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October 2012

Analytics Pioneer: Price Jockeying is an Old Tactic; Fresh Service Ideas Key to Telco Value Creation

Analytics Pioneer: Price Jockeying is an Old Tactic; Fresh Service Ideas Key to Telco Value Creation

“Wealth consists in bringing things from where they abound to where they are wanted; in wise combining.  The art of getting rich consists not in industry, much less in saving, but in a better order, in timeliness, in being at the right spot.”

“Coal lay in ledges under the ground until a laborer with pick and windlass brought it to the surface.  We may well call it black diamonds.  Every basket is power and civilization, for coal is a portable climate.  Coal carries coal, by rail and by boat, to make Canada as warm as Calcutta.”

Ralph Waldo Emerson, The Conduct of Life 1860

If coal was the “black diamond” of the 19th century, what’s its equivalent in today’s telecom industry?  Which industry strengths and assets can be fused together to form those precious gems that deliver one hundred times greater value than their cost to provision?

And what are the consequences of failing to find that next black diamond?  Will telecom industry revenue be squeezed to nothing by “over-the-top” (OTT) content providers like Apple and Google?

Well, while the OTT threat is very real, if you look back at our industry’s history, you notice that telecoms have risen to the commoditization challenge many times in the past.

For instance, in the 1990s, telecoms discovered black diamonds in the highly profitable Advanced Intelligent Network inventions of voice mail, call forwarding, and 800-number/Free Phone services.  Likewise, in the 1980s Southwestern Bell successfully drove WAN-based home security alarms --- a “sticky” service because if you switch service providers you’re putting your family’s safety at risk.

But over the last three decades, billing has unquestionably been a telco’s favorite tactic for adding value.  Billing falls under many guises: service bundling, creative pricing, customer specific discounts and various promotions.  And the great billing ideas of yesteryear like good old MCI Friends and Family continue to pop up in new variations such as Verizon’s new Shared Data Plans for mobile data.

But much has changed in the last ten years.  In advanced markets, “all-you-can-eat” voice and data plans are everywhere.  And adding innovative services today is as simple as downloading a new mobile app.

So can pricing innovation sustain the industry as it has for the last 30 years — or do we need to turn elsewhere?

Here to lend his perspective on that key issue is David Leshem, inventor, telecom analytics pioneer, and the former CEO of Compwise (sold to Ectel in 2008 and now owned by cVidya), a tiny pricing analytics software firm that in its day served customers as large as France Telecom, T-Mobile UK, Telstra Australia and Vodacom South Africa .

In our interview, David explains the theory of his software and why it was successful.  He then, surprisingly, shoots holes in the notion that those same pricing schemes have much of a future.  Finally he shares some humorous anecdotes and points to a few innovative service examples as he makes the case for greater out-the-box thinking by telcos.

David, to begin, I think readers would enjoy hearing a little more about the software firm you founded.

Sure Dan, we were very proud of our accomplishment and we delivered some excellent results for our clients providing impact analysis and financial metrics for offering and portfolio analysis.

Pricing Analytics for Small Business & Corporations

The purpose of our software was really about determining: what is the value of a customer?  How do you measure this asset?  How much does he cost you?  And how do you maintain the customer?

I was often asked, “What’s the best price for the customer?” But that was an easy one to answer: The best price for the customer is free! The more interesting question, of course, is “What is the best offer to make to a customer”, while considering the business objectives and consequently the CXO annual bonus targets and that’s where we focused our analytics energy.

I was living in the States for 5 years and this was a time when the market was full of competing long distance provider and the LD call calculation in the U.S. market was very complex with its many inter-State and intra-State inter-LATA, intra-LATA jurisdictions and regulatory rules.

The system allowed an end user to compare the price plans of 1,000 U.S. long distance carriers, also known as Inter eXchange Carriers(IXCs).  So this allowed you to select the best routes or determine: what’s the best deal?

But our big break came at a telecom conference in Cannes, France.  There I met the CEO of Vodacom RSA (Vodacom South Africa) who asked me if I could do a certain calculation balancing “fear and greed” in customer management analytics.  He was pursuing the Small Business market, so we won a contract there to help them acquire and retain business customers at the right price point.

Our system could take many cost and revenue parameters, including competitive offerings, usage patterns providing competitive analysis while considering the value for Vodacom and the customer.  Enabling Vodacom to look at all sides of the pricing equation?  What are my costs?  What is my commission?  What is my margin and competition?

And all this was put on a PC.  On top of handling the myriad of degrees freedom and constraints THE criteria for success was get results within one second of pressing the ENTER key.  It was accomplished and delivered a superb engine that could crunch huge volumes.  So at Vodacom we could handle large corporate clients and complex business scenarios with lots of parameters.

The point of the software was to allow a Vodacom marketeer to analyze what is the most appropriate offer for the customer.

The sales guys meanwhile would have three options: Option A was the best for Vodacom, with highest commission for the sales manager and obviously worst for the client.  Option B was the in-between option, for the client and the sales rep where Option C was best for the client bearing only modest commission for the sales manager, which is better than no commission.

And one of the beauties of this was there was no room for maneuvering by the sales guys, who behave like cats and cannot be herded.  Fringe benefits were streamlined corporate financial efficiency in customer retention and acquisition.

Soon after we deployed the solution, Vodacom became number one in Johannesburg.  They became the leader in less than 6 months, the ROI was tremendous and the solution came with workflow and other bells and whistles like a view for the financial guys not visible to the sales guy.

The idea was to deliver simply software, the opposite of what an Amdocs or EDS delivers.  And happily I am still very good friends with the ex-CEO of Vodacom.  I will always be grateful to him.  Our fee was $400,000 and he had the guts to buy a solution from an unknown small company.

And yet, 15 years later, you question the software’s value in today’s market?  Why is that?

Well, Dan, the product was ideal in the days when retail prices were linked to the cost function with a clear distinction between in-network and out-of-network products, network bandwidth was a challenge et al; these days are long gone.

Why Pricing Tactics are Weak Today

Fifteen years ago, the customer was penalized for not knowing what his core costs were, such as the price to call a certain country or area code, or other business parameter like call rounding, would it be by 12 sec, 60 sec or 1sec, call jurisdiction and interconnect fees and more.

Pricing today is greatly simplified because so many plans provide unlimited usage.  In Israel today, my daughter can spend $25 a month call all she wants.  The same goes for mobile data.  There are limits on these plans, but it’s usually a very high number of calls or SMS beyond what you would normally use, so it becomes a predictable price for the customer.

By contrast, in the old days one tariff had over 100 call types and each call type had plenty of parameters.  So the marketeers at the time had plenty to toy with.  In short, the whole industry was making money on the confusion of the customer over prices.

But today we are selling a service that is rather cheap with lots of competitors, and the traditional pricing confusion has been exposed.

Today’s telecom business is like buying a bottle of perfume that has no scent.

It’s true.  Look at the financial statements of any large carrier around the globe and the margins are going south.  To illustrate my point, I think a comparison in the consumer world is appropriate.

The Innovative Promotion of Coke Zero

Over the last 3 years Telefonica (TEF) stock lost over 50% while Coca Cola (COKE) gained over 40%.  How do you explain this?

Telefonica is similar to Coke in that they are both in the consumer business and it is safe to say that Telefonica knows much more about its customers: they even know their customers' average driving speed.  But unlike Telefonica, Coca-Cola is in a cut throat business with limited customer visibility.  Both are players in a mature and highly competitive market, yet the performance gaps are startling.

Coke Zero

What's the catch? Well, let’s have a look at the can of Coke Zero I bought last week in Paris, which is promoting the new James Bond movie.  The Zero can is a dual revenue stream generator, selling black-colored soda and serving as an advertising platform for the upcoming James Bond Zero Zero Seven movie.  Needless to say I’m not an investment analyst so this is only one possible explanation for the performance gap of the two adjacent players.

So what does a telecom CEO do when he faces a tough business climate?  I met a mobile CEO one time who was on the verge of firing people.  So he went out and bought a Ford Focus, a very simple automobile with almost no styling or luxury features.  Of course, this made all the Vice Presidents very upset because it meant they had to get rid of their fancy SUVs and drive something lesser or equal car model the CEO had driven.

These are great stories, David!  So what do you feel telecoms can do to add value if you can no longer rely on pricing dexterity?

Well, I think the answer is embodied in the buzzword that’s been in fashion for the last few years: CEM or Customer Experience Management.  It’s a great concept and frankly it’s about time.

But somehow people don‘t get the CEM concept quite right.  I met the CMO of a major telco once, and he told me that his Business Intelligence (BI) system tells him everything he needs to know about his customers, even their average car driving speed in a car.

And hearing of the great analytic power of his system I said, “So tell me, what intelligence do you have in your BI tool that’s useful to your customers?”

He had no idea.

And another example.  Two years ago in the London press, what did I see?  I saw a story about 2,000 traffic lights in the UK being mailed letters by BT thanking them for being a loyal BT customer.  The story has since been buried and removed from the press.  I tried to find the link, but it’s gone now.

LOL.  I’m reminded of those creative fraudsters in South Africa who stole the SIM cards inside hundreds of traffic lights so they could put them in SIM boxes.  Perhaps some of those traffic light customers are now living a double life:- ) Seriously though, how can telecoms make CEM real?

Well, Dan, let me tell you about an interesting service called Waze.

A GPS Car Navigation Service for Traffic Jams

Waze is a small Israeli company who offers a GPS-based social networking service.  It’s ideal for commuters and travelers because it recommends driving routes so members can avoid traffic jams.  The Waze members basically report the bad traffic they are experiencing in the road and Waze makes the collective reports available in real-time.

OK, I think Waze is a valuable service that a telco could replicate on its own, and it’s something that would require no change in the network.  The triangulation of wireless towers makes it very easy to track the speed of cars on the highway, so rather than require people to report traffic jams (as in Waze members do) a telco can easily offer this service in real-time in major cities.  So when the mobile subscriber uses GPS to find a route to travel on, this information can be made instantly available to them on their phone.

Now here’s a wonderful service that not a single telco [to my knowledge] is exploiting.  Why?  Well, I can only conclude that people remain in their system silos and don‘t think outside their boxes.  Too many people have their heads down working in billing, RA, and so forth.  They are thinking about what the next tariff will be, but they don’t look for obvious ways of adding value for their customers.

The telcos have the channel, the ability the media the distribution abilities, yet none was done on this front.

I think the Waze style car navigation idea is a good one.  Yet I think there’s still a great need for pricing analysis.  To be sure, the analytics focus has shifted a bit.  In mobile data, for example, flat rate pricing may make overall pricing less elastic, but you still need to measure margins, segment customers, and combine services in profitable ways via life style data plans and the like.

Don‘t get me wrong, I have no complaint about trying to improve pricing plans.  It’s just that tweaking the prices is not going to get you very far these days.

My point is that too many people who work at telcos are simply staffers who are punching a time clock.  CEM may be a system trend, but thinking from the eyes of the customer is not in a telco’s culture.

Yes, in the Far East in places like Japan and Korea you have mobile banking.  And you can purchase a cup of coffee and a paper with your cell phone, yet mobile phones can offer much more value than a mobile cash register machine And we know that companies like eBay and Amazon have changed the on-line buying experience.  Meanwhile too many telcos are still thinking in terms of customer offers made 20 years ago.  If they continue on the current path they will truly becoming data pipes only.

I think the internet is a splendid analogy of what you’re driving at.  While speed and accessibility have improved in the last 10 years, the basic building blocks of the internet (HTML, CSS, and web servers) have remained constant.  Yet the usefulness of the net has improved geometrically over the last decade.  And it’s due to ingenious ways people have exploited existing technology and standards.  And to your point, only a handful of telcos even play in the IP services or Over the Top realm in any significant way.

Dan, here’s another service example.

The Lost Kitten Finder

My daughter lost her kitten a couple years ago.  Now a telco can offer a free device with a SIM card for her kitten.  It costs them almost nothing.  It could transmit a signal once every 10 minutes.  It could even be sun powered because the cat will usually be outside.

So here’s something that would eat almost no bandwidth but the value for my daughter and myself would be tremendous.

So the Waze and kitten finder ideas are just too examples.  You could offer these services for a symbolic price, but the real benefit is customer stickiness and convenience.

The commonality between the two examples is obvious, in both cases the service offered is functional, has clear benefit and provides a personal connection with the customer (via a lost kitten or via time saved while driving).  And funny enough it has little to do with the old hat of “pricing engineering”.

I’ve heard of the pet finder idea before.  It’s an emerging Machine to Machine (M2M) application that I read about 12 months ago.  But it seems telcos are pretty slow implementing these ideas.  The idea is probably stalled in some M2M architecture committee or something.  So bureaucracy is another issue.

As I said, I worked for Vodacom and they had businesses in South Africa and elsewhere on the continent.  And one of the very creative things they ended up doing was giving their customers free AIDS cocktails.

Offering AIDS Cocktails to Customers in Africa

The percentage of people in Africa who have AIDS is very high and these people are dying.  To stay alive as long as possible, these people with AIDS take medicine they often cannot afford.  So Vodacom ends up going to Europe to buy AIDS medicine whose shelf life had already expired.  And they buy those medicine stocks at a very low price.  Even though the medicine has expired, it still works, though maybe not as good.  So Vodacom would provide that medicine to its customers for free.

AIDS Cocktail

The plan serves a couple purposes.  The AIDS afflicted guy could make phone calls and live a few more days because of this plan.  And secondly a lot of good will is spread about the company because competitors are not offering this service.

So this is an example of what companies in Africa are doing for their clients.  But I think it shows the kind of creativity that is highly prized by customers.  Same here it stands for the basic criteria set above: the offering is functional, has clear benefit and provides personal connection.

David, thank you for stimulating our thinking and making us laugh.  Would you like to summarize your main points?

Dan, I think as an industry, we need to get creative again.  We need to make CEM part of the work culture: it something deeper than a back office IT or CRM slogan.  I offered the ideas about real-time GRP traffic monitoring, the kitten finder, and the AIDS cocktails.

These ideas seem far-out only if you believe telecoms should only do certain traditional activities.  So to those gray-haired guys who are still driving pricing differentiation, I say:“Get a life”.  The price plans are old school now.  You can‘t differentiate yourself on price alone anymore.

Smart Billboard cartoon

We need creative services that provide value, functional and create personal bond to keep telecom profitable.  The only barrier is the willingness of telecom people to think outside the box.  But hopefully not like this cartoon.

One final thought.  I was a good friend of AT&T’s CIO who told me once, “everytime our marketing guys went out to get drunk I got a new tariff the next morning.”  I think it’s high time those marketing guys came up with new service ideas rather than new tariffs.

Copyright 2012 Black Swan Telecom Journal

 

About the Expert

David Leshem

David Leshem

David Leshem has extensive international experience addressing the financial and competitive challenges faced by telecoms, banks and smart grid service providers.

David has delivered significant business efficiency and profit margin improvements by championing and implementing marketing and financial solutions.

Many of the projects he has managed required his interpretation of new business requirements into practical technical and business architectures to drive advanced analytics with a clear ROI.

He graduated from the Tel Aviv University in Israel with BSc. in Mathematics and Ben Gurion University with MSc. in Industrial Management.   Contact David via

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