Is Product Cannibalization Eating into Telcos’ Revenue
Maximizing a customer’s lifetime value and analyzing their profitability is highly important and essential to the growing telecom business. According to a report by McKinsey, Telcos will witness the growth of an additional billion middle-tier customers, mainly in emerging markets, by the year 2025. To tap into this growing customer base, Telcos are constantly seeking new ways to engage and connect with their audience. The most effective way to do so is by launching fresh and exciting products to cater to changing customer expectations. While this strategy is highly effective, it can, however, lead to product cannibalization—where the sales volume, revenue, or market share of one product is reduced as a result of the introduction of a new product by the same provider. Cannibalization can be desired when we want the customer to switch to a higher ARPU product that delivers better service and undesired when the customer switch to a product that relatively generates low ARPU. Here we will talk about the undesired cannibalization.
Impact of Product Cannibalization
The biggest impact of product cannibalization is the loss of existing ARPU and respective revenues, with current customers moving to a low margin plan. It results due to the launching of multiple products so close to each other that they eat into each other’s market share. For example, a leading telco in India kept the pricing close and intertwined with a little difference across the plans for local calls to its own network phones. While the telco used its pricing plans to strategically increase its market share by giving customers incentives to talk to other users of the same telco company, this, however, resulted in product cannibalization.
Product Analytics—a Vital Measure to Prevent Cannibalization
Product cannibalization impact can be minimized by wielding product analytics. Product analytics help telcos gain recommendations on how to target customers. Product analytics helps make the right decision regarding the products to be launched by analyzing product performance and optimizing products based on customer requirements. It helps them to be proactive in terms of:
- Estimating the revenue contribution per product: The majority of revenue for a telco is derived from customers’ usage. Product analytics helps telcos determine various factors such as the total volume of data, minutes, and SMS transmitted over the network and content consumed over multiple channels like various OTT platforms. With operators being able to tap into the above analytics, they will be able to create unique products that captivate new customers.
- Understanding the type of customer consuming each product: Product analytics helps telcos understand customers in terms of handsets, time of usage, the proportion of voice, and data, SMS usage behaviors and type of content consumed. This will enable Telcos the advantage of having a clear picture when developing new product catalogs.
- Mapping the usage behavior of customers: Product analytics help Telcos track the psyche of the customers. They gain deep insights into what offers will attract them, why they chose a particular network, what their data, voice and OTT content usage behaviors are, etc.
- Perceiving network footprint of customers: By recording and analyzing network usage patterns by time of day and by the customer and with accurate analysis of the data, operators can form a good picture of how different types of customers contribute to the economic value. New products can then be designed accordingly.
- Measuring the impact of cannibalization post new launches and campaigns: It is vital to proactively measure the impact of cannibalization as this will help telcos determine the profitability and ROI of the new product.Product Analytics help determines the number of new customers the network has acquired and how many of them will switch from existing products – which will equip them to take corrective measures to minimize the effect of cannibalization.
- Segmenting customers in terms of contribution and network footprint:Accurate analytics will help Telcos determine which customers are worth pursuing and investing in and what products can help them achieve this goal. It helps in avoiding the acquisition of low-value customers at a high cost, as well as selectively managing their current customers for the best financial yield.
How to Control the Cannibalization Effect?
Product cannibalization can be managed by understanding products that offer unique features, meets customer needs, reduces the customer’s total costs, creates a high usage value product and is innovative in being the first of its kind in the market.
To minimize the cannibalization effect, Telcos need to make sure the products are designed perfectly. Each product should be clearly positioned for the segment of users it is aimed at, with very clear differentiation in terms benefits, and with right price points to separate target segments considering customer need and ability to pay. With fewer well-differentiated pricing plans, the chances of plans cannibalizing each other are minimal as each plan targets a different segment.
Product cannibalization is an inevitable risk that Telcos face, but with regular and extensive proactive measures, telecommunication companies can anticipate such cannibalization situations and contain such occurrences.
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