For two decades of continuous growth, MSOs have focused their marketing energies almost exclusively on acquiring new subscribers. That is now changing: Basic cable has reached the saturation point at 70 percent of U.S. households; churn rates for new digital services are running as high as 35-50 percent; and competition loom on all fronts — from satellite TV to video rental to telcos.
The bottom line is that cable companies need proactive marketing strategies for holding on to the customers they have.
Customer defection remains poorly understood in cable. Little, if any, effort is made to profile subscribers in terms of subscriber lifetime profitability, likelihood of attrition and even reasons for leaving. This is due in part to some difficulty in obtaining current, account-level data from outsourced billing and call center partners, but it is also a result of cable's historical disinterest in nurturing customer relationships once a subscriber is signed on. When cable does try to "save" a disconnecting customer, the results are mixed.
Assuming price and service quality are within acceptable ranges, customer retention mechanisms — from connection management programs to loyalty programs — offer cable marketers the next most effective means for influencing and improving subscriber lifetime value and, therefore, shareholder value.
Subscriber value is primarily a function of price and purchase frequency, and then customer account duration. Thus, a modest 1 percent boost in retention rates can translate into a 10 percent to 15 percent increase in subscriber net present value, or 5 percent to 10 percent increase in shareholder value.
The subscriber lifecycle
By taking cues from their counterparts in telecom, cable operators can do more than just tally customer disconnects. In particular, tracing defection patterns across the subscriber lifecycle allows companies to predict when customer churn is likely to occur and, as important, why it occurs. With that powerful information in hand, MSOs can design retention programs that anticipate and prevent subscriber defection.
Although the specifics differ on a company-by-company basis, the customer lifecycle roughly divides into three phases — new, transitional and established. In each of these phases, customer loyalty attitudes can generally be described as "rational" (active comparison shopping), "neutral" (passive comparison shopping) or "emotional" (not shopping at all), becoming more neutral with time.
The first of these phases — the "new customer" phase — is about three months in duration and is often characterized by attrition rates of 50 percent or more. Subscribers terminate their service principally because of some connection hassle or because they are taking advantage of a trial offer they have no intention of renewing beyond the offer period.
Average per subscriber profit on a cash flow basis is negative, ranging from $100 to $200 depending on the service provided and net of any fixed cost allocation. Customers are overwhelmingly rational (and sometimes even "skeptical") during this phase, meaning that they are regularly assessing alternatives to cable, including over-the-air TV.
A connection management program that ensures interoperability among the set-top box and other home entertainment devices and includes a follow-up phone call after installation can work well in heading off early defection at this stage.
The subscriber lifecycle then enters the "transitional customer" phase, which is about six months long and exhibits a gradual tapering of defection rates to 10 to 30 percent. During this period, customers drop services primarily due to perceived noncompetitive price or customer service disappointment.
Average subscriber cash flow is still negative in this stage at an estimated $50 to $100. Subscribers evolve from being rational to become increasingly "neutral" through the transition phase. Usage promotions that deepen product and service interaction — like buy two pay-per-view, get one free or a complimentary month of Home Box Office — are effective retention tools during this period.
The last phase — or "established customer" stage — continues beyond the first 9 to 12 months through account termination. Disconnects are running at their lowest level at between 3 percent to 5 percent, and reasons for leaving include a move or one-time, price-based competitive offers.
Per subscriber cash flow turns positive with lifetime values from $2,500 to $5,000 depending on the cable system and service. Customers are typically divided equally between rational and neutral loyalty segments. Move management programs that eliminate the inconvenience of canceling and then renewing service and loyalty programs that reward increased purchase are proven means for raising retention at this point in the lifecycle.
Several top MSOs have either established or explored customer loyalty programs in an attempt to stem churn, so they are worth reviewing in some detail. These programs run the gamut from the purely economic (reward points) to the more emotional (affinity programs), including:
Distinguishes offer with program partners' brands, products.
Motivates additional purchase of same product, at a reduced margin.
Discourages price shopping and encourages testing of new offers.
- Differentiated Service:
Satisfies need for membership, status and exclusive treatment.
Creates personal, higher-order relationship with lifestyle segments.
The two most prominent loyalty programs in cable are rewards programs run by two of the top 10 MSOs. These programs award subscribers points to be redeemed for merchandise and discounts with their content partners.
Industry sources report that one of these has seen a 10 percent reduction in disconnection rates, while the other has witnessed a 20 percent reduction in churn. Little information exists on program returns on investment, although the largest cable rewards program largely relies on co-funding from program partners.
Regardless of the loyalty program being considered, it should be designed to be the following:
Focus on behavior the company wants to encourage, e.g. sustained increased spending, rather than simply buying "free riders" with price discounts.
Measure program returns using metrics closely correlated to repurchase, e.g. share of wallet as opposed to customer satisfaction.
Provide sufficient value to attract and maintain members by ensuring award "attainability" (eligible for benefits within six months) and "relevance" (equivalent of $30-40 per annum in benefits).
A practical approach
While churn is an increasingly pressing concern for the cable industry, the good news is that understanding and reducing it does not require significant upfront investment. Within six to eight weeks, a company can create its own subscriber lifecycle model by customer segment — as defined by product, demographic and behavioral variables — that predicts which subscribers are likely to defect, when and why. Based on that roadmap, cable companies can take subscriber retention into their own hands by proactively testing, launching and tracking customized, high-return retention offers.