JH990709JHZXT466DS_P1

JH990709JHZXT466DS_P1

SUMMARY

• Can create significant benefits through introduction of a rewards

programme
– Usage
– Retention
– Support of targeted retention programmes
– Countering competitive threat

• But reward programmes can also easily lose money

– Insufficient change in customer behaviour
– Over-ambitious and expensive programme design
– Uncertainty over value created

• Major risks can be mitigated by following a conservative design and

rollout approach

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BACKGROUND

• Duopolistic mobile telecoms providers

• Growth in contract customers stagnating
• Losing market share in prepaid customers
• Churn rates of 2-3%/month and rising
• Estimated value of 25% churn reduction would contribute an additional 8% to EBIT
p.a. (steady state)

Key challenges
Hyper-competitive Aggressive selling by client and competitor through mostly dual
market service providers
3rd operator expected to enter market in 6-12 months

Inferior market Growing customer perception of better value with competitor

image (service, price, network quality)

Diminishing Huge (and growing) handset subsidies by both competitors – up to

product 100%
profitability

Limited churn Pre-McKinsey plans would have thrown considerable value away for
reduction little churn impact
experience
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Focus of this presentation
PROJECT APPROACH

Lever Key Objectives

Loyalty • Conduct market research
rewards • Evaluate viability of current
programme programme

• Determine overall reward

programme strategy
• Develop programme design
blueprint

Build
Targeted • Assess current programmes organisation
retention • Identify high value customers retention
programmes • Identify reasons for churn + capabilities
• Define pilot programmes and post McKinsey
economics
• Roll out and iterate pilots
• Roll out programmes

Operational • Identify improvements during

Service improvements course of retention analysis
• Form client sub-projects to
Price deliver on improvements
• Monitor progress
Network

Total project length: 4½ months

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3 KEY QUESTIONS

1. Should we launch a rewards programme?

2. What is the value-maximising programme design?

3. Will the programme pay for itself?

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UNDERLYING ANALYSES

• 1 700 face-to-face mobile telecom customer

interviews (weighted by value and type of contract)
• Key questions on:
Customer research
– Interest in reward programmes
– Preference for type of reward and redemption
frequency

• 15 McKinsey CSS involved in reward programmes

• Attendance at London conference on reward
programmes
‘Expert’ interviews • Key questions on
– Programme ‘value for money’
– Business objectives
– Best practice programme structuring

• Cost: benefit analysis

Existing • 300 telephone interviews for programme members
programme • Key questions on
evaluation – Satisfaction with programme
– Willingness to move to another programme

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3 KEY QUESTIONS

1. Should we launch a rewards programme? • Have reward programmes been

successful elsewhere?

2. What is the value-maximising programme • Are customers really interested?

design?
• What customer benefits can a rewards
programme bring that targeted
3. Will the programme pay for itself? retention initiatives on their own
cannot?

• How would a rewards programme

affect the competitive landscape?

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WELL-DESIGNED LOYALTY PROGRAMMES CAN LEAD TO SIGNIFICANT

IMPROVEMENTS IN USAGE AND CHURN

Churn reduction Usage increase

US cellular provider 1

US cellular provider 2 15-30%

US cellular provider 3 5-16%

27-35% Cautionary note:

US cellular provider 4
• Uncertain at what
cost these results
UK mobile phone provider 1 7-11% have been achieved
• Uncertain how
results were
UK mobile phone provider 2 4-6%
calculated (and
therefore whether
UK mobile phone provider 3 12-19% they are valid)

International department
stores/financial institutions study

Source: Team analysis, McKinsey 8

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UP TO 60% OF HIGH VALUE CUSTOMERS ARE INTERESTED IN

REWARDS PROGRAMME MOBILE TELECOM
PROVIDER SURVEY

% responses
Actively avoid Partially participate Fully participate

Contract High value 34 39 27

customers
Medium value 32 50 18

Low value 40 45 15 The

percentage of
interested
customers is
Actively avoid Partially participate Fully participate higher for
High Value
Prepaid High value 36 44 20 customers
customers
Medium value 51 37 12

Low value 49 37 14

Source: 1 700 customer interviews 9

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A REWARDS PROGRAMME CAN COMPLEMENT OTHER

CRM INITIATIVES VERY WELL

Anticipated additional benefits

• Offering points can be more cost-effective than offering targeted programme incentives
directly
– Time lag between points offer and redemption
– Breakage

• Valuable customer information can be collected (especially on low information segments

such as prepaid customers)

• The value of a targeted programme offer to a customer is enhanced due to increased choice

• Points can be offered across all value segments, since the amount of points offered can
be linked to customer value

• The programme could improve retention in its own right (points earned are a barrier to exit)

• Reward programme points could be used in an acquisition programme (a 1% increase in

gross connections has considerable NPV impact)

• Loyalty points can be offered to groups difficult to reach through other CRM initiatives
(e.g. corporate customers, customer who cannot be contacted, or low value customers)

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A REWARDS PROGRAMME ALSO PROVIDES THE MOST PRACTICAL

COUNTER MEASURE TO A REWARDS PROGRAMME LAUNCH BY A
COMPETITOR MOBILE TELECOM OPERATOR

Anticipated value trade-offs for Competitive benefits of reward

launching rewards programme* programme relative to other tactics***
Indexed NPV** • High market visibility and long set up
Launch 25 100 period (1 year) can create acquisition
‘window of opportunity’

• Can dramatically heighten customer

60 -70 retention upon introduction of number
Client portability
-100 0
• Can boost telecom industry PR by ‘giving
something back’ to customers
Don’t
launch 160 0

Launch Competitor Don’t

launch
*Key assumptions: client has a 40% market share; 75% of churners saved through programme would have gone to
competitor
**Indexed 2 year NPV where the NPV of the client launching and the competitor not launching = 100
*** E.g., price reduction, greater use of targeted reduction offers, etc.
Note:NPV value calculated assuming 4% usage increase and 4% churn reduction 11
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3 KEY QUESTIONS

1. Should we launch a rewards programme? • What rewards should we offer?

• What redemption rate or reward

2. What is the value-maximising programme frequency will change customer
design? behaviour?

• How can the earnings structure risk be

3. Will the programme pay for itself? limited?

• Should we ‘go it alone’ or join a

consortium?

• What is the best implementation and

roll-out approach?

• How can we accurately measure

programme impact?

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SEVEN KEY DESIGN PRINCIPLES

1. Apply the basic ‘rules of thumb’

2. Make rewards align accurately with valued customer preferences

3. Ensure earnings structure is linked ‘beyond doubt’ to changes in customer behaviour

4. Ensure programme administration and customer communication channels are simple

and inexpensive

5. Own the points ‘currency’

6. Evolve the programme strategically

7. Create rigorous performance measures

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1. APPLY THE BASIC ‘RULES OF THUMB’

Rule
• Use a low earnings: revenue ratio
(1.4-2%)
• Points are lost after
predetermined period (3 years)
• Points are lost after customer
terminates relationship (or is
dormant for 3 months)
MOBILE TELECOM OPERATOR
Rationale
• Best practice shows 1-5% ratio is sufficient to
successfully modify customer behaviour
• Limit long term accounting liability
• Incentive to reduce churn and dormancy

• Points are added quarterly • Incentive to reduce churn

• Points are earned on both • Aligns customer incentives with company value
outgoing (billable) and incoming drivers
initiatives
• Calls for redemption/customer • Offsets cost of programme
queries are chargeable
• Customers can only join • Incentive to only take on ‘serious’* customers
programme after an initial period
(3 months)

*Not acquired via over-generous promotion, or having major financial difficulties (e.g., received contract as Christmas
present and could not afford)
Note:Figures in brackets denote client programme choices 14
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2. MAKE REWARDS ALIGN ACCURATELY WITH VALUED CUSTOMER

PREFERENCES Areas of concentration
Customer research feedback (mobile telecom operator)

Interest in type of rewards Interest in redemption frequency

(relative score) (% preferring)

High* Medium* Low* High* Medium* Low*

Cellphone 3.8 3.8 3.9

related 1-2 months 13 10 12
• Initially focus on
cellphone
Travel 3.2 2.6 3.1 related rewards,
19 22 14 with some travel
3-6 months
and leisure
leisure 2.8 2.9 3.1
• Focus on yearly
redemption,
Financial 2.6 2.4 3.2 28 35 30 with some ‘big
7-12 months
products ticket’ items
(e.g., air tickets)
Accommodation 2.6 2.7 2.5 for 24 months+
13-24 months 15 23 23

Meals 2.4 3.0 2.5

24+ months 25 10 21
Home services 1.4 1.8 1.4

*Customers by value category

Source: 1 700 face to face customers interviews 15
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3. ENSURE EARNINGS STRUCTURE IS LINKED ‘BEYOND DOUBT’ TO

CHANGES IN CUSTOMER BEHAVIOUR MOBILE TELECOM OPERATOR

Domain Basic Loyalty programme Targeted retention programmes

General Foreseeable Ad hoc bonus

formula
Base points + bonus points + points

Accrual • 1 point per incoming or • 5 points per additional • Points as alternatives to

basis outgoing minute minute over predetermined targeted retention offers at
• 500 points as a joining incentive levels equivalent value

Purpose/ • Drive enrolment • Quid pro quo usage • Widen customer choice of
rationale • Create impression of ‘giving stimulation retention offers
something back’ • Reduce cost of retention
• Overseas evidence of impact on offers (breakage, relatively
retention (up to 15%)* and usage lower cost vs handsets)
(up to 5%)*

Value of points 0.9*** 0.5** • Dependent on points take-up

(% of customer rate relative to offer
bill) acceptance

*Evidence from USA, UK

**For customers participating in ‘The Company X challenge’
***Excludes joining bonus
Note:Basic points distribution philosophy is to start with a minimum and increase bonus points if no impact achieved 16
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ONLY A VERY SMALL PERCENTAGE OF CUSTOMERS WILL BE ABLE TO

REDEEM BASE POINTS FOR HIGH VALUE REWARDS MOBILE TELECOM OPERATOR

Value

2 500 • 0.0003% (30

• Air-ticket customers)

• Based on base
points alone,
breakage would
be about 10%
500 • 0.7% (6 900
• Resort customers) • Benefits would
• Hotel be driven by
evidence of
retention and
100 • 21% (200 000 slight usage
• Accessory customers) increases

50 • 41% (400 000

• Free customers)
minutes 20 • 66% (650 000
customers)
3 6 9 12 15 18 21 24 27 30 33 36

Points
forfeited on
FIFO basis
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THE ‘COMPANY X CHALLENGE’ PROGRAMME OFFERS INCENTIVES TO

CUSTOMERS TO INCREASE THEIR USAGE OVER THE LONG TERM
Customer decision tree MOBILE TELECOM OPERATOR
Receive
additional
bonus
equal to
Receive
Earn 40% of
bonus
Basic structure higher Qtr’s
equal to 1
level of bonus
Qtr points
• Earn 1 point for Yes points Yes earnings.
points.
Yes Continue
1 minute of use for 1 Qtr Move to
(incoming or to earn
higher
outgoing) points at
usage
original
Continu band Continu
• Can receive 5 ‘Accept’ rate
bonus points per e for 2 e usage
usage
minute of use if Qtrs at at
challeng
quarterly higher higher
e
increase in level level?
Stay in
usage is above a
higher
predetermined,
Ye band but
public threshold No No No
s earn at
equal to 20% of
Continue to earn at Stay in current original
average usage in
lower rate (less usage band rate
the band
chance of Accept
redemption) challeng
e again?

Note 1:This scheme needs to be piloted with usage thresholds potentially being
adhered to increase take-up rates
Continue to earn at
Note 2:Customer base has been divided into 4 usage bands-very high (10%); No
original rate 18
High (15%); Medium (25%); Low (50%)
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CUSTOMERS THAT PARTICIPATE IN THE BONUS PROGRAMMES WILL

EARN POINTS MORE QUICKLY
Value
• 0.0003% (30
customers)
2 500
• Air-ticket
• 0.7% (6 900
customers)

500
• Resort • 21% (200 000
• Hotel customers)

100
• Accessory • 41% (400 000
customers)
• Free 50
• 66% (650 000
minutes 20 customers)

3 6 9 12 15 18 21 24 27 30 33 36

Points
forfeited on
FIFO basis

Note:Assuming a 2-year participation the ‘Company X Challenge’ programme 19

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BONUS POINTS CAN ALSO BE USED TO STIMULATE CUSTOMER

BEHAVIOUR DIRECTLY IN OTHER WAYS MOBILE TELECOM OPERATOR

• ‘Sign on a friend’

• Speed up penetration of new technology (e.g., SMS,

facsimile, Internet)

• Competitions and raffles

• Participation in customer surveys

• Other (?)

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4. ENSURE PROGRAMME ADMINISTRATION AND CUSTOMER
COMMUNICATION CHANNELS ARE SIMPLE AND INEXPENSIVE
Communication and redemption
requirements
• Make communication channels
easy to use for customers
– Points and reward queries
– Reward redemption
• Minimise setup and operating
costs
– Database management
– Customer enrollment
– Customer communication
– Rewards management
• Enable targeting of customer
segments that are difficult to
reach with other CRM initiatives
– Corporate
– ‘Could not contact’
– Lower value
Proposed structure
• Customer interfacing via SMS
messaging, call centre (mostly
IVR), and internet site
• Programme rollout as a ‘soft
launch’
– Outbound call and minimal
brochure to high value
customers only (SMS to rest)
– Rewards brochures available at
distribution outlets
• Use of legacy IS system for
database management
• Rewards offered to be mostly
non-physical (e.g., airtime, air
tickets, hotel accommodation)
• Physical rewards management to
be outsourced (e.g., handset
accessories)
JH990709JHZXT466DS_P1
MOBILE TELECOM OPERATOR
Rationale
• SMS is very cheap compared to
mail, can reach ALL customers
• Call centre still mandatory for
specific queries – majority of
customers not Internet-savvy
• Focus of programme is on high
value customers
• Cost of a call and a brochure to
entire base is prohibitive (time,
resource, money)
• Existing programme IS
infrastructure deemed to be
sufficient
• Predominance of non-physical
rewards reduces stock
management complexity and
delivery costs
• Not a core competency – can be
handled by specialists and set up
faster
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5. OWN THE POINTS ‘CURRENCY’

MOBILE TELECOM OPERATOR

Pros Cons

• Wider choice of • Less flexibility to

rewards and earnings structure programme to
potential for customers influence customer
• Low(er) barriers to exit behaviour in favour of
Join a – Customers can company
consortium
continue to be • Less opportunity to
members even if we build own company
terminate our scheme brand
• Could create long term • Churning customers do
competitive advantage not lose all points
if consortium is accrued
dominant • Non-dominant
Structuring consortium can be
options replicated

• Can build own company • High(er) barriers to exit

brand (through ‘point’ • Basic programme more
currency) readily replicable
• Flexibility to structure (potentially limited
programme (and ensure competitive advantage)
‘Go it alone’ customer behaviour
can be influenced)
• Lower IS system
complexity (if legacy
system in place)

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LESSONS LEARNT FROM LEGACY PROGRAMME

MOBILE TELECOM OPERATOR
AGREEMENT WITH AIRLINE
FREQUENT FLIER PROGRAMME

Programme characteristics* Impact

• Low membership • Virtually no impact on • Need to ensure principal

attractiveness for customer churn reduction at all customer relationship
base (30 000 members on 1m • Highly negative through programme
customers after 5 years) programme NPV for (brand)
• Customers allowed to keep mobile telcom company
points after churning – Benefit of breakage • Need to ensure
• Very low direct retention enjoyed by programme programme rules are
possible parent company linked tightly to desired
– Average member could – High cost per customer behaviour
redeem lowest reward after 3 programme ‘point’
years (airmile) for mobile
– Mostly seen as ‘top up’ telcom company
programme for frequent
flyers (principal customer = launch programme
loyalty with airline) in-house

*Programme rewarded mobile telcom customers with airmiles linked to strongly branded programme of a specific
airline
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6. EVOLVE THE PROGRAMME STRATEGICALLY

MOBILE TELECOM EXAMPLE

Overall premise: Build the next level of programme sophistication but hold in reserve until required

Create
consortium
Link to other
programmes • Third party
administration
• Company X should
Enhance basic only move to a next
programme • Leverage (only if we
phase if:
attractive control
Basic – The previous
• Special customer currency)
programme phase has been
offers bases of
successfully
• Offer free other
Elements • Cellular- companies
completed
based value added – Competitive
rewards services advantage can be
• Basic • Create ‘Gold gained by moving
membership club’ for to the next phase
valued (e.g., if a
customers competitor copies
programme)
– Moving to the
next phase can
be financially
Key drivers • Improve value • Cost saving • Separate profit justified
proposition to • Acquisition centre
members tool

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7. CREATE RIGOROUS PERFORMANCE MEASURES MOBILE TELECOM OPERATOR

Basic functionality operational measures Value measures

(Monthly and weekly frequency)

• No. customer complaints (by category) Churn and Year 1 Year 2

usage tests
• No. redemptions and average redemption value by
customer
Ongoing • Month 1 customer • Continue to test
• Call centre queuing time programme cohort (by value) Month 1 and
• Month 6 customer Month 6 cohorts
• No. of responses from SMS offers cohort • Months 12 and
18 cohorts (test
for acquisition
• No. of communication interactions with customer
(IVR, call centre) additionally)

• Admin cost per customer

• Programme customer base penetration rate (by Programme • Continue • Continue

category) hurdle programme if programme if
condition cohort in month cohorts in
• No. and % customers gaining bonus point status 1 is NPV positive months 1, 6, and
12 are NPV
• No. customers accepting targeted offers positive

• % of customers choosing points over other Pilots to test • ‘Gold’ Club • Further reward
rewards or services
alterations
• Reward discount vs actual value

• Costs of rewards/redeemed point

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3 KEY QUESTIONS

1. Should we launch a rewards programme?

2. What is the value-maximising programme

design?

3. Will the programme pay for itself?

• How difficult is it to achieve
breakeven?

• How can the long-term liability be

minimised?

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A CONSERVATIVE DESIGN AND ROLLOUT APPROACH CREATES A

GOOD CHANCE OF POSITIVE NPV MOBILE TELECOM OPERATOR

Seven design principles Expected NPV over 2 years

(% of total cost)
1. Apply the basic ‘rules of thumb’
40
2. Make rewards align accurately with
70
value customer preferences
100
110 50
3. Ensure earnings structure is linked
‘beyond doubt’ to changes in
customer behaviour 80
10
4. Ensure programme administration
and customer communication
channels are simple and
inexpensive

5. Own the points ‘currency’

Usage Churn Total Admin Base Bonus NPV
6. Evolve the programme (4% (4% cost cost points points
strategically increase*) decrease**)
7.
Create rigorous performance
measures

*Assumes 1% through basic programme; 3% through foreseeable bonus scheme with 15% take up rate)
**Assumes 5% for high value customers; 2.5% for low value customers)
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THE REWARDS PROGRAMME CAN BE JUSTIFIED USING

CONSERVATIVE ASSUMPTIONS

2-year
NPV Average decrease in churn*

0 1 2 3 4 5
0 - - - - - -
Programme has a
1 - - - - - - positive NPV if it
achieves 1% increase in
Average 2 - - - - + + acquisition of gross
increase connections,
in usage 3 - - - + + + irrespective of churn
and usage impact
4 - + + + + +

5 + + + + + +

*Weighted average based on a decrease of 0-2.5% (Low Value customers) and 0-5% (other customers). Weights: low
value 15%; other 85%
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THE EARNINGS STRUCTURE DESIGN ALSO IMPLIES A LOW FINANCIAL

LIABILITY Yearly liability
Indexed earnings liability Additional liability of
‘normal programme’*
(or to be used as ad
185 100%
176 hoc bonus points)

47
45 25%
By making <50% of all
points distributed
100 discretionary or
2 50 57 31% directly linked to
usage increases, the
Discretionary
long term liability is
or bonus
points
50 considerably
diminished vis-à-vis
giving away all points
81 81 44% automatically
Non-
discretionary 48
base points

Yr 1 Yr 2 Yr 3
(Steady
state**)

*All points given away as base points at 2% of customer revenue

**Assumes no net adds to customer base at 40% reward programme penetration 29
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THE BOTTOM LINE

Don’t really know whether it will work

unless you try it

So try it

But

Limit the downside risk

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