Fierce competition is making prepay less profitable, meaning operators may have to find other revenues to cover the cost of prepay customers
Fierce competition in the prepay market is forcing UK network operators into a ‘spiral of death’ that may end up with them losing money unless they are prepared to innovate, claims mobile analyst Strand Consult CEO John Strand in a new report.
Strand’s analysis claims that many operators are currently using a great deal of their prepay market resources on short-term solutions, many of which are merely focused on matching competitors’ prices.
Strand believes that this behaviour is ‘very similar to a spiral of death that will slowly but surely result in an operator’s prepaid business case developing negatively’.
Prepay subscribers make up a large part of the customer base for most UK mobile operators. But in a saturated market such as the UK, operators are being forced to offer increasingly cheap prepay deals to keep customers – and to poach others from their rivals. As a result PAYG revenue is falling, leaving operators with less revenue to invest in innovative products.
Strand argues that a mobile penetration of over 120% is not a sign of a healthy market, but one where an increasing number of customers are choosing to use multiple Sim cards. The battle then becomes about retaining existing customers, with lowest price being the main differentiation point.
He warns: ‘All that customers are interested in is access to cheap traffic, without taking into consideration any impact this has on operators.’
That impact could be severe unless the networks find more innovative ways to either encourage low spending prepay customers to spend more, or migrate them to more profitable contract tariffs.
Despite this, prepay is unlikely to die off completely. As one operator source says: ‘Some consumers choose prepay for total flexibility in terms of control. Some might not pass the credit check, and parents taking out a contract for children may want to go for a pay-as-you-go option.’
But if Strand is right, that still leaves operators struggling to manage a large, but low ARPU prepay customer base. Above are some of the solutions available to them.
Solutions for managing low ARPU prepay customersSim-onlySim-only contracts, where customers do not get a handset from the operator, grew in popularity during the height of the recession last year, with deals going as low as £9. Consumers love the deals because a commitment varies from one month to one year.
Operators approve of the deals because there is no handset subsidy, and a Sim-only customer counts as a contract in financial terms.
‘Sim-only is a kind of hybrid – for those that are less handset orientated – and it is good for us as it doesn’t have any subsidies,’ says one operator source.
Strategy Analytics analyst Phil Kendall says: ‘Look at O2, there is a
big trend away from prepay and towards postpay. Let’s change how we all give customers a good deal for a contract that they can’t turn down. Sim-only is postpaid – but in the consumer’s mind, it is more similar to prepay.’
Getting the mid-range handsets rightIf operators want to continue the marginal shift away from prepay, they will need to rethink their high-end multimedia strategy and cater for those who don’t want an iPhone.
Prepay is also so embedded in consumers’ minds that it is hard to move away, according to Kendall. The operators have almost ‘taken the ball off’, he says, as they concentrate on high-end multimedia devices.
He suggests that it will take a [Motorola] ‘RAZR-type phone’ to kick-start the mid range, and that operators should increase their mid-range portfolios. A free and ‘trendy’ phone on a cheap contract would attract those 20-somethings who have not yet made the move from prepay to contract.
Mobile advertising Mobile advertising is another way to add a further income for operators. The extra revenue stream helps to offset the cost of keeping low spending prepay customers on the network.
O2 and Orange are leading the way here and it is thought that all the networks will follow suit eventually.
But Orange has taken things a step further with its prepay tariff, Monkey, which allows users to stream music for free in exchange for advertising texts. This gave it a way to utilise and make money from its prepay base.
Added benefitsGiving consumers a reason to top up can also offset decreasing ARPU. Orange has embraced prepay with its ‘animal’ tariffs. It is ‘about segmenting animal plans with social networking and it’s about the awards they get’, says one source. It is part of attracting consumers to the brand.
O2, meanwhile, has incentives such as ‘top up surprises’ and tariffs offering free texts. 3 has benefits lasting 90 days, plus it gives away free Skype with its Sims – an incentive launched last year. Vodafone has tried benefits depending on how much a customer spends over the week.
Brand benefits are also a driving factor. O2 Priority and Orange Wednesdays boost brand loyalty and the likelihood of customers moving over to a postpay contract and as a result, increasing ARPU.
MVNOsMVNOs are a cost effective way of getting people on the network, without the acquisition costs, and are a good revenue stream. Operators have even set up ‘MVNAs’ (aggregators) to cut the cost of acquiring niche customers.
By keeping acquisition costs down, the greater the chance that profitability will rise. The revenues gained will help networks cover the costs of keeping low spending prepay customers on the network. By providing attractive enough prepay offers, they will keep these customers happy. The networks may then be able to slowly increase prepay ARPU or entice these customers onto more profitable contracts.
Source:-
here.
