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Fighting churn with rate plan right-sizing: a customer retention strategyfor the wireless telecommunicationsindustryKen Kwong-Kay Wong aa Department of Marketing , Universitas 21 Global , 5 ShentonWay, #01-01 UIC Building, Singapore, 068808, SingaporePublished online: 04 Sep 2010.

To cite this article: Ken Kwong-Kay Wong (2010) Fighting churn with rate plan right-sizing: acustomer retention strategy for the wireless telecommunications industry, The Service IndustriesJournal, 30:13, 2261-2271, DOI: 10.1080/02642060903295669

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Fighting churn with rate plan right-sizing: a customer retentionstrategy for the wireless telecommunications industry

Ken Kwong-Kay Wong�

Department of Marketing, Universitas 21 Global, 5 Shenton Way, #01-01 UIC Building,Singapore 068808, Singapore

(Received 15 June 2009; final version received 18 August 2009)

Prior literature suggests that wireless customers have difficulty in predicting their usagerequirements and they often subscribe to rate plans that are not financially optimized.However, the benefits of having wireless customers on optimal rate plans are relativelyunknown due to limited research in this area. This paper aims to address this knowledgegap and presents a customer retention strategy for the wireless telecommunicationsindustry. The usage and payment records of 1403 Canadian post-paid wirelesscustomers are examined over a 3.7-year study period. Pearson’s x2 test and hazardfunction graph are used to reveal how customer churn rate is influenced by rate plansuitability. The statistical analysis demonstrates that customers who are usingoptimal rate plans have lower churn rate than those with non-optimal ones.

Keywords: wireless; pricing; customer churn; customer retention; rate plan right-sizing

Introduction

In the service industries, the loss of customers is known as customer churn (Neslin, Gupta,

Kamakura, Lu, & Mason, 2006). This issue particularly affects service providers in the

wireless telecommunications industry where competition is fierce, acquisition costs are

high, and service offerings are similar (Gerpott, Rams, & Schindler, 2001; Kim &

Yoon, 2004; Neslin et al., 2006). For example, the average customer churn rate for

Canadian wireless carriers has reached 1.6% per month. With a monthly average

revenue per user of CAN$59, the churn issue is costing the industry over CAN$200

million a year (Canadian Radio-television and Telecommunications Commission

(CRTC), 2008; Canadian Wireless Telecommunications Association (CWTA), 2006).

New customer acquisition cost is known to be very high in the wireless telecommuni-

cations industry. This is mainly caused by heavy handset subsidization and aggressive

multi-channel marketing programmes (Kim, Park, & Jeong, 2004; Kim & Yoon, 2004;

Lu, 2002). Wireless carriers often need to retain their customers for almost a year

before realizing any profits. High customer acquisition cost together with high churn

rate have made customer churn management a priority for many wireless carriers (Ahn,

Han, & Lee, 2006).

According to the CRTC (2008), Canadian wireless subscribers are often confused

about wireless service in terms of its pricing and rate plan structure. Specifically, only

55% of Canadians found wireless rate plans and features ‘easy to compare’ in 2003,

and this rate gradually dropped to 46% and 44% in subsequent years (Dalfen, 2003,

ISSN 0264-2069 print/ISSN 1743-9507 online

# 2010 Taylor & Francis

DOI: 10.1080/02642060903295669

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�Email: kwong@u21global.edu.sg

The Service Industries Journal

Vol. 30, No. 13, November 2010, 2261–2271

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2004, 2005). New wireless rate plans are introduced every few months, and customers are

often not aware of the changes. Together with their inability to forecast usage requirements

accurately, many customers are sitting on inappropriate rate plans. They are either paying

a premium per-minute rate when exceeding their subscribed bucket of minutes, or wasting

too many unused minutes with their plans (Harris, 2007). It is revealed that up to half of

the carriers’ revenues are contributed by customers’ overages and underages (Brewin,

2002). Does it matter if customers use non-optimal rate plans? This paper aims to

answer such questions by exploring the impact of rate plan suitability on wireless customer

churn rate.

Literature review

Overview of customer retention strategy framework in the service industries

Customer retention is considered as one of the important factors driving superior business

performance in service industries (Fornell & Wernerfelt, 1987; Reichheld & Sasser, 1990).

To maintain their competitive position and market share, service providers should pay

close attention to the planning and execution of customer retention initiatives (Lee, Lee,

& Freick, 2001). Studies show that companies implement different kinds of programmes

and activities to improve customer retention, such as customer complaint management

(Fornell & Wernerfelt, 1987), customer satisfaction programmes (Anderson, Fornell, &

Lehmann, 1994; Jones & Sasser, 1995; Rust & Zahorik, 1993), and customer loyalty pro-

grammes (Dowling & Uncles, 1997; Reichheld & Teal, 1996). According to Neslin et al.

(2006), customer retention strategies can be divided into two fundamental approaches: the

untargeted and the targeted. The first strategy focuses on strengthening brand loyalty

through service improvement and mass advertising. On the other hand, the second strategy

relies on giving special incentives, such as reduced pricing or customized solutions, to

those customers who have a high probability of churning away from the company. This

targeted approach can be useful in retaining price-sensitive customers or those who

need special services from the service provider.

Development of customer retention strategy in the wireless telecommunicationindustry

Literature focusing on churn management in the wireless industry started to emerge since

the early 2000s (Ahn et al., 2006; Aydin, Ozer, & Arasil, 2005; Eshghi, Haughton, & Topi,

2007; Gerpott et al., 2001; Kim et al., 2004; Kim & Yoon, 2004; Lee et al., 2001; Seo,

Ranganathan, & Babad, 2008). Prior literature argues that customers’ perceived value

of their wireless services has a strong influence on their satisfaction levels. Prominent

research in this area comes from Gerpott et al. (2001) who argue that ‘good and fair’

service pricing and perceived personal benefits of wireless service are important factors

leading to customer satisfaction. Other factors with a significant impact on customer sat-

isfaction include voice call quality, customer care, and value-added services (Kim et al.,

2004). Network coverage is also suggested to play a role in customer satisfaction. Kim

and Kwon (2003) claim that a carrier with larger wireless coverage has an advantage

over the smaller carriers in acquiring customers.

Customer satisfaction and loyalty levels are suggested to be moderated by switching

barriers (Aydin et al., 2005; Lee et al., 2001). It has been argued that wireless carriers

should build trust with their customers. This is because having a positive interpersonal

relationship with customers strengthens the switching barrier and subsequently increases

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customer loyalty and retention levels. Wireless carriers’ ability in retaining customers is

also found to be driven by their brand images and handset offerings (Kim & Yoon, 2004).

The need for a new churn management approach in Canada

Bendapudi and Berry (1997) argue that if a provider has superior service features that

others cannot match, customers will typically stay with their existing providers.

However, industry consolidation in the 2000s has made Canadian wireless carriers very

similar in terms of their service pricing, network coverage, product features, customer

service, and even handset offerings (Bell, 2006; Callnet, 2005; Rogers, 2005; Strategis,

2005). By Q1 2006, most of the acquired networks had been integrated into their acquirer’s

networks, and the top three carriers, Bell Mobility, Rogers Wireless, and TELUS Mobility,

dominated, with over 91% market share of the oligopoly wireless market in Canada.

Traditional switching barriers such as lack of wireless number portability, high handset

acquisition cost, and inferior network coverage of alternative network no longer exist,

and these developments have forced marketers to rethink their customer retention

strategies.

The challenge of rate plan selection

In a study of local phone service, Train, Ben-Akiva, and Atherton (1989) find that custo-

mers cannot precisely anticipate their own demands and often select the wrong rate plan.

This is in line with research conducted by Kridel, Lehman, and Weisman (1993) in which

one-third of the telecom customers who subscribed to a flat-rate pricing plan were found to

use fewer than expected minutes to justify their subscription. Choi, Kim, and Kim (2002)

observe that almost 45% of US long distance (LD) customers overpay their services

because of insufficient usage. On the wireless side, Joo, Jun, and Kim (2002) report that

almost 40% of Korean mobile customers subscribe to the wrong rate plans.

Inappropriate rate plan selection can be caused by many reasons. Some telecom users

have no idea about their actual usage, while others may have persistent misconceptions of

their actual usage (Mitchell & Vogelsang, 1991; Taylor, 1994). Kridel et al. (1993) argue

that some customers are not comfortable with the financial risk caused by unpredictable

telecom usage; so they select the flat-rate or high usage plans to ease their billing concerns.

Furthermore, the price difference among various rate plans may be too small to be of

concern to the consumer (Clay, Sibley, & Srinagesh, 1992). This view is in line with

Train et al. (1989) who claim that telecommunication customers are not switching rate

plans as often as expected from a pure cost-minimization perspective. The high ‘compu-

tation cost’ that customers may incur during the rate plan selection process may help to

explain why customers often select the wrong plan (Miravete, 2003).

Use of rate plan right-sizing for churn reduction

Lee et al. (2001) point out that retention activities are often carried out only when custo-

mers reach the end of their contract terms, and suggest that wireless carriers should take an

active role to analyse customers’ usage patterns and present incentives early on to better

retain the customers. Aydin et al. (2005) has mentioned that positive attitude engendered

by trust is important for customers to remain with the company to make future purchases.

Based on the idea of building trust with wireless customers and establishing a new switch-

ing barrier, this paper examines the feasibility of using rate plan right-sizing, the practice

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of matching customers to the optimal individual rate plans, to reduce wireless churn rate.

Although the concept of ‘encouraging customers to pay less’ was first introduced by Joo

et al. (2002), it has not been widely discussed in the literature as a churn management strat-

egy. The author aims to strengthen our understanding of such strategy through this

research study. Figure 1 illustrates how rate plan right-sizing fits within the customer

retention framework.

Research design and methodology

Wireless rate plans

A post-paid wireless rate plan typically includes a fixed number of voice minutes that a

customer can use per month. Usage exceeding the monthly allowance is called overage

and will be charged at a premium per-minute rate. Any unused minutes will expire at

the end of the billing period and not be rolled over. Generally speaking, low-usage

plans have high overage fees, while high-usage plans have low overage fees. Unless cus-

tomers have a good understanding of their historical usage patterns and have the ability to

predict their future wireless needs accurately, selecting an optimal rate plan to subscribe

can be a challenging task. Table 1 provides an overview of the wireless rate plans that are

included in the statistical analysis.

Determination of rate plan suitability

Wong (2009a, 2009b) and Joo et al. (2002) argue that wireless customers can be divided

into two groups: those who are subscribing to the best available plan and those who are

overpaying for their services due to inappropriate rate plan selection. Specifically, custo-

mer’s rate plan suitability is determined based on their actual voice usage, the monthly rate

of their selected plans, and the associated overage charges. A customer is identified as

having an optimal rate plan when his or her monthly wireless usage falls within the

optimal range of minutes of the selected rate plan. Conceptually, non-optimal rate plan

customers could have saved money by switching to other more suitable plans to minimize

Figure 1. Constructs leading to customer retention in the wireless telecommunications industry.

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their voice overages and underages. When compared among all plans within the same rate

plan category, the lowest possible payment is shown in bold (Table 1). In this research,

customers’ rate plan suitability is checked every month during their stay with the wireless

carrier. If a customer is having optimal rate plans over 50% of the time, he or she is cate-

gorized into the ‘optimal’ rate plan customer segment. The same methodology is used to

identify the non-optimal customers. The main research question of this study is as follows:

Is there a difference on churn rate between customers who are using optimal rate plans andthose with non-optimal ones?

Description of research data

The data set for this research is provided by one of the top three national wireless carriers

in Canada. A total of 1403 post-paid residential customers who joined the wireless carrier

and activated their services in May 2002 were selected for this study. These customers are

using similar LD wireless rate plans, making it possible to conduct direct comparison. Out

of these 1403 customers, 154 of them belong to the North America LD group while the rest

belong to the Canada LD group. Their wireless voice usage records and payment history

up to December 2005 are extracted from the carrier’s data warehouse for analysis. This

study has intentionally excluded data from business customers; the author believes that

the inclusion of such data may adversely affect the validity of the research findings.

This is because business customers can reimburse wireless expenses with their employers

and they are not personally responsible for the payment. Statistical procedure such as

Pearson’s x2 test and f statistics are carried out in SPSS and the results are further

validated visually using the hazard function model graphs for each group.

Table 1. Overview of wireless rate plans.

Rate plan typeCanada LD plan North America LD plan

Monthly rate $30 $50 $100 $150 $250 $75 $100 $150 $300Minutes included 150 400 800 1250 2500 250 400 700 1600Overage fee (per min) $0.25 $0.25 $0.25 $0.25 $0.15 $0.30 $0.25 $0.25 $0.20

Actual minutes usedTotalfees

Totalfees

Totalfees

Totalfees

Totalfees

Totalfees

Totalfees

Totalfees

Totalfees

0 $30 $50 $100 $150 $250 $75 $100 $150 $300100 $30 $50 $100 $150 $250 $75 $100 $150 $300200 $43 $50 $100 $150 $250 $75 $100 $150 $300230 $50 $50 $100 $150 $250 $75 $100 $150 $300300 $68 $50 $100 $150 $250 $89 $100 $150 $300350 $80 $50 $100 $150 $250 $104 $100 $150 $300400 $93 $50 $100 $150 $250 $119 $100 $150 $300500 $118 $75 $100 $150 $250 $149 $125 $150 $300600 $143 $100 $100 $150 $250 $179 $150 $150 $300800 $193 $150 $100 $150 $250 $239 $200 $175 $300900 $218 $175 $125 $150 $250 $269 $225 $200 $300

1000 $243 $200 $150 $150 $250 $299 $250 $225 $3001100 $268 $225 $175 $150 $250 $329 $275 $250 $3001300 $318 $275 $225 $163 $250 $389 $325 $300 $3001650 $405 $363 $313 $250 $250 $494 $413 $388 $3101700 $418 $375 $325 $263 $250 $509 $425 $400 $3201750 $430 $388 $338 $275 $250 $524 $438 $413 $3301800 $443 $400 $350 $288 $250 $539 $450 $425 $340

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Data analysis and results

Rate plan suitability and customer churn rate – Canada LD group

In this research, it is observed that 46.2% of the 1249 wireless customers are subscribing

to non-optimal rate plans. This finding is in line with prior literature which suggests

that 40% of Korean wireless customers are using non-optimal rate plans (Joo et al., 2002).

From the contingency table (Table 2), it is revealed that 218 optimal rate plan

customers and 314 non-optimal ones churned away from the wireless carrier by the end

of our 3.7-year observation period. This represents a churn rate of 32.4% and 54.4%

for these two groups, respectively. There was a significant association between rate plan

suitability and whether or not customer would churn x2(1) ¼ 61.33, p , 0.001. This

seems to represent the fact that based on the odds ratio, wireless customers were 2.49

times more likely to churn if using non-optimal plans than if using optimal ones. The f

coefficient is 0.22, p , 0.001, indicating some association between these two categorical

variables.

To gain better understanding of customer survival during the tenure of observation,

the hazard function plot (Figure 2) is used to describe the risk of customer churn.

A cumulative hazard value of 1.0 is equal to the action of customer churn; the smaller

the hazard value, the less likely that a customer will churn away from the wireless

carrier.

The hazard function plot clearly shows that customers who were using optimal rate

plans (the lower line in the plot, code ¼ 0.00) had lower probability in churning than

those of non-optimal rate plan customers (the upper line, code ¼ 1.00) during the 3.7-

year study period. All of these statistical procedures indicate that within the Canada LD

rate plan group, there is a significant difference on churn rate between customers who

are using optimal rate plans and those with non-optimal ones.

Rate plan suitability and customer churn rate – North America LD group

Within the North America LD group, it is found that 46.1% of the 154 wireless customers

are subscribing to non-optimal rate plans (Table 3).

The importance of rate plan suitability on customer retention is clearly demonstrated

from this analysis. Table 3 reveals that out of the 154 customers who activated their ser-

vices in May 2002, 79 customers remained with the wireless carrier at the end of our study

period. Of these staying customers, 55 were using optimal rate plans while 24 of them were

using non-optimal ones. This represents a retention rate of 66.3% and 33.8% in these two

groups, respectively. Similar to earlier findings in the Canada LD group, this analysis

shows that customers in the North America LD group churned less when using optimal

rate plans.

Table 2. Contingency table showing how many wireless customers have churned in the Canada LDgroup.

Rate plan suitability

Optimal Non-optimal Total

Customer churned? Yes 218 314 532No 454 263 717Total 672 577 1249

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There was a significant association between rate plan suitability and whether or not

customer would churn x2(1) ¼ 16.14, p , 0.001. This seems to represent the fact that

based on the odds ratio, customers using non-optimal plans were 3.85 times more likely

to churn than those with optimal ones. The f coefficient is 0.32, p , 0.001, showing

that the strength of the relationship between rate plan suitability and customer churn

rate was significant.

It can be clearly seen from Figure 3 that customers who were using optimal rate plans

(lower line in the plot, code ¼ 0.00) had significantly lower probability to churn than those

of non-optimal rate plan customers during the study period.

Overall, the statistical results reveal that there is a significant difference in churn rate

between optimal and non-optimal rate plan customers. This finding is consistent with both

Canada and North America rate plan groups that are being analysed.

Figure 2. Hazard function plot – Canada LD group.

Table 3. Contingency table showing how many wireless customers have churned in the NorthAmerica LD group.

Rate plan suitability

Optimal Non-optimal Total

Customer churned? Yes 28 47 75No 55 24 79Total 83 71 154

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Conclusion

Faced with high churn rate and expensive customer acquisition cost, wireless carriers are

seeking better customer retention strategies to defend their market positions. Customers’

dissatisfaction on pricing is found to be a major churn determinant in the service industry

(Keaveney, 1995; Kim et al., 2004). This paper explores the potential benefit of having

customers on the right rate plan in terms of churn rate reduction. Based on the research

of 1403 post-paid wireless customers from a Canadian wireless carrier over a 3.7-year

study period, it is discovered that approximately 46% of customers are subscribing to

non-optimal rate plans and overpaying for their services. Greater loyalty is observed in

customers with optimal wireless rate plans than those with non-optimal ones.

Managerial implications

As discussed earlier, it is challenging for wireless customers to find their optimal rate

plans due to a wide variety of reasons. However, having an inappropriate rate plan may

lead to billing surprises, which affect customer satisfaction and loyalty levels. To

reduce the probability of customers getting into an inappropriate rate plan, wireless

carriers can consider simplifying their rate plan structures to make them easier for custo-

mers to understand. For example, the rules governing the use of included monthly minutes

in a rate plan should be straightforward; if the carrying costs are similar, domestic calls do

not need to be differentiated between intra-network (on-net) and inter-network (off-net)

types. Wireless carriers should also communicate clearly to the customers when their

rate plans include special ‘weekday’, ‘weekend’, or ‘off-hour’ bonus minutes to avoid

Figure 3. Hazard function plot – North America LD group.

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confusion. Furthermore, value-added service such as global roaming and data service can

have a simple price structure that is easy to understand. In this way, customers are prepared

to pay for these premium services when required.

To address the issue of overage and its financial impact on customers, wireless carriers

can consider giving a fixed bucket of ‘free’ overage minutes to wireless subscribers during

their contract terms, as a rate plan feature. An ‘unlimited’ usage plan can also be launched

to target those customers with high wireless usage needs. Some wireless carriers have

loyalty programmes in which customers can accumulate dollar points for gifts redemption.

Perhaps wireless carriers can leverage these programmes to allow their customers to pay

off these overage charges using their loyalty programme points.

The problem of underages, on the other hand, can be addressed by launching ‘roll-over

minutes’ so that customers can retain the value of their unused minutes. Wireless carriers

can also consider adding a ‘pooling’ option to existing plans, allowing customers to share

their minutes with friends and family members. On the sales front, customers should not be

bombarded by too many rate plans during the selection process. Having sales people who

know consultative selling at the retail level is a great way to help customers select the ideal

rate plans based on their wireless needs. Making an online rate plan selector available on

the carriers’ web sites also prevents customers from making inappropriate rate plan

selection over the web.

Once customers have started their service with the wireless carriers, they should be

reminded about the service rates and the expiry date of any time-limited special pro-

motions so that billing expectation is managed. Wireless carriers can also send customers

information sheets to explain their billing methodology if their services are priced very

differently from other carriers. To ensure that customers can settle with the appropriate

rate plan, they should be encouraged to make rate plan adjustment within the first few

months of their contract terms without penalty.

Several customer care initiatives can also be implemented. To help customers better

manage their minutes, historical usage information can be presented graphically in their

monthly invoices. How about sending Short Message Service notifications to customers

when they exceed their pre-determined usage thresholds? Wireless carriers can also proac-

tively inform customers about new rate plans, and allow them to make rate plan changes

anytime without extending their current contract. To take this concept a step further, wire-

less carriers can invite their customers to visit their corporate stores once a year to consult

with a wireless specialist for complimentary billing analysis and rate plan adjustments. If

the budget allows, wireless carriers can invest in a customer relationship management

system to build a unique profile for each wireless customer based on the individual’s

usage and calling patterns. Wireless carriers can use that profile to recommend cost-

effective rate plans to customer on a periodical basis. Through these actions of ‘trust’

and ‘care’, wireless carriers may strengthen the relationship with their customers to

better retain them.

As in any research projects, there are limitations. First of all, this research has not

examined other factors that may influence the linkage between rate plan suitability and

churn rate. The potential endogeneity impact of these factors has not been assessed. Sec-

ondly, rate plan suitability is solely based on monthly expense minimization of a

customer’s ‘voice’ service. Future study can utilize a more sophisticated model that

incorporates both voice and data service components. Researchers can also consider

expanding this research to cover other customer segments or rate plan groups to gain

additional insights into this field.

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