Strategy Analytics and Juvo, the pioneer in mobile Identity Scoring for financial and digital access, has launched a study uncovering the hidden reality of the prepaid mobile market in developing economies in the Asia-Pacific region, as well as Latin America and Africa.
Though prepaid is the dominant form of mobile connection – accounting for 71 percent (5.7 billion) of global mobile connections and 32 percent ($265 billion USD) in service revenues in 2018 – very little research has been conducted in the space. “Death by a Thousand NOs: Putting the Profit Back into Prepaid” reveals a high-margin market where billions of dollars of operator OPEX are being wasted annually as operators acquire and re-acquire constantly churning customers, and where opportunities to drive loyalty and launch new services are being missed.
The study analyzes eight prepaid-dominant markets: India, Malaysia, the Philippines, Thailand, Argentina, Brazil, Mexico and South Africa. In the four APAC markets alone, operators wasted $397 million USD last year replacing lost prepaid subscribers.
The Prepaid Market in Developing Economies
Prepaid is even bigger business in developing economies. Prepaid services account for 82 percent of connections and 50 percent of revenue in developing Asia-Pacific markets; 94 percent of connections and 80 percent of revenue in Africa; and 70 percent of connections and 32 percent of revenue in Central and Latin America.
In contrast to popular belief, prepaid is a strong source of profitability for developing market mobile operators in APAC, with EBITDA margins falling in the 45-55 percent range (aside from India where Reliance Jio cut the price of service by more than half and created significant downward pressure on pricing).
However, in the APAC markets studied, prepaid churn in the last year ranges from 3.8 – 6.6 percent per month (45-80 percent per year, compared to 16 percent per year for postpaid). This means, on average, operators have to replace their entire prepaid subscriber base every two years.
In the APAC markets analyzed, high churn is having a direct impact on operator bottom lines. In the last year, 86 percent of subscriber acquisition cost expenditure was devoted to replacing churning subscribers and just 14 percent to subscription and revenue growth. To put that into context, subscriber acquisition costs accounted for 2.9 percent of prepaid OPEX and 1.8 percent of prepaid service revenue. Over that period, the operators in these markets spent $397 million USD on replacing lost prepaid customers.
A New Prepaid Proposition
The prepaid business is a constant race against time, with customers at their highest risk of churning during low balance periods. Mobile operators have to change their relationships with prepaid customers in order to change the churn dynamics. To shift from a customer acquisition mindset to a new prepaid value proposition focused on consistently and constantly driving retention, loyalty and added value.
Operators must leverage every single interaction with their customers to build more personalized, deeper identity-based relationships. This means using transaction data like topping-up prepaid airtime, repaying progressive airtime credit and rewarding positive behaviour along the way to build financial identities for customers. Consistently incentivizing customers to move up the ladder unlocks access to new, higher value products and offerings like handset financing and other financial services. All of those benefits evaporate if a user suddenly decides to grab another SIM card and leave the operator’s network. Retention of that user not only saves money, it creates a financial identity that is the foundation for new revenue streams.
Operators that reduce churn and create a more sustainable acquisition engine can maximize their gains in one of two ways:
The first option is for operators to ‘bank’ their gains of reduced churn. Increased loyalty alleviates the never ending pressure to spend quickly, become more profitable and maintain a desired growth rate. Reducing churn by 20 percent means an operator’s subscriber acquisition cost expenditure would fall by 18 percent – a 0.5 percent reduction of prepaid OPEX – and improve prepaid EBITDA by 0.8 percent.
The second option, of specific interest to ‘early movers,’ is to maintain subscriber acquisition cost expenditure and grow market share. On average, if an operator in one of the eight markets had taken this decision in September 2017, reducing churn by 20 percent means prepaid service revenue would have been 4.7 percent higher and EBITDA 4.9 percent higher in the year to September 2018.
“The market opportunity here is 5.7 billion customers and over $265 billion in annual revenue. However it is hampered by huge churn and missed opportunities. As an industry, we need to talk about prepaid, we need to change our approach and we need to put identity at its heart,” said Steve Polsky, founder and CEO of Juvo. “Prepaid customers in emerging markets consistently churn because they are constantly told NO. NO you’re out of airtime. NO you don’t have enough money. We have to start with ‘YES’.”
Polsky continued, “establishing longtime prepaid loyalty is possible and can unlock massive financial opportunities for operators. The purpose of Death by a Thousand NOs is to shine a light on the prepaid market and to highlight the economic impact that saying ‘NO’ by default is having on the operator’s bottom line. We want to prove that by saying ‘YES’, both prepaid customers and operators win.”
“Until now, the industry has been in the dark on the scale of the costs associated with prepaid mobile churn, and the portion of prepaid OPEX spent on reacquiring the same customers,” said Phil Kendall, executive director of the service provider group, Strategy Analytics, and author of the report. “What this research allows us to do is to confidently calculate the profit that can be unlocked when prepaid churn is reduced. Success in the highly volatile, promotion-fueled prepaid market will go to those operators who can improve customer loyalty, allowing them to make strategic choices between OPEX reduction, accelerated growth or investment in service differentiation.”