As part of the Experian Decision Analytics Telco Forum in July, we held a workshop to discuss the impact of the current trend away from single product mobile phone service to multi-product offerings media services. The following article provides an overview of the discussion and the key points that we covered concerning the challenges ahead and strategic collections and limit management.

Challenges
A key challenge being faced by the industry today is the falling margin for mobile telephony as a result of increased competition and market saturation. In order to off-set this falling margin, mobile operators are offering more bundles and services via the mobile and moving into adjacent markets, creating so called quad-play offerings: mobile, broadband, fixed line and TV. This is only the first step, with operators still considering how to move into financial services, offering mobile payments and providing credit products through the main relationship. The new products have different dynamics:

• Risk profile - does the customer ‘care’ more and is therefore more likely to pay their bill?
• Margin - are there higher fixed costs associated with this product that means the margin is lower?
• Third party costs - are there payments out to another service provider, for example with content provision?
• Bill complexity - as the number of products increases, so does the complexity of the bill and, therefore, the number of disputed items.

This expansion of services brings a new set of challenges, as the bill increases, potentially five-fold, the incidence of compulsory churn. The average write-off amount will also go up. This will put pressure on the collections team as well as the risk team to ‘fix it’.

With all these products, the future bill could be as much as five times higher, moving from an average bill of about €54 to €250. The graph below shows how this growth could come about, with a large part of the bill coming from m-payments and a significant increase in content usage. The anticipation is that the call component of the bill will continue to increase in volume, but remain static in value as call bundles are used as a means of attracting customers and a means of rewarding other product purchase.

For a consumer, the average bill of €54 is manageable, although a compulsory churn would not be unusual. As this bill increases to €250, this bill will represent a larger percentage of the household income. In some cases, this will be displacement revenue, e.g., fixed-line telephone and broadband, but the objective of moving customers onto these bundled services is to provide even more to them:

• Content - TV and Internet browsing.
• TV - more pay per view and portal to TV Shopping
• Broadband - adding faster connection services

These are all new services and represent additional household spend. Clearly, this presents a fantastic opportunity for the telco industry to grow revenue; it also provides opportunities for establishing hook products, those products that ensure the customer prioritises your bill above other bill payments. The more products that the customer takes from you will also have an impact on voluntary churn rates, as taking the whole range of products elsewhere becomes more challenging, and the complexity of comparing the packages falls prey to customer apathy.

The challenges of compulsory churn are two-fold:

• Increasing numbers of accounts in collections querying bills or not able to pay their bill
• Rising bad debt and write-off levels which have a direct impact on profitability

For a portfolio of three million customers, this could easily take €100m off of the bottom line. However, a strategic approach to collections and limit setting can contain this figure.

Strategic Collections
As collection cases grow, there is an initial urge to add capacity to the operation to cope with the demand. This is followed by a prioritisation of customers, based on the outstanding balance and the months in collections. However, a strategic approach to collections includes stopping customers from coming into collections and segmenting based on risk.

Triage or pre-delinquency strategies look for customers who may have problems at another provider (as highlighted by their bureau score) or a change in their behaviour may indicate that they are heading for collections. A pre-emptive call, a reduction in their credit limit or request for a deposit can be used to reduce the exposure.

Using risk and historical data to separate the ‘lazy payers’ from the high-risk cases, means that the lower risk cases can be pushed down lower cost reminder channels, such as SMS, and high risk customers can be targeted with calls and aggressive strategies straight away.

Strategic Limit Management
The objectives of limit management strategies are to reduce the number of accounts in collections and the average default balance. Currently, limits are set on the account, but often customers are not aware of these limits until they exceed them. The change in product mix, and the different margins, is likely to drive a change in approach to limits. Limits need to be simple for the customer to understand, as well as reflect these margins. They also offer a great tool in the collections area, stopping certain services until the bill is paid, whilst maintaining the relationship through higher margin products. Limits could therefore be set as follows:

• A customer overall limit, that includes fixed payment products (broadband, fixed line and TV)
• Mobile calls, texts and content
• M-Payment
• Pay-per-view

As well as customers, the concept of these limits and the way that they are communicated to customers needs to be clearly explained to call centre staff.

To conclude, considering the discussion points covered during the workshop, about the changes are currently experiencing, the telco or ‘multimedia’ market can probably be considered to be one of the most exciting sectors at the moment, and also one of the most challenging. Telco businesses must embrace these challenges focusing on all elements of credit risk - from risk assessment to real-time rating of accounts to allow expansion of a limit. Effective customer management is vital to maximising the potential that these opportunities bring, and understanding what we are facing is only the first step to achieving success.

Matthew Dodd – Head of Best Practice for Customer Management, Experian Decision Analytics - From the session held at the Experian Decision Analytics European Telco Forum 2007

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