mobileYouth®

The 10 Changes a CEO needs to make to win young consumers

#1 Change your metrics

The CEO of a well known mobile operator in Europe once talked to me about his company’s unique vision – to “win the hearts and minds of young consumers”. The strategy involved a focus on the latest technology – 3G video, social networking and web2.0 – all key elements that support a service that “appeals to youth” (apparently). Within 24 months his board had unceremoniously booted him out of office for a string of sub-par results that reflected both falling presence within their domestic market and eroding margins.

So what went wrong?

It certainly wasn’t the “vision thing”. Unlike many CEOs he had it. The answer lies in the DNA of his very organization:

The DNA of any single living organism is nothing short of a miracle. It contains the genetic instructions that determine the position and role of ever cell, every chemical in our body. The marvel of this miracle of nature can be seen in its ability to replicate itself. The average cell is “damaged” over 500 times a day yet it continues to re-group according to the genetic plan despite the constant pressure of change.

What’s measured gets done

Jack Welch, former CEO of GE and Fortune’s “Manager of the [20th] Century” is famously quoted as saying “what is measured gets done”. It’s all very well talking about “winning the hearts and minds of young consumers”, but as long as we continue to measure our daily activity and set internal performance indicators that effectively encourage strategies that counter our intentions, our talk will never be realized.

As long as our DNA creates a genetic plan for our industries that is not conducive to “winning the hearts and minds of young consumers”, all our talk at industry presentations and trade fairs is merely point scoring and whistling in the wind. No matter how much we try to change, our fundamentals of activity measurement – the KPI, the genetic plan will persist in pushing us in its predetermined path.

We’re measuring our way to unprofitability

So what exactly is our industry KPI? In the mobile industry for example, investors pay heed to ARPU and net additions. As always, in need of a credible “growth story”, CEOs often present quarterly earnings reports on the basis of net additions – often won from rival networks.

The question is then, is measuring ARPU and net additions conducive to winning the trust of young consumers?

Media and tech CEOs rewarded for net additions over existing customers

In short no.

And here is the problem. We operate through a strategic paradigm relevant to a high growth industry with few established or educated customers. 10 years ago we could have pulled it off, but today it’s eating into our profitability. Industry heads are rewarded more for investing in winning new customers than looking after existing ones:

Consider any high street retailer and compare the deal you get for a handset as an existing versus a new customer. In many cases it makes more economic sense to unsubscribe from your network and register as a new customer. Retailers have actually suggest I do this in order to get a better deal for a particular handset.

Consider also mobile content providers. In order that they satisfy the needs of their investors their CEOs are rewarded for buying distribution in developing markets. Should the CEO focus on deepening the relationship with existing customers in the domestic market he would be ousted for failing to participate in the global landgrab.

The CEO of a well known youth content provider in London confessed to me this was the case. Why would he want to learn how to increase revenues from existing customers in the UK when it was cheaper for him to simply buy a content provider in China? And that’s what he did. He bought in China, India and all over the Asian Pacific rim. Within 24 months, their share price had crashed and the company had wound up insolvent. What went wrong?

The House of Cards

Like most companies focusing on young consumers, they had failed to build any sustainability in their customer base. Winning market share through subsidies, loss leader offers or simply buying in distribution creates a customer base that views the provider in merely a transactional capacity.

New customers cost 5-10 times more to acquire than existing ones (Bain 2003). Bear Stearns reports that subscriber acquistion costs in Europe avreage between $220 and $300 per new customer. Needless to say this is a hidden cost, conveniently brushed over when the headlines referring to increases in market share are written. Not only are the costlier to acquire, they are both costlier to maintain and spend less. If your company thrives on the premise of offering students a cheaper offer than your rival, how do you expect to extract a payback from a customer base already pre-qualified on their drive to spend less?

In many cases, the relationship between young consumers and the provider is no stronger than that afforded to a record label or a utility provider. It’s one of convenience. No more. Take the convenience away and the house of cards collapses.

Making the Change

The CEO needs to lead the internal change. We’ll talk about the technicalities of creating a buy-in to reduce potential resistance later on. The key here today is to focus on what needs to change.

Most media and tech companies focusing on top line growth of their young customer base because it’s both easily quantifiable and demonstrable. Yet, it’s loyal not new consumers that drive profitability, so it makes logical sense that consumer loyalty should be the key metric within the organization.

Customer Loyalty equals Profit, so start measuring it

While EBITDA levels vary substantially, the total cost of consumer acquisition (in West Europe for example) accounts on average 26% of the opex, and in some cases over 30%. By comparison the impact of a 10% increase in ARPU would provide less than 2% of revenue growth. Sources (Analysys 2005) suggest that this could equate to 12% of the total lifetime revenue a consumer brings to an operator.

In short, if you’re a youth content provider and you’re talking up your company’s ability to spike an operator’s ARPU, you may sell a good story – but you could be better focused on helping them address that quarter of their cost base you intend to help them save by creating more loyal customers.

While ARPU and net additions talk to the top line, Lifetime value and Churn rates are key determinants of profitability. The challenge facing most strategic decision makers is finding confidence in these metrics converting to real dollars. As I had mentioned before, ARPU and net adds are in favour because the money is easily quantifiable. Measuring LTV and churn may not provide the financial return today but no good CEO should be focused on the day to day management of his or her company. Their role is months if not years out.

Direct (2006) found that 73% of marketers that measured LTV expected to make their money back on the initial outlay (ie cost of internal training, databases etc). 92% said they expected to fully recoup their investments, compared with 63% of respondents who were not making use of or not actively engaging in tracking LTV.

Simple changes

Measuring and rewarding churn and LTV will no doubt require a degree of internal change, but what changes can we effect immediately? If you talk to any young consumers, and if you’re not doing this on a daily basis check out what they have to say through the mobileYouth on-the-street videos, you’ll find that a repeated theme in all their “wishlists” from operators is not better technology or handsets but merely a request that the operators treat them with some respect and value their custom.

As one student said in addressing a recent mobileYouth workout in London “I’ve been with you (Vodafone) for 5 years… why is it that this counts for nothing in comparison toa new customer when I want to upgrade my handset?”.

Telefonica Moviles is making small yet progressive internal changes. Their loyalty scheme rewarded customers for their usage over time which could be ultimately redeemed through upgrades. It seems youth like it. Not only does Telefonica reflect highly in our on-the-street surveys but their financial statements support the fact.

So my CEO friend may have saved his job if he had taken a leaf out of his rival’s book. Following introduction of the loyalty scheme, Telefonica’s quarterly churn rate fell 2% without need to recourse to 3G video or Web2.0 That’s 2% of their customers sticking around every quarter, or 8% a year because they their operator was saying “I care about your business”.

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