Mobile Churn

The impact of churn on mobile

subscriber profitability

Industry briefing
This year, mobile operators
will spend billions of dollars
replacing lost subscribers.
The ability to retain
subscribers, and reduce
acquisition costs, has
therefore become a key
measure of operator success.
But what is the real impact
of churn on profitability and
why do subscribers churn
anyway?

WDS Industry Briefing Mobile Churn

WDS Industry Briefing

Contents
CHURN: A KEY PERFORMANCE MEASURE

p3.

UNDERSTANDING THE IMPACT OF CHURN
p4.

Gross Additions, Net Additions and the Cost of Churn
p4.

How much does it cost to acquire a new subscriber?
p5.

WHAT INFLUENCES CHURN
p6.

Customer Experience and churn
p6.

Environmental & Purchase History and churn
p7.

Customer Lifetime Value
p8.

Is loyalty the same as retention?
p8.
STRATEGIES FOR CHURN REDUCTION

p10.

CONCLUSION
ABOUT WDS
APPENDIX

p11.
p12.
p13.

WDS is the trading name of Wireless Data Services Ltd. registered in England and Wales (company number
01714719). Registered address Wireless Data Services Ltd., Alder Hills Park, 16 Alder Hills, Poole, Dorset,
BH12 4AR, UK. VAT number GB 911330278. While every care has been taken to ensure that the information
in this document is correct, WDS cannot accept (and hereby disclaims) any responsibility for loss or damage
caused by errors or omissions. All rights reserved. No part of this document may be reproduced without the
prior permission of WDS. Copyright: WDS 2011.

www.wds.co
2

WDS Industry Briefing Mobile Churn

Churn: A key performance measure

The wireless industry is at an inflection point; marked by saturation, competition, stagnant revenue growth
and increasing customer care and subscriber acquisition costs. As such, the ability to retain an existing
customer has become critical to recapturing some of the revenue and margin sacrificed by customer
acquisition programs and price promotions.
Of course, focusing marketing dollars on customer retention rather than customer acquisition is far from
breaking news. Across most mature wireless markets, mobile operators have long appreciated that the cost
of acquiring a new customer is incrementally greater than the cost of retaining an existing one. Today this
has never been truer. As an example, assume a mobile operator with 1.5 million net additions in the year,
Average Revenue Per User of US$39 and a 3.5% quarterly churn rate. Decreasing that churn by 50 base
points to 3% would deliver an additional $40m of revenue and $22m profit (from the original collective of
net additions) in just 36 monthsi.
With such figures at stake, churn data, alongside subscriber acquisition costs, has become a key measure
used by industry analysts and financial commentators to determine mobile operator performance. Yet
despite its prevalence as a reporting measure its not an immediately transparent figure to benchmark,
analyze or predict. Churn rates vary enormously. In Europe, the blended churn rate for a Tier One mobile
operator is double that of an equivalent US operator. This isnt to suggest that European subscribers are any
less loyal, or that US operators provide a better service. Instead it reflects the relative unpredictability of
churn as a science, and the external influences that make some groups more susceptible to defection than
others.
This paper provides an overview of how churn impacts mobile operator performance, how it is measured and
why (and when) consumers leave a network.

WDS Industry Briefing Mobile Churn

Understanding the impact of churn

ARPU (Average Revenue Per User) has long been a standard measure for operator performance. However it
makes no reference to profitability and is of limited value when assessing performance and customer value
in todays highly competitive mobile markets. APPU (Average Profit Per User) instead factors in the cost of
managing the subscriber within the network, in addition to the original acquisition costs. This provides a
more accurate and representative view of subscriber value. Fig 1. shows how a fluctuation in churn impacts
the predicted subscriber margin by amortizing costs, including CPGA (Cost Per Gross Addition), over a longer
average customer life expectancy.
Quarterly
Churn

Average Customer
Lifetime (months)

Blended APPU

Extended Subscriber
Margin

2.5%

150

$30.46

60.92%

3%

100

$29.92

59.85%

3.5%

86

$29.66

59%

4%

75

$29.39

58.75%

4.5%

67

$29.12

58.24%

5%

60

$28.85

57.71%

Fig 1. Assumes 1.5m net additions on a 20m subscriber base. $50 ARPU, $160 CPGA, $18.50 CPU.

Gross Additions, Net Additions and the Cost of Churn

To understand the cost of churn (the financial burden put onto remaining customers to replace a churned
customer with a new customer), its important to understand how the industry measures new additions
within the network. All mobile operators report
Net Additions; the increase in the total subscriber
Start of Period (SoP) Subscribers
18,500,000
count from the start of the period to the end of
Gross Additions
4,090,000
the period. However, Net Additions is not the
Lost customers in period (at 3.5%
-2,590,000
total number of new subscribers connected to the
quarterly churn)
network (Gross Additions). Instead it represents
Net Additions
1,500,000
Gross Additions, minus lost (churned) customers
End of Period (EoP) Subscribers
20,000,000
over the period. While Net Additions is useful
in assessing a networks overall growth, further
Gross Addition:Net Addition Ration 2.73
analysis of Gross Additions allows a more granular
Cost of Churn (at CPGA $250)
$8.75
view of Gross Losses, the Gross Addition vs Net
Fig 2. Calculating Gross Additions and the Cost of Churn.
Addition Ratio and the Cost of Churn.
In this example (Fig 2), a 3.5% quarterly churn rate
means it takes 2.73 Gross Additions to achieve 1 Net Addition. This variance also allows us to calculate the
Cost of Churn, this is the cost that is borne by the remaining subscribers to replace a churned subscriber
with a new subscriber. Cost of Churn provides a useful performance measurement from which to analyze
the indirect cost burden of churn and the cost of subsidizing new devices for new customers (Fig 3) . The
calculation is expressed as CPGA x Churn.
15

Leap
$11.22

US$

12

T-Mobile
Sprint

9
6

$12.05

$7.53
$4.49

$5.30

$6.10

MetroPCS
Verizon Wireless
at&t

3
0

Fig 3. Cost of Churn analysis. The cost burden on existing subscribers to replace a churned
subscriber. (Source: MetroPCS Q4 2010 Financial Report).

WDS Industry Briefing Mobile Churn

How much does it cost to acquire a new subscriber?

The cost of acquiring customers has increased incrementally in line with more advanced (and costly)
smartphone equipment. Often reported as CPGA (Cost Per Gross Addition), acquisition costs include retail,
administration, marketing and handset subsidy costs. While efficiencies in retail, such as driving customers
through online channels, have helped to cut acquisition costs, the average cost of subsidizing equipment
has grown. CPGA now averages $250, and is far higher for smartphone connections. Apple iPhone subsidies
are, for example, notoriously high. Industry analysts estimate that Verizon Wireless will spend between
US$3-5b in 2011 subsidizing the iPhone at a cost of $350-400 per customer ii.
Subsidizing equipment in this way has become a key promotional tactic to attract new customers or retain
existing customers within a network. However, to recoup their investment it has become imperative to
extend the average customer lifetime. Coupled with the continued costs associated with maintaining a
customer (customer care, network maintenance etc), its not uncommon for mobile operators to have to wait
+12 months to breakeven on a customer; extending the average customer lifetime therefore has a notable
impact on subscriber margins.
Q1 09

Q2 09

Q3 09

Q4 09

Q1 09

Q2 09

Q3 10

Nokia (SP)

$248

$254

$277

$265

$210

$174

$183

HTC

$364

$358

$348

$348

$339

$340

$342

Apple

$600

$600

$600

$620

$600

$595

$610

RIM

$357

$345

$320

$311

$299

$304

$300

Samsung (all)

$122

$124

$120

$169

$192

$185

$210

Sony Ericsson
(all)

$162

$170

$166

$171

$182

$195

$207

Motorola (all)

$123

$124

$124

$169

$192

$207

$223

Fig 4. Mobile device Average Selling Price (as sold by manufacturer to the operator, before any subsidy is applied. (Source:
WDS 2010)

Subsidizing handsets for new and existing subscribers remains one of the industrys most extensively used
promotional tools. In a study by Informa Telecoms & Mediaiii, 57% of interviewed operators subsidized
equipment for new customers with only a quarter agreeing that their subsidy costs had decreased for the
period 2009 to 2010.

WDS Industry Briefing Mobile Churn

What influences churn?

A number of factors influence churn (see fig 5), some are regulatory or technological and innately control
churn. Others are more personal, and importantly, controllable.
Native Factors

Environmental Factors

Age
Income
Profession
Employer
Family & Friends on Same Network
Credit Score

Mobile Termination Rates

Number Portability
Numbering
Spectrum Allocation
National Coverage
Competition
PrePay Availability
Handset Bundling

Purchase History Factors

Customer Experience Factors

Retail Channel Used

PrePaid vs PostPaid
Business Contract
Number of additional subscriptions
Termination Fee
Contract Duration
Hero-Handset
Time as a customer
Additional services

Data Speeds
Call Quality
Support Requirements (type of call /
number of calls)
Retail Experience
Device Quality
Firmware / Software

Fig 5. Examples of factors that influence propensity to churn.

In addition, propensity to churn can be amplified by Churn Gates. These describe notable milestones in the
customer journey where subscribers will exhibit a higher rate of churn. Examples include:
1.

End of contract period: In the weeks preceding the expiration of a contract, subscribers will begin
looking for more advantageous deals or for a plan that includes a desired device.

2.

Start of contract period: The first 30 days of device ownership are critical to setting long-term usage
trends and, subsequently, profitability. Poor retail practice or a poor out of the box experience can
produce instances of buyers remorse (where the device or service does not meet expectations) and
drive product returns.

3.

Launch of a Hero Handset: The availability of a Hero Handset on a particular network may promote
Gross Additions at the expense of other networks. AT&Ts US exclusivity on the iPhone (until 2011) was
considered a key driver for acquiring new subscribers and keeping them.

4.

Buggy device: Device launch cycles are shortening as manufacturers look to gain a competitive
edge through first-to-market advantage. However, instances of buggy devices being released have
increased as a result. These typically take the form of firmware issues limiting device functionality.
Resulting device recalls or over-the-air patches can damage subscriber confidence.

5.

Network failure: Poor network performance, such as low voice quality or slow data speeds can frustrate
subscribers. Data congestion in high-density population areas is increasingly common and has been
cited as a driver for churn.

Customer Experience and Churn

There are multiple innate factors that make a subscriber more susceptible to churn. Age, for example, can
have an extreme impact with some studiesiv citing blended youth churn in the US at 31.5% against a
national average of 3%. However, there are many factors directly controllable by the mobile operator; these
are categorized as Customer Experience Factors.

WDS Industry Briefing Mobile Churn

Fig 6. Key stages of the mobile

consumer journey.

SE

CO
N

R
E
AT

Y
BU

Mobile Consumer Journey

EVA
LU

While a positive customer experience has a positive

effect on customer acquisition (loyal customers
are more likely to recommend a product or service
to friends), its value is largely in the retention of
existing customers. In a September 2010 survey by
the Telemanagement Forum, 60% of companies
surveyed cited Improve Customer Retention as a
key driver for customer experience programs. 25%
cited customer acquisition as a driver.

rn

u
Ch

DE
SI

For many mobile players, the customer experience

has become a key differentiator. Parity across price
plans, hardware and services means consumers
increasingly see little measurable difference
between brands; certainly not enough to build
loyalty. Instead, the customer experience has
emerged as a means for players in this highly
competitive market to differentiate their brands and
build loyal, and profitable, customer bases.

Its easy to assume customer experience begins and ends at customer care. The reality is that the customer
experience is the sum of all the experiences a consumer has with a service provider; from awareness,
discovery, purchase, use and advocacy. For todays players, driving value from the Customer Experience
is about aligning the many discrete user experiences, processes and touch-points that todays mobile
consumers interact with. These may include an interaction with a retailer, a support channel, the network,
the device or a service.
Environmental and Purchase History Factors and Churn
The US stands almost alone in its low churn rate and Tier One operators such as Verizon Wireless routinely
post quarterly churn rates below 2%. There are several key environmental and purchase history factors that
make this so.

Coverage: As a purchase criteria in Europe, coverage is barely considered. However, the ubiquitous
coverage enjoyed in Europe does not exist for many US consumers, particularly those looking for highspeed data services. Coverage footprint therefore remains a key purchase criteria and motivator to
remain within a network.

PostPay Dominance: Across many mature wireless markets, prepay plans continue to represent
a significant share of net additions (typically ~50% for a Tier One operator). Such plans offer the
consumer immediate benefits and flexibility, but while prepay plans have a low cost of entry they
are also easy to leave and so attract some of the industrys highest churn rates as price sensitive
consumers shop for the best deals. In the US, Prepay services represent only a small percentage of total
subscriptions (typically less than 10% of a Tier One operators total subscribers). Indeed, in 2010 both
T-Mobile US and Verizon Wireless saw net losses on their Prepay subscriber base.

Number Portability: Although mandated by the FCC in the US since 2003, number portability is
discreetly marketed and not actively understood or leveraged by consumers.

Handset Control: Mobile operators (either through direct or indirect channels) remain the dominant
force in device distribution. Devices are closely locked to the network and the supply of SIM-unlocked
third party devices is limited. This is a natural churn prevention.

WDS Industry Briefing Mobile Churn

Customer Lifetime Value

Understanding if certain groups of subscribers are more susceptible to churn than others requires detailed
modeling and segmentation. Not all subscribers have equal value and operators must look carefully at
strategies to retain their high-value and loyal customers. Customer Lifetime Value (CLV) models provide a
useful way to apportion a dollar value to a subscriber (or subscriber group) based on cumulative cash flow
from a subscriber relationship and the benefits of loyalty and advocacy that increase over time. They provide
marketing teams with a means to gauge the effectiveness of their acquisition costs and retention strategies.
CLV modeling may also be used with the goal of changing the behavior of different customer segments to
consequently change their lifetime value.
The following table (Fig 7) provides a series of segmented CLV scenarios.
Contract Type

Post-Paid

Pre-Paid

Pre-Paid

Post-Paid

Post-Paid

Age Range

25-35

45-55

16-22

45-55

25-35

Usage Summary

Smartphone,
heavy data
user.

Light pre-paid
minute usage
(off-peak). No
data usage.

Heavy prepaid minutes

usage. Heavy
text use.

Smartphone,
limited data
use. Uses all
monthly voice
minutes.

Smartphone,
heavy data
user. Cancels
after 12
months.

Usgae Summary

$350

$10

$10

$350

$400

ARPU

$50.00

$15

$8

$50.00

$50

Cost p/user

$20

$10

8%

$15

$20

Churn

3%

4%

$170

2.5%

3%

CLV @ 1 year

$110

$50

$429

$170

$60

CLV @ 2 years

$479

$119

$812

$608

CLV @ 3 years

$880

$202

$1373

$1095

CLV @ 4 years

$1316

$300

$1373

$1636

Fig 7. Customer Lifetime Value scenarios

Understanding a segments susceptibility to churn, and their CLV, is crucial to both acquisition and retention
strategies. Typically, a subscriber base comprises multiple segments, each with varying profitability
characteristics. Some may represent a higher cost-to-serve through above-average customer care use,
others may have a low cost-to-serve but add significant load to the data network through intensive usage.
Whatever the characteristics, their churn and profitability patterns will vary. For operators deploying a
churn reduction strategy, identification of high value customers must always be a priority. While all churn is
arguably bad, the loss of low-value customers will inherently be less damaging than the loss of once loyal,
high value subscribers.
For example, in 2010 T-Mobile US suffered negative industry attention because of a net loss of 33,000
subscribers. However, closer analysis reveals losses largely came from the lower prepaid segment
(-218,000), while the more lucrative post-pay contracts saw a 185,000 net gain. A net loss will always be a
negative, but better they be from lower-value customers whose departure wont significantly dent overall
margins and profitability.

WDS Industry Briefing Mobile Churn

Is Loyalty the Same as Retention?

Loyalty and retention are often terms used interchangeably. While they both impact churn they are very
different and should not be confused.
Loyalty relates to an emotional bond between service provider and consumer and typically goes beyond
simple price and product promotions. As a result, loyal customers often become brand advocates and deliver
enormous value through word-of-mouth recommendations. Unfortunately, despite such value the results
of a loyalty program are often long-term and difficult to accurately identify. Retention strategies are instead
highly visible and deliver immediate results. Such programs relate to stopping a consumer from leaving a
network at a point of churn. Typically they are driven by price and/or product promotions.
A retained customer therefore, may not necessarily be a loyal one. By the same token, although churn can
reflect poor customer satisfaction it does not directly show the degree of satisfaction within a subscriber
base. When a customer churns because of poor customer satisfaction its typically too late to perform a
recovery. To counter this, operators should use a collection of measures to better predict churn, including
Net Promoter Scores, Customer Lifetime Value and CSAT scores.

WDS Industry Briefing Mobile Churn

Strategies for churn reduction

There are a myriad of programs deployed by mobile operators around the world to reduce churn. Fig
8. provides an overview of key churn mitigation program types and their influence on either loyalty or
retention.
Type

Description

Example

Handset
Exclusivity

Exclusive availability of
key handset models in a
defined market.

AT&Ts four year

exclusivity on the Apple
iPhone.

Service
Rewards

Additional free
minutes, data or texts.

Many operators offer

additional credit for
regular prepaid
top-ups.

Converged
Offers

Bundling multiple home

entertainment and connectivity services.

Virgin Mobile (Broadband, TV and Phone

bundles)

Community
Privilege

Beneficial access to
events for subscribers.

Orange Wednesdays
(free cinema tickets).
O2 Blueroom (tickets
to concerts available
before general sale).

Handset
Subsidy

Discounted devices

Common across 70% of

global operators.

Value-Added
Services
(Business)

Complimentary services
aligned to target audience.

Vodafone Spain
provides hosted IPBX
service and Business
Apps.

Value-Added
Services
(Consumer)

Complimentary services
aligned to target
audience.

Telstra MySync delivers

contact back-up service

Over-andAbove

Unexpected services
that go over and above
the industry norm.

US Cellular Battery
Swap and Handset
Replacement service.

Contract
Privilege

Improved contractual
terms after a set period

US Cellular One &

Done contract, offers
no contract period after
initial two years.

Reward
Points

Subscriber earns points

to spend on a selection
of products / services.

Orange Barclaycard
earn Orange Credit
Card points to redeem
for vouchers.

Retention

Loyalty

.....
.....
.....
.....

.....
.....
.....
.....

.....
.....
.....
.....
.....
.....

.....
.....
.....
.....
.....
.....

Fig 8. Examples of churn reduction strategies and their benefit to retention and loyalty.

10

WDS Industry Briefing Mobile Churn

Conclusion
Churn will remain a key challenge for mobile operators and may in fact rise as the wireless value chain
becomes increasingly decentralized. The explosion of connected devices and the increasing influence of
over-the-top (OTT) players will force greater fluidity in how consumers interact with mobile products and
services. Mobile operators once fixed position at the center of the mobile experience is being challenged
by these, and other disruptive forces, forcing them to look at new and innovative ways to drive long-term
loyalty and stem immediate churn.
In planning loyalty and retention programs, mobile operators remain heavily reliant on BSS integration of
CRM and billing platforms. However, researchv shows that CRM systems are often used more for operational
tasks (order management for example) than churn prediction or other proactive loyalty planning.
In reality, a combination of tools and systems need to be aligned and deployed; from subscriber profiling
and competitor monitoring to network monitoring and marketing campaign management. There must
also be an appreciation that a subscribers decision to churn may be the result of several smaller customer
experience failures. Aligning the customer journey and delivering a consistent experience as subscribers
pass through the retail and usage stages of the journey will be key to building loyalty and long-term
advocacy. During these mini-experiences it will also be vital to capture data, and share that knowledge
centrally to build a more holistic view of the subscriber and his likely propensity to churn. For example,
consider a consumer who engages with a retail channel with the express purpose of purchasing an email
messaging device. A month later, the same consumer has not sent a single email from his new device and
the device management platform reveals no attempt has been made to configure it. By aligning all of the
network nodes, tools and touchpoints that the subscriber has interacted with, key business intelligence can
be extracted and used against predictive churn models.
Different regions will also need very different churn strategies. For some the goal will be churn management
rather than churn reduction. For example, reducing churn any lower than 2% is a difficult task. In such
environments, focus may be put on ensuring churn does not increase, rather than finding ways to further
reduce it. In other regions, where churn is +30% the immediate goal will be improved segmentation and
marketing strategies to identify key fault points and stem the flow. Regardless of the region and the
operator, churn will remain at the forefront of operator challenges and as a key measure of success for the
foreseeable future.

11

WDS Industry Briefing Mobile Churn

About WDS
WDS: Enlightened Thinking
As the industrys only provider of specialist managed services dedicated to optimizing the customer
experience across the wireless value chain, WDS works alongside some of the industrys best-known brands,
spanning mobile operators, handset manufacturers, OS vendors, retailers and service providers.
WDS uniquely understands how people use wireless products and services. We use this understanding to
enlighten our customers, helping them to assure the customer experience, improve future products and
services and build profitable, long-term relationships with end-users. To us, continued cost efficiency and
revenue gains do not have to come at the expense of the customer experience; they should be a direct result
of it. Through a single platform, deployed across our customers businesses, we align critical processes,
gather intelligence and deliver actionable insight that drives real end-user value.
With offices across five continents, and interactions with millions of end-users every month, no one has a
more global view of the customer experience and the wireless value chain.
To learn more please visit ww.wds.co or email tim.deluca.smith@wds.co

12

WDS Industry Briefing Mobile Churn

Appendix
REFERENCES
i. Assumes 1.5m net additions. $38.69 ARPU and a quarterly churn rate of 3.5%. 49% margin per subscriber.
ii. http://www.bloomberg.com/news/2011-01-10/iphone-may-cost-verizon-5-billion-in-subsidies-in-its-first-year-ofsales.html
iii.Informa Telecoms & Media 2010, Cutting the churn: best practice loyalty strategies from around the world
iv. http://www.mobileyouth.org/post/3-methods-of-fighting-churn-among-us-operators-find-out-which-one-is-themost-effective/
v. Informa Telecoms & Media 2010, Cutting the churn: best practice loyalty strategies from around the world

DEFINITIONS
ARPU: Average Revemue Per User describes the gross revenue contribution per user, per month.
APPU: Average Profit Per User describes the monthly profit per user after all costs have been factored.
Churn: The measure used to describe subscribers leaving a network for a competitor.
EoP Subscribers: End of Period subscribers, the amount of subscribers in a network at the start of a
measurement period.
SoP Subscribers: Start of Period subscribers, the amount of subscribers in a network at the end of a
measurement period.
Cost of Churn: A calculation to measure the cost burden on remaining subscribers of churned subscribers.
The calculation is expressed as CPGA x Churn. It can also be shown through the following calculation: (Lost
customers in quarter x CPGA)/SoP Subscribers.

13

www.wds.co

WDS is the trading name of Wireless Data Services Ltd. registered in England and Wales (company number 01714719).
Registered address - Wireless Data Services Ltd., Alder Hills Park, 16 Alder Hills, Poole, Dorset, BH12 4AR, UK. VAT number GB 911330278
While every care has been taken to ensure that the information in this document is correct, WDS cannot accept (and hereby disclaims) any
responsibility for loss or damage caused by errors or omissions. All rights reserved. No part of this document may be reproduced without
the prior permission of WDS. Copyright: WDS 2011