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Global mobile carrier improves ROI by gaining control of handset subsidy spend

Use of innovative marketing analytics provides insight to reduce subsidy costs by 10 percent.

Challenge

Mobile network operators face two pressures from maturing postpaid mobile phone markets: Downward pressure on revenue as customers seek out the best deal and upward pressure on costs driven by high subsidies for new smartphones such as the iPhone. McKinsey was asked to find a way to increase value generated for one of the largest global mobile network operators while maintaining or reducing the several hundred millions of euros spent on handset subsidies and other acquisition and retention spend.

Discovery

In the first phase we focused on customer lifetime value (LTV) analysis with the goal of getting highly detailed insight into which pockets of customers drive value by combination of segment, channel, tariff, device, and region. A core challenge was to work with the client to create breakthroughs, pulling together a deeper level of data granularity to construct these LTVs with data from multiple systems.

During the second stage we helped develop an innovative technique using econometric models to understand price elasticity of customers at acquisition and retention. A key innovation in the model design allowed the team to see price/volume relationships on a given device and plan, but also interrelationships or cross-elasticities (for example, how an iPhone discount would affect the volume of other premium smartphones and whether cannibalization would make this move unprofitable). This work enabled a significant step forward in the ability of the client to take targeted commercial actions to improve returns.

The final and most important phase was to transition this customer lifetime value-based approach into ongoing capabilities. A minor part of this was transitioning the data preparation, modeling, and insight generation to a core team at the client. More significant, though, was a change in culture, led by the client with support from McKinsey, to focus on value over volume. Changes across governance, KPIs and incentives were all critical to ensure the initial impacts would generate lasting competitive advantage.

Impact

The LTV analyses revealed the potential to reshape subsidy programs and reduce their overall cost while not hindering sales. With the new insights and analytic capabilities in hand, the team identified actions that could yield a 5-10 percent improvement in ROI on handset subsidy spend (which translated to cost savings of €50 million-€100 million), over €50 million of which was captured within one year. The company is on track to capture ongoing savings through capabilities built during the course of the project and is on a path to become best-in-class in a value-based approach in the telecommunications market.

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