Telcos Spend Much, But Are They Spending Smart?

Despite spending $1.5 billion annually in marketing and advertising, Sprint lost another million customers last quarter

3 min read

For the 2nd quarter of 2009, Sprint lost almost a million regular (“postpaid”) subscribers. The loss was partially offset by 777,000 prepaid subscribers, but in addition to the net loss, prepaid subscribers generate an average revenue per user per quarter of $34, while “its ARPU for postpaid plans was $56,” according to an excellent summary by NetworkWorld. No wonder Sprint lost $384 million in the quarter.

And Sprint is hardly alone. The much smaller Vonage lost 89 000 customers (download its Q2 report here ), “Churn rose to 3.2 percent from 3.0 percent in the prior year's quarter.” U.S. Cellular 88 000 (Q2 report here) from a customer base of 6.2 million.

Sprint's losses come despite spending well over a billion dollars annually in marketing. Did you ever get the feeling that the huge sums that phone companies—especially cellphone carriers—spend on big advertising campaigns should instead be used to, oh, say, train their customer service employees or build more base stations?

A group called the CMO Council has the same feeling, and they've backed it up with an 80-page study. The report notes that the companies within the $4 trillion telecommunications industry are under great stress—companies that used to concentrate on doing one thing well—such as voice calls on a cellular network—now have to provide data services, broadband connectivity, multimedia messaging, FM radio reception, and so on. “In 2009, mobile phone users are expected to download over 10 billion applications to their mobile phones.”

Competition is fierce, and not just among cellular carriers. “Even as traditional phone companies controlled more than 83 percent of the North American market for voice services,” the study says, “competition with cable providers had saved consumers more than $23 billion and could save households and small businesses a total of $111 billion over the next five years.” Of course, competition saves customers money because it gives customers the ability to switch from one provider to another. Looked at from the carrier side, that's a deadly increase in the churn rate.

The study cites the analysts at McKinsey for two key facts:

  • Satisfying and retaining current customers is three to 10 times cheaper than acquiring new customers, and a typical company receives around 65 percent of its business from existing customers.
  • A five percent reduction in the customer defection rate can increase profits by 25 to 80 percent, and seven out of 10 customers who switch to a competitor do so because of poor service.

And yet, are companies truly fighting to retain customers? Two more stats:

  • A Gartner study found that 92 percent of all customer interactions happen via the phone, and 85 percent of consumers are dissatisfied with their phone experience.
  • A typical business only hears from four percent of its dissatisfied customers; the other 96 percent leave quietly. (University of Pennsylvania)

In a phone conversation last week, CMO Council executive director Donovan Neale-May told me “there is a disconnect between marketing, and the back-end IT service delivery groups.”

“So marketers are saying, hey, we're spending, in this case, when you look at how much money is being spent by these large telco wireless operators, I mean, the top advertisers like AT&T, they're spending over US $3 billion. Verizon, over $3 billion. Sprint $1.5 billion. Comcast, $670 million. DirectTV, $450 million. They're spending a lot of money on marketing.

“And they're saying it's costing them more and more to acquire and keep and they're also seeing greater churn rates. So you're spending large sums of marketing money on your brand, and on a promise or a claim, announcing and delivering new services, new plans, new pricing, new devices, new applications, yet there's a dissatisfaction—a high level of dissatisfaction—with unmet needs and expectations with products and services, usability and complexity, with billing problems...

“So on the one hand we see massive outlays of money, for demand generation, and for branding, and for making people feel good and nice about these brands, yet the marketing people aren't doing what they should be doing, which is interacting more with the different stakeholders within the operation, and engineering, and technical side of things to improve the billing and the financial side to impove the customer experience.”

Neale-May says it's not how much a company is spending, it's how. One last stat from the CEB report:

  • Companies that restructure call centers around a customer service strategy often cut their costs by up to 25 percent and boost the revenue they generate by as much as 35 percent. (McKinsey)


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