Download - Channel Strategy 2
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Distribution Channel Strategy
Madrid, July 17th, 2001
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1. Introduction
2. The Spanish mobile market
3. Channel Strategy
- The role of distribution channels
- Trends and emerging issues
4. Clients main challenges regarding Channel Strategy
5. DCs Channel Strategy approach and methodology
Contents
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1. Introduction
2. The Spanish mobile market
3. Channel Strategy
- The role of distribution channels
- Trends and emerging issues
4. Clients main challenges regarding Channel Strategy
5. DCs Channel Strategy approach and methodology
Contents
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Introduction
The wireless industry globally is facing significant changes:
High license cost that have to be recovered.
Constant pressure by the stock market.
Slow growth due to market saturation.
Falling ARPU as consequence of decreasing tariffs and commoditization of voice services.
The challenge for the operator is to capitalize on GPRS/UMTS technology by launching mobile data
services to generate additional revenue streams to stop ARPU decrease.
Data services are far more complex than voice services, thus the sales and service organizations of the
operator have to adapt to that increasing complexity.
Due to market saturation, the marketing focus of the operator shifted from customer acquisition to
customer retention.
Todays distribution channels are poorly prepared for selling and servicing data services, as their
traditional function was mere dispatching of products to cope with high growth rates.
The future distribution channel must be able to sell complex services and play a important role in
customer retention.
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1. Introduction
2. The Spanish mobile market
3. Channel Strategy
- The role of distribution channels
- Trends and emerging issues
4. Clients main challenges regarding Channel Strategy
5. DCs Channel Strategy approach and methodology
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The Spanish mobile market has experienced a strong growth in the past threeyears and is now entering a maturity stage
According to EMC, by February 2001, the total Spanish mobile market reached 25.847 thousand subscribers and a
market penetration of aprox. 63%.
The high growth rate verified since 1999 is related to the entry of the 3 rd GSM operator Amena.
Evolution of Total Mobile SubscribersSpanish Market (Un: 1000 subs)
9442.996
4.337
7.051
15.005
24.052
Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00
CAGR = 490%
Source: Comisin del Mercado de las Telecomunicaciones
0
20
40
60
80
100
120
AlternativeStage
ComplementaryStage
SubstitutionStageSaturation
Stage India
USA
Spain
Sweden Finland
No fixed lineavailable
Mobile as acomplement forfixed voicecommunication
The mobilestarts tosubstitute thefixed telephonyfor voicecommunication
Mobile telephonydominates andextends itself todata and videoservices
Mobile Voice Lifecycle
Penetrationrate(%)
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As a result of the penetration of low-end market segments and decreasingtariffs, ARPU is constantly eroding
ARPU and MOU have constantly
decreased due to the penetration of low-
end market segments. The market
converged into a mass market where
sales volume is key to success.
Fierce competition and the consequent
reduction of voice tariffs had an
additional negative impact on the ARPU.
High market growth rates have so far off-
set the ARPU decrease. Thus the total
revenue of each operator is still
increasing.
However, that situation will dramatically
change due to market saturation.
Summary ARPU Assumptions
0
10
20
30
40
50
60
70
1999 2000 2001 2002 2003 2004 2005
ARPU(EUR
permonth)
Airtel Vodafone EMEA
Source: Lehman Brothers
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Despite the entrance of a 3rd operator in 1998, Client was able to maintain itsmarket share. However, recently Clients market share is decreasing
Amena was able to capture significant market
share right from its launch in 1998.
Despite the entrance of Amena, Client was able
to maintain and even increase its market share
during 1998.
In 1999 however, Amena gains caused equal
losses in market share of both, Client and
Telefnica Mviles Espaa, thus Clients market
share suffered a decrease by 4 % points.
This trend is partly due to the fact that Client
started shifting its focus on retaining its valuable
customers rather than acquiring additional low-end customers.
Market Share GSM M arket
0%
20%
40%
60%
80%
100%
1.1.98 1.7.98 1.1.99 1.7.99 1.1.00 1.7.00 1.1.01
amena
Airtel
Telefnica
Source: Expansin directo
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The entry of a 4th player, combined with the launch of GPRS / UMTS services, isslowly leading the Spanish mobile operators to change their market approaches
Client has structured its short-term strategy around three main axes:
Focus on high value market segments
Retention policies
Adding value through data services
Being the market challenger and Spains first convergent operator (wireless, wireline, Internet), Client hasadopted a positioning rather similar to Telefnica Mviles, targeting all market segments with main focus on highusage customers. This is a different market approach from the other two alternative operators (Amena andXfera), which have chosen to focus on young dynamic customers mainly through the launch of innovative
products with competitive pricing schemes
Costumer retention has made Client and Telefnica Mviles Espaa adopt a variety of loyalty programs mainlybased on the accumulation of points - with the objective of decreasing churn, while keeping its most valuable
clients. On the other hand, Amena and, after Fall 2001, xfera will sti ll be mainly focused on customer acquisition.
UMTS service launch in 2003 (after an initial postponement) will allow all four operators to offer a broad variety of
rather complex solutions to their end customers. The early launch of GPRS this year represents a way of dealingwith UMTS delays and a test bed for UMTS applications, while locking in the client.
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In conclusion, the operators are facing a unseen series of challenges to whichare being forced to react accordingly
Competition is stronger than ever before
Tariffs are eroding
ARPU is decreasing
Market growth is slowing down
Voice services become a commodity
Data services get more and more complex
Investments in licenses reached exorbitant levels
Capex requirements for infrastructure are enormous
New technologies are not mature, causing significant delays
Develop new products and services
based on 2.5G/ 3G technologies
Focus on customer profitability andretention
Conversion of distribution channelsfrom dispatchers to customerservice centers
KEY ISSUES
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Key issues (I) - Develop new products and services based on 2.5G/3Gtechnologies
Within the 2.5G/ 3G value network,
the operators ability to extract value
and maintain ownership of the
customer is threatened by a variety
new market enablers and competitors.
While costs associated with advanced
wireless services are clear and
substantial, the revenue generated by
these services and who captures this
revenue is less clear.
There are still no proven economic
models, product profitability is the
overarching issue.
DistributionChannels Internet Direct / indirect
Customers
Terminal Device Suppliers WAP handsets Bluetooth or MExE - enabled devices
PDA / other devices
Hardware/Network Vendors GPRS providers UMTS providers Supporting software
Consumers Corporate MVNO
3rd Parties
Content Providers & Merchants Infotainment
Merchants Vertical market Aggregators
SolutionIntegrators System integrators Hardware vendors
MobilePortals
Direct competition
for customer
ownership
Mobile Network Operators Existing mobile operators Greenfield operators MVNOs
Application Providers Horizontal applications (e.g. E -mail, CRM)
Vertical applications (e.g. Mobile banking,Telemetry)
Customized mobile internet servicesTransaction/Settlement
Processors Financial institutions Mobile wallets
TechnologyPlatform Vendors Browsers OS (e.g. EPOC/Palm/Symbian) Internal OSS Gateways
Source: X Consulting Advanced Mobile Services Solution Set
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Key issues (II) - Focus on customer profitability and retention
The churn rate was very high in
1999, mainly due to the entry of the
3rd new entrant, Amena. It has
subsequently decreased.
The first challenge would be to keep
churn low through customerretention to minimize churn-off to the
4th new entrant, xfera.
Another associated challenge would
be to retain the most valuable
customers to turn around ARPU
decrease.
Source: Bear, Stearns International Ltd; EMC Database
Client vs. Telefnica Moviles EspaaChurn (%)
15
20
25
30
35
1999A 2000E 2001E 2002E 2003E
Churn TelefnicaChurnClient
%40
32
28,2
24,5
22,2
20,8
37,2
23,2
20,6 20,618,5
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Key issues (III) - Conversion of distribution channels from dispatchers tocustomer service centers
The distribution channel strategy in the past was designed to achieve a broad coverage
of the population to support strong subscriber growth.
The basic function of a distribution channel was to dispatch handsets or pre-paid packs
and activate basic voice service.
Given the low level of growth, the current distribution channel network is over-
dimensioned.
Due to the complexity of future data services, distribution channels have to convert from
mere dispatchers of handsets to customer service centers that offer a wide range of
services ranging from technical assistance, product configuration, installation and
maintenance, training, help desk, etc.
The products offered will have to include PDAs, handheld computers, PCs, software,
and a wide range of accessories.
Future distribution channels also have to assume customer care functions to play an
important role in customer retention.
Distribution Channels
Own shops
Sales Force
Contact Center
Web Channels
Agents
Franchises
Small retailers
Major Retailers
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1. Introduction
2. The Spanish mobile market
3. Channel Strategy
- The role of distribution channels
- Trends and emerging issues
4. Clients main challenges regarding Channel Strategy
5. DCs Channel Strategy approach and methodology
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1. Introduction
2. The Spanish mobile market
3. Channel Strategy
- The role of distribution channels
- Trends and emerging issues
4. Clients main challenges regarding Channel Strategy
5. DCs Channel Strategy approach and methodology
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CRITICAL SUCCESS FACTORS
As in other european countries, strong client / service orientation will be keyfactors to effectively address the future challenges of the Spanish mobile market
High churn rates
Lower voice MoU
Decreasing ARPU
Strong weight of SAC on cost structure
Lower operational margins
INTERNALISS
UES
MARKETISSUES Market saturation / massification
Maturity stage for mobile voice
Heavy competition
Lower tariffs
Lower product differentiation / commodity
CLIENT ACQUISITION STAGE CLIENT RETENTION STAGE
Data traffic growth
Increased product complexity
Increased product variety
Increased Competition
Individualised / non-standard customer needs
Increased replacement of SAC by SRC
Different costumer profiles
Decrease on churn rates
Expected increase on value per subscriber
Higher focus on customer service asdifferentiation factor
Client knowledge
Client segmentation
Internal process efficiency & cost control
Broad scope of service offer
Customer care
Integrated salesapproach
Non exhaustive
time
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Therefore, client-related activities, mostly developed by the distribution channels,are gaining overall importance in the process of achieving competitive advantage
Client knowledge
Client segmentation
Customer care
Integrated salesapproach
Internal processefficiency & costcontrol
Broad scope of serviceoffer
Information
Education
Pre-qualification
Promotion
POS marketing, Merchandising
Prospection
Product/service selection
Sales
Credit scoring
Financing
Ordering / Provisioning
Contract negotiation
Billing and paymentprocessing
Service activation
Product configuration
Installation
Costumer care
Customer monitoring
Detection of cross-selling
opportunities Training and technical support
Customer training
Help Desk
Maintenance
Problem/complaints handling
Customer retention
Core Distribution Activities towards the customer
ACQUISITIONTRANSACTION /
DELIVERY
SERVICING /
MAINTENANCE
Direct channels
Agents Small Retailers Major Retailers Franchises
Own Shops Sales Force Contact Centers Web Channels
Non exhaustive
CRITICAL SUCCESSFACTORS
Indirect channels
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Distribution channels main characteristics (1/2)
Web Channels
Own Shops
Sales Force
MAIN RESPONSABILITIES
Contact Centers
Directly owned by the operator or by a V-Partner;
Bi-directional, interactive, personalized low-cost channel;
Increasing spectrum of activities; may allow self-provisioning;
Constraints regarding information availability, customer usage
(depending on Internet penetration rate).
Directly owned or outsourced to a 3rd party (specialist);
Lower operational costs than previous 2 channels;
Generally focused on after-sales activities;
Problems regarding staff turnover and training;
Can be combined with other channels, namely web, media and
mailing concept of contact center;
Less personalized contact, though allowing a proactive behaviortowards the costumer in terms of monitoring, promotion;
campaigns, etc.
Directly owned and managed by the mobile operator; High initial investment associated; high maintenance costs;
Location is a key issue central/ commercial urban areas;
Promotes operators brand awareness, allows end-to-endservicing.
Directly employed and coordinated by the mobile operator;
Covers almost all distribution activities;
High set-up and maintenance costs associated;
Personalizes client / channel relationship;
Generally suited to high value customers.
Non exhaustive
5 5
DESCRIPTION
5
2 4
3 5
Legend: from Major role to1
Less important role
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Distribution channels main characteristics (2/2)
Agents
Small Retailers(Kiosks; Gas Stations;
Stationary Shops)
Major Retailers(Store-withina-store;
Department Stores;Supermarkets;
Electronic Shops)
MAIN RESPONSABILITIES
Franchises
Exclusive distribution of the service of a single operator;
Works as an extension of the operators own shops, acquiringcostumers and giving technical support;
Close relationship operator / channel: investment sharing,strong level of control, transversal branding / promotion.
Generally non-exclusive agreements;
Broad coverage, low cost and good time- to-market;
Limited range of activities, focus on selling pre-paid products;
Requires strong distribution relation management efforts.
Generally non-exclusive agreements;
Strong channel negotiation power; risk of lack of control;
Broad coverage, high sales rotation ideal for fast growing
markets with standardized products/services;
Main focus on selling activities to mass market.
Not exhaustive
5
2
3
5
2 2
3
5
1
DESCRIPTION
Independent sales representative;
Low cost, good time-to-market;
Allows broad coverage of disperse customers;
Exclusivity is a major issue, as generally distributes services ofmultiple operators;
Risk of lack of control - alignment with operators sales &marketing and commission strategy can be a major issue.
Legend: from Major role to1
Less important role
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Channel mix choices often reflect a specific mobile operators strategic positioning,service offering and life-cycle stage
Contact Centres
Directchannels
Web Channels
Agents
Franchises
Small Retailers
Mass Market
Indirectchannels
Own Shops
Major Retailers
Sales Force
Product differentiation
Average channel cost per costumer
Costumer loyalty
Average revenue per costumer
More important
Less important
+-
Niche playerStrategic Positioning
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Costumer-related costs, including the ones directly related to distributionchannels, have a strong impact on the total cost structure of a mobile operator
Operational service costs (2000)- mobile operator -
Source: X Consulting Survey
Costumer service, Biling and other MS
support represent aprox. 42% of the total
operating costs in a standard mobile
operators cost structure.
Therefore, distribution is one of the areas
where cost reduction and process efficiency
would have a major impact on overall
business profitability.
Interconnection Fees
26%
Customer Service
22%Network Maintenance
and Operations
22%
Biling
10%
MS support other than
biling
10%
Other
10%
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1. Introduction
2. The Spanish mobile market
3. Channel Strategy
- The role of distribution channels
- Trends and emerging issues
4. Clients main challenges regarding Channel Strategy
5. DCs Channel Strategy approach and methodology
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The changes in the Spanish mobile market are shaping the evolution of bothdistribution channel roles and mix
GPRS / UMTS
Non-standardized costumer needs
TECHNOLOGY
MARKET DEMAND COMPETITION
Non-standardized complex solutions
Increased product varietyIncrease on Internet penetration and usage
Commoditization of voice needsEntry of a 4th operator
MOBILE OPERATORS DISTRIBUTION CHANNELS
Retention cost
Revenues per client Acquisition cost
Customer relationship
New client acquisition
Customer loyalty Customer/ Channel profitability
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Technology is changing the economics of distribution channels, while allowing rolesharing by broadening the range of activities performed by non-physical channels
5 %
80 %
30 %
50 %
5 %
15 %
20 %
20 %
20 %
5 %
35 %
10 %5 %
15 %
70 %
Operations
Increase in transactions1998 2002 (CAGR)
Channel mix
Currentaccount status
Tranfers Informationrequests
Sales
10 - 20 % 5 - 7 % 10 - 20 % 2 - 5 %
Agencies
Call center
ATM
Mailing
Web
Average reductionon channel costs
- 82 % - 37 % - 33 % - 15 %
15 %
5 %
80 %
30 %
50 %
5 %
15 %
20 %
20 %
20 %
5 %
35 %
10 %5 %
15 %
70 %
Operations
Increase in transactions1998 2002 (CAGR)
Channel mix
Currentaccount status
Tranfers Informationrequests
Sales
10 - 20 % 5 - 7 % 10 - 20 % 2 - 5 %
Agencies
Call center
ATM
Mailing
Web
Average reductionon channel costs
- 82 % - 37 % - 33 % - 15 %
15 %
Internet has broadened the
channel mix, by increasing the
usage potential of a set of non-
physical low-cost channels,
namely the web.
Additionally, IT improvements -
mostly related to internal systems
integration - have contributed to a
overall decrease in channel costs,
as well as improved channel
control.
In the near future, the extent of
utilization of the web channel will
depend upon Internet penetration
and e-commerce rates, which are
still low in the Spanish Market.
Impact of technology in channel mix and distribution costs
(Financial Services / Banking system France)
Illustrative
Source: X Consulting - France
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As a result, overall customer-related costs will tend to decrease in the folowingyears, while investments will shift from acquisition to susbcriber retention
0%
5%
10%
15%
20%
25%
2001 2002 2003 2004 2005
SAC's SRC's
Evolution of SAC and SRC as a percentage of revenuesD2 Vodaphone
%o
fRevenues
Source: Lehman Brothers estimates
0% 20% 40% 60% 80% 100%
Profitability
Quality of
client service
Increase No Change Decrease
Source: IDC 2000, Datamonitor 2000
Effects of the Web call center(French Mobile Market)
The slow down on mobile market growth will result on a major shift from customer acquisition effords to costumer retention
Non-physical channels will play a major role on achieving profitability, while maintaining high standards of customer service for
basic customer needs
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As the voice market matures, the link between channel strategy and CustomerValue Management will need to increase
280%
70%
30%
-180%
Profitable
Non-profitable
CLIENTS PROFITS
280%
70%
30%
-180%
Profitable
Non-profitable
CLIENTS PROFITS
Illustrative
Client Profitability Mobile Market -
Effective segmentation and continuous assessment of client/channel profitability will become major issues
The alignment between client needs/value and channel capabilities/costresults on the migration of less attractive segments to lower cost channels
- +Sales force / Own shopsWeb
CLIENTVALUE
-
+
CHANNEL COSTS
Pre-paid
Low Usage,No Features
Post-paidhigh usage
PROFITABLE
NON-PROFITABLE
- +Sales force / Own shopsWeb
CLIENTVALUE
-
+
CHANNEL COSTS
Pre-paid
Low Usage,No Features
Post-paidhigh usage
PROFITABLE
NON-PROFITABLE
Source: X Consulting analysis
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Wireless Unique Solutions
Enterprise Extensions
CRM/ERP/SCM Custom legacy applications High-speed dial-up
Enterprise Extensions Standard Corporate Applications
(PIM, E-Mail, messaging) Limited intranet access
Consumer Extensions
Mobile advertising Personalization (customized information) M-wallet
Basic Wireless Data Services
Consumer Wireless POS Location based services Personalization
(customized services)
Enterprise Field sales & service Inv. management ASP Services Telemetry