Thursday, July 26, 2007

Virgin Mobile inside the numbers, part 2: let's talk about loyalty

Customer loyalty is perhaps the biggest profit driver in wireless--so big, in fact, that your wireless company employs many tools to enforce your loyalty to them. Among them are two- (and sometimes three-) year contracts with large early-termination penalties, handsets locked to use their network only, content you can't port, etc.

Why is loyalty so important in wireless? It comes down to four numbers: ARPU, CPGA, CCPU and Churn.

ARPU stands for Average Revenue per Unit and represents the monthly revenue for each subscriber on the service.

CPGA stands for Cost per Gross Add and is the cost the wireless operator incurs for each customer sign-up.

CCPU stands for Cash Cost per Unit and is the cost per month to support each subscriber.

Churn rate means how many customers disconnect from the service each month.

So, getting to Virgin Mobile. According to their S1 registration filing, here's how they fared on each of those metrics for 2006:

ARPU: $21.48
CPGA: $120.55
CCPU: $13.15
Churn: 4.8%

Massage the above numbers and you can learn some interesting things about Virgin's business. Their monthly gross profit per customer (APRU minus CCPU) is $8.33. They spend $120.55 to sign up a customer. This means that an average customer has to use the service for fifteen months before he becomes profitable. (And a business like Virgin, that's growing substantially, they is signing more new customers up, incurring more CPGA, with fewer old customers generating profits. That leads to net losses in the short term.)

With a churn rate of 4.8%, the average Virgin customer stays on the network a bit less than two years. Meaning there are only six or seven months to make profit from that customer. (Note that Virgin's churn rate is quite a bit lower than a typical prepay operator's churn, which can run upwards of 7% per month, yet is much higher than the postpay operators--e.g., Verizon, Alltel, AT&T--whose churn is around 1.5-3.0% per month, depending on the operator).

One way to summarize this is using a metric called lifetime customer value. According to a model from Harvard Business School, Virgin's lifetime customer value is $30.59. (Here's how I came to that figure. Please check my assumptions and math and let me know if you think anything needs fixing.)

If they could reduce their churn one percentage point, Virgin's lifetime customer value would rise to $64.18. More than double.

And that's why loyalty's important.

(For more on customer loyalty and how it drives the success and failure of businesses, read Fred Reichheld's book, "The Loyalty Effect.")


Amy Madsen said...

If any of your readers are interested in more info from Fred Reichheld, we invite them to visit his Net Promoter blog, which is based on his latest blog, "The Ultimate Question."