In the early days of mobile phones, wireless carriers had a hard time attracting new customers. The phone itself is very expensive and the mass is simply weren’t willing to shell out a hundreds of dollars upfront to buy it. Especially, given that the technology was new and unfamiliar. To stimulate adoption and customer acquisition, most carriers started providing the phones for free with the idea that they could recoup their investment through somewhat higher monthly service fees. This presented a high business risk to the carrier. If customers didn’t stick around for long enough, they wouldn’t recoup the cost in the free phones and they lose money. It could take about 20 months for the cumulative cash flow to become positive, and a bit longer for the carrier to actually make a reasonable profit.
This example is a simplified version of what we do in customer lifetime value analysis. We basically look at the total profitability of an individual customer over their lifetime by looking at the actual revenues and costs associated with that customer. By doing this type of analysis, carriers figured out that customers really needed to stick around for about two years on average to be profitable. So the industry converged relatively quickly on the two-year contract as a standard business practice.
The strategy works well for attracting new customers, but it creates a problem. Historically, mobile phone service had some of the lowest customer satisfaction scores across the board. And it was particularly poor during this period as carriers struggled with network quality and coverage gaps. At the same time, there wasn’t much structure in place for what to do with existing customers, especially when initial contracts were over. So you can imagine what could have happened: customers with low satisfaction whose contracts have expired. They see a competitor who give them a new phone if they switched. The result would have been a very high degree of customer turnover called Churn in the industry.
A wireless carrier wants to explore how they might incentivize customers to stick around longer. In particular they want to see if they could get customers to renew their contracts which would lock in a longer revenue string. What they don’t know is how they should do it? How should they contact customers? When should they contact customers? How much incentive will it take to get the customer to renew their contract? Should they renew for another two years or for a shorter period like one year? .
Because the contract renewal effort had never been attempted, there is no historical data to analyze to answer these questions. So a controlled experiment is designed to test a number of factors to see what combination of things would work best. You would reach out to customers with some sort of contract renewal campaign. And test the number of things they thought might impact how likely customers would be to renew their contracts. Three communication channels can be considered: A bill insert which is basically just an additional note that’s included with a bill when it comes in the mail, a stand-alone direct mail piece. and an outbound call to a customer.
With the full set of data around customer behaviors and their financial impacts, each test group could be compared with the control group and to each other. Incremental impact of the contract renewal could be calculated and we could determine what combination of factors could work best in a full-scale rollout of the program. With the planning complete, experimental campaign is also watched in the market.