1998
The customer takes control
By
David Prichard and Miles Powell
GSM operators want to increase customer numbers while maintaining profitability. Could pre-paid services be the ideal way to expand into the mass market with the least possible risk?
GSMQ,
01 May 1998
With increasing competition between GSM operators, and more operators set to be licensed and launched, the challenge is to somehow find and attract potential new customers sooner rather than later. The generally accepted view is that the new market is the mass market.
The traditional model has been that increasing penetration on the mass market usually equates to lower margins. Lower-spending customers are less profitable, make more calls to query their bills and are the most likely to default on bills.
How then can an operator profitability target the mass market? One answer many operators have found is to offer pre-paid services. Pre-paid has significant advantages. These include: revenue protection through payment in advance; cost reduction through saving on bills and other costs; and attraction of new customers previously worried about managing costs.
The mass market may include 'credit-risky' customers, who have traditionally caused anxiety to revenue assurance. There are customers who may have previously been denied a mobile phone service for credit, employment history or other reasons. So to target these segments, many GSM operators, predominately in Europe, have launched a service that gives the customer more control over costs - a pre-paid service with pre-paid tariff plans.
Anonymous
The pre-paid concept is very simple: no contract, no bills and anonymous purchase and use of service. Payment in advance permits both the customer to manage spend and the operator to manage revenue and costs. The pre-paid service does away with contracts and allows the customer to decide how much to spend each month on mobile phone charges. And with customers in control, and no bills being sent out, the number of customer care calls gradually declines reducing the overall costs to the operator.
Usually, a customer initially buys a GSM handset and then buys a block of airtime. Depending on the pre-paid system in use, the value of the airtime block is then stored either on a SIM card or somewhere on the operator's network.
These blocks of airtime must be used up within a certain time period. Once this time has expired, or the airtime allocation has been used up, the customer will be barred from making further calls. The customer may usually continue to receive incoming calls until the airtime date of expiry. Most GSM operators have imposed a life on the pre-paid cards so that they do not become open-ended calling cards, with unlimited availability for incoming calls.
How then is pre-paid credit replenished ? A common method for GSM pre-paid customers to 'top up' pre-paid airtime is to buy more airtime vouchers. These airtime vouchers usually have a scratch portion which reveals a unique personal identification number (PIN). This PIN can then be keyed into the GSM handset by the customer by following a sequence of automatic voice prompts. Alternatively, the customer can call the operator's customer care centre where he will be prompted for the PIN before airtime is replenished.
An alternative method of 'topping up' airtime is through a bank. For example, TMN in Portugal uses bank ATMs to allow customers to recharge their pre-paid credit limits. Pre-paid customers of the competitor service from Telecel can recharge by using Telecel's on-line banking service.
The pre-paid customer does not always have to call the customer care centre to check the account balance. Operators provide a number of methods of alerting the pre-paid customer to either low or zero credit. This alert may be by the handset display by SMS (Omnitel Pronto in Italy), or by a warning call when the credit is low (Mobilkom in Austria, Airtel Móvil, Spain). Other operators may provide a free phone number (TIM Italy, MTN South Africa, Mobilkom in Austria, Airtel Móvil in Spain).
Major attraction
A major attraction of pre-paid services for operators is that they eliminate credit checks and the monthly billing and collection cycle. Although some operators have experienced increased numbers of customer care calls after launching pre-paid services, over time the numbers of such calls are considerably fewer than for contract services.
Although pre-paid cards are predominantly an individual consumer proposition, the cost-control element may appeal to the business sector as it allows tight controls on employee expenditure. Pre-paid cards also offer a way for operators to minimise bad debt as 'credit-risky' customers can be directed to pre-paid rather than contract based service.
Pre-paid service customers do pay a price premium for the convenience of no bills and no credit checks with higher than usual airtime charges. Airtime charges vary between GSM operators but vary between 10 per cent and 50 per cent higher than standard GSM tariffs.
Similarly, most GSM pre-paid service handsets are more expensive than for contract-based customers. This is because the pre-paid handsets are either unsubsidised or not subsidised to the same extent as contract-based handsets. In fact, some countries do not allow GSM handset subsidies. The growth in the number of pre-paid systems is illustrated in figure 1.
Source: GSM MoU Association, PA Analysis
Figure 1 : GSM - Networks and Pre-Paid Systems
Pre-paid tariff plans are an innovative way to increase a GSM operator's customer base. Pre-paid services are now being targeted at low-income groups, credit-challenged customers, children, bad debt customers, lapsed customers, corporate users, students, tourists and business travellers.
One of the key pre-paid target segments is lapsed subscribers. The experience is that many customers sign up for a standard contract, typically 12 months, and then disconnect. Disconnection is usually due to monthly charges being higher than the customers had anticipated.
All of these groups are attracted to the absence of a contract, cost-control features and no monthly billing that generally feature in pre-paid tariffs.
For GSM operators, the attraction of pre-paid card services is that they appeal to potential users who are either unwilling to sign standard cellular contracts, because they are low-usage customers who do not want to commit to regular subscription payments, or are unable to sign contracts because they are perceived as poor credit risks - or perhaps as not old enough!
Challenge
Pre-paid services should enable the operators to open up new segments of the market, such as students, who want access to mobile services but are unlikely - or unable - to buy them on standard terms. The challenge is to ensure that it is easy for customers to buy 'top up' pre-paid cards - so a mass market distribution strategy is therefore essential.
Pre-paid does involve inherent risks. For instance, some analysts believe that the growth of pre-paid services will reduce operator margins. There is the concern that some customers will generate little revenue and that the pre-paid service will cannibalise the existing contract customer base.
To minimise the effects of cannibalisation, operators need a barrier to ensure low contract users do not switch to the pre-paid service. Switching barriers employed to date have been related to the tariff plan pricing and airtime validity of the pre-paid vouchers.
It is true that pre-paid services do usually have a lower average revenue than contract customers. This lower revenue is outweighed by lower associated operating expenses resulting from lower customer acquisition costs.
Margins
So with no contracts, no billing and no debt collection and improved cash flow, GSM operators have lower administrative costs. Specifically, there are either no or very little handset subsidies, no bad debt risk, reduced customer care calls over time. All these factors contribute to producing comparable margins to average contract customers.
The bad debt risk is minimised as the pre-paid service is bought in advance. However, the operator does become exposed to a variable cash flow from pre-paid customers as opposed to the steady cash flow from the monthly rentals of contract customers.
Overall then, the benefits of providing a pre-paid service outweigh the possible risks. There will always be some small level of churn when a pre-paid service is launched but with increasing numbers of pre-paid customers, churn rates will become less meaningful for many operators.
Most GSM operators have adopted a single mass-market pre-paid tariff plan. However, in Italy, one of the most successful pre-paid markets, the policy for TIM has been to set different tariffs to appeal to different mass market segments. This tariff policy has allowed customers more choice to effectively customise a tariff plan to their personal requirements. If the requirements change, it is simple and inexpensive to change tariff plans.
Similarly in Portugal, TMN now has three pre-paid tariff plans: Mimo, Spot and Taco. Each plan is targeted at specific customer segments. For example, Spot is the 'fashion' brand specifically targeting young people, while Taco - money in Portuguese slang - is targeted at people who receive more calls than they make. For every received call, the pre-paid customer receives a bonus, hence the strapline: 'the more it rings, the more you get'.
Despite all the apparent advantages, there is a potential downside of pre-paid services for operators. This is that with no contracts, there is sometimes very little information on who the pre-paid customers are. At a time when customer relationships and loyalty are being cited as key to operator success, it is a paradox that pre-paid services are distancing the customer from the operator.
Nevertheless, in some countries there is legislation that requires an operator to record some particulars of all customers using the mobile service including pre-paid customers and most operators can usually glean some base information from promotional activities e.g. competition reply cards at the point of initial sale.
Pre-paid is growing fast. In most countries where a GSM operator has launched a pre-paid service, competing operators have responded with a 'me-too' service, usually within a matter of months.
Today there are more than 40 pre-paid GSM services world-wide. Europe dominates these services but pre-paid services are now operational in Africa (South Africa and Lesotho), the Middle East (Lebanon and UAE) and the Asia Pacific region (Australia, Malaysia, Indonesia, the Philippines and India).
On the system supply side too, activity is increasing. A number of companies provide pre-paid systems that are based on their expertise in one of the following areas: SIM technology; network applications and card management: customer care and billing; intelligent networking.
Every solution has some form of trade-off for investment and operating costs, functionality and scalability. For example, most pre-paid systems being deployed now have real time call cut-off. This means that when a pre-paid customer is making a call, as soon as the account balance reaches zero, the call is stopped. In fact, one of the major reasons why pre-paid services are a recent innovation is because there was always an element of risk associated with the very last call made by a customer. Traditionally, calls were rated using the Call Detail Record (CDR) produced at the end of a call. Depending on the credit at the start of the call, the credit level may be insufficient to cover the whole call.
Without real time cut-off, there is always the risk that a customer can make a call and effectively incur a negative account balance by the end of the call. This was the case on early analogue network-based pre-paid systems and meant that operators were exposed to this uncharged element of its customers' calls.
IN-based solutions charge in real time and reduce the financial exposure for the operator. The account balance and the maximum possible minutes are calculated depending on the digits dialed by the customer. By contract, hot or warm billing-based solutions do not calculate and charge in real time and cannot provide real time cut-off.
Orga
Comviq - Sweden, T-Mobil D1 - Germany, TMN - Portugal, Eircell - Ireland
Brite Voice Systems
Mannesmann D2 - Germany, TeleStet - Greece
Swiss Telecom (GSM operator) & Gempius:
Telecel - Portugal, Multiara - Malaysia, Omnitel - Italy
AETHOS
Libertel- Holland, Telenor Mobil - Norway
Sema Group Telecoms
MTN - South Africa, Airtel Spain
Examples of pre-paid system suppliers and where their systems are deployed
Pre-paid system technology is still evolving and some operators have experienced scalability challenges with standalone pre-paid systems operating at the limit or beyond their design envelope.
The choice for the GSM operator is often to decide between a moderate investment in a standalone pre-paid system or a higher investment in an IN platform which can run a pre-paid service and other services in the future.
David Prichard is a member of PA's Management Group and specialises in IT in Telecommunications. E-mail: david.prichard@pa-consulting.com Miles Powell is a Principal Consultant in PA's Telecommunications Specialist Group. E-mail: miles.powell@pa-consulting.com
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