to buy on promotion and terminate just prior to annual renewal by switching to a lower cost competitor. The  cost of acquisition was approximately $400; demons were not only not breaking even but destroying shareholder value. Sales and the GM were “hitting their numbers,” but profit was taking the real hit.

The solution to a quandary like this is to shift the focus to where it belongs: on the customer, making angels and demons easy to recognize. This scenario can be avoided with three steps that treat customers as assets that generate profits over the long run.

First, marketing expenditures to acquire and retain customers should be treated as investments, not expenses. Rather than using traditional metrics such as product revenue, the fundamental building block to protect this investment should be the customer’s “lifetime value” — the present value of a customer based on future cash flows attributed to the relationship.

Second, telecommunications marketers need to manage customer segments to optimize shareholder value. Since some customer segments drive profits and others don’t, investing in customers should vary by their profit contribution and potential.

Third, marketers need to create mutual value exchange based on profi tability and organize around customers, not products. Organizations such as Best Buy, Apple and American Express have shifted their strategy, operating model and execution from products to customers, managing their customer segments extraordinarily well and, as a result, delivering shareholder value quarter after quarter.

Telecom marketers can learn from those successes by following these three steps and creating a customer view that lets them avoid the demons and welcome the angels.

Kevin McShane is senior vice president and general manager of marketing-automation software-as-a-service provider Entiera.