Investaura is pleased to present its new whitepaper on Activity-Based Costing and Profitability Analysis, which provides a step-by-step roadmap for a successful implementation over a 5 week period.
Service Costing has the reputation to be complicated and time-consuming to implement. It doesn’t have to be so. Using the eTOM business process framework for telcos, as well as a top-down approach and a representative data set for a mobile service provider, this white paper presents the key steps for a rapid implementation undertaken over a five-week period with Prodacapo, the Activity-Based Costing (ABC) software platform. Once the initial model has been set up, it can easily be expanded as required.
Back in the early 1990s, I used a Cray2 computer. Only 27 of them were made and sold worldwide, for a price tag of $17m (per unit), or about $30m in 2014 dollars.
Since its commercialisation in 1985, the price of the Cray2 computer has gone down by a factor 100 000, equivalent to -35% per annum. Its form factor has also changed a bit.
Believe it or not, the iPad2 (2011) is as powerful as the Cray2 computer of the late 1980s. Its commercial success has also been larger: tens of millions of iPad2 have been sold so far. And it is still selling.
Business planning and costing don’t have to be complicated. They aren’t! INVESTAURA is pleased to provide you with this simple Excel template to help you get started.
You need to register for free as a ‘Discovery’ member on this web site to download the Business Planning and Costing simple Excel template (more than 1800 downloads). Go to the registration page.
As you can see, apart from 43 views in a STEM model than contains more than 2,700 elements, we also drank plenty of water. More about this recent events and its proceedings can be found on Implied Logic web site.
Do you still use Microsoft Excel for Budgeting, Business Planning or Performance Management? Microsoft Excel was good for the job 10-15 years ago, but Excel also has its limits, and you probably have come across many of them already. In particular, Excel is not a database!
Today, very powerful, easy-to-use, and affordable solutions are available on the market that can set you apart as Manager, and truly help improve your company’s performance. If you are a Financial Planning Manager at a mid-size or large company, and still use Excel for Budgeting and Forecasting, then you’ve got quite a bit of catch up to do. And most likely you know that.
We are often asked how high the cost of churn to service providers really is. As often in economics in general, and costing in particular, it really depends how you look at costs and value, i.e. whether you focus on the direct costs only, or include the indirect costs as well.
The direct costs of churn mostly include:
- the SIM card costs (not much these days, but you might want to consider the fully loaded costs i.e. the sourcing, logistics, packaging, and all other costs directly associated with the SIM card, including staff costs)
- the SAC (subscriber acquisition costs), including marketing, advertising and commission of various sorts paid to the acquisition channel (indirect sales) as well as the fully loaded costs of the direct sales channel
- a portion of the SRC (subscriber retention costs), as ‘retention’ money is certainly spent on subscribers who none-the-less decide to leave.
All in all, the direct costs of churn will typically be in the range of $20-$100 per churning customer (depending in which country you are, and how much you spend on acquiring customers).
Believe it or not, there are plenty of similarities between coffee and telecoms services (voice, data). Both are largely commoditised product. Then it shouldn’t come as a surprise that telecoms service providers and Starbucks have so much in common. For a start: discrimination. Price discrimination.
Price discrimination in telecoms (and in coffee shops)
There is plenty of price discrimination around us. People don’t pay the same for essentially the same goods or services. If that sounds unfair, then think of ‘discrimination’ as ‘differentiation’ instead. Economically speaking, price discrimination is often socially optimal as:
Telecom service providers are very capital intense businesses. Everybody knows that. But in addition, they are mostly fixed-cost businesses. Everybody seems to have forgotten that.
Fifteen years ago, when GSM really kicked off, there were still a lot of PAMR (Public Access Mobile Radio) service providers on the market. For those who don’t know or were too young to know: PAMR were deployed in the late 80s to provide services to corporate customers. Do you remember Dolphin in Europe? Now these operators have all gone, cannibalised as they were by GSM operators. But with PAMR, you did not have to pay per minute. You would pay per user, per month.
Investaura Management Consultants, the telecoms consultancy specialized in Business Intelligence and Performance Management, are pleased to announce the launch of the first end-to-end Business Planning, Budgeting and Activity-Based Costing (ABC) solution for telecoms service providers. The solution was built on the Adaptive Planning platform from Adaptive Insights Inc, the world leader in Budgeting, Forecasting and Reporting. The solution combines the power of Adaptive Insights ‘Software as a Service’ platform with Investaura’s unique understanding of the needs of telecoms operators in both developing and mature markets.
To demonstrate how telecom service providers can use Adaptive Planning, Investaura has developed a fully functioning application that contains all the building blocks found in Budgeting solutions used by telecom operators. The application can easily be customized for service providers of any size, including mobile, fixed, and cable TV operators. It requires next to no IT support for its roll-out within our customers’ organizations.
There are two main mistakes that people do when they calculate the CLV. The first one is to simply multiply the customer ARPU by the EBIT margin of the company to estimate the customer profitability in a given month. This is quite bad, but the second mistake is a lot more worse: some people forget about customer churn i.e. they assume that the customer will remain a customer until the end of time. Or if they do assume customer churn, they assume that the probability that a customer churn is constant over time (and independent of the customer); in essence, they use a model of customer lifecycle and customer churn that is totally inappropriate for telecom service providers in a competitive environment. If you want to do better than most, then keep reading until the end of this article.
Comparing prices with costs is a most enlightening exercice. Unfortunately, service costing being as much an art as a science, many telecom service providers don’t do much service costing; and as a result, they don’t understand their service costs and their sources of profitability well enough.
In many cases, prices for telecom services are set too low by the marketing team. Under pressure to gain new customers and increase market share, setting low prices is certainly one of the easiest strategy to implement for new entrants. The thinking is the following: “in our business, almost all costs are fixed, so we need to build up market share quickly to reach profitability” (true) and “we have to be cheaper than the competition” (false) as well as “the marginal cost of our services is zero, so we can price our services very low” (false).
In the telecom service provider business, more than in any other business, most costs are fixed in the short-term. However all costs are variable in the long-term. If most costs are fixed in the short-term, this does not mean that the marginal costs of services are zero. In particular, for prepaid customers, commissions have to be paid to the sales channels (e.g. dealers) typically as a percentage of scratch card value. Also, off-nets call lead to interconnection charges.