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Front Lines is a guest viewpoint section offering perspectives on current issues and events from people working on the front lines of Canada's technology industry

Telecommunications will undergo a major change within the next two to five years. In all probability, the business model will move from voice connectivity to virtually every aspect of communications you can imagine. Customer intelligence will enable telcos to thrive — focusing their resources on gaining and retaining the customers they really want.

Organizations in any industry want to hold on to good customers, but it's unlikely that it's a bigger issue anywhere than in the telecommunications industry. So much so that telcos have their own word to express just how dangerous life is when it comes to keeping customers: churn.

In telecommunications it is now routinely assumed that many customers are tempted to move from one operator to the next, looking for the best possible deal. Not long ago the industry consisted of big national and regional operators who plied their trade in safe, familiar home waters. But over the past 10 to 20 years the industry has been tossed about on the rough seas of rapid deregulation, changing customer demands and technical innovation. The more saturated the market the greater the churn. Fast-changing offerings mean customers are more likely to be enticed by competitors.

Convergence and the evolution from connectivity to content increase the need for excellent churn management. But it also raises the question about increasing customer value despite decreasing margins. Telcos are desperately looking for new sources of revenue and as far as we can see there is only one serious answer — selling content rather than connectivity and broadband.

Other industries have also travelled from being a safe bet for investors to being very troublesome, and then managed to turn things around by rebuilding customer loyalty or cutting costs. Think of the airline industry in the early eighties, before air miles and segmentation between budget and premium carriers. However, for airlines the basic product is the same: getting people safely from A to B. The problem for telecommunications is that the entire business proposition needs to change, and everyone is fearful of the big costs and risks that go with being a first mover. Telcos are not quite ready to move into the content business — there are many new and different business rules that telcos do not yet fully understand — specifically in terms of understanding changing customer needs and how to respond.

Churn should be seen as a great market opportunity. Come again? Look at it this way. Churn is affecting all players on the market, so if you can control the exchange of subscribers in your favour, you win. To do this you need to invest heavily in retention programs to protect high-end customers while allowing low-end customers with low average revenue per user (ARPU) and low expected lifetime value (LTV) to leave. At the same time, with intelligent below-the-line acquisition strategies, telcos can collect churners from the competition. The net result could be roughly the same number of subscribers, but with higher value.

In a market that has been characterized as saturated, cross and up-selling has been the holy grail for many telcos. If you are measuring customer value based on ARPU you could be making more trouble for yourself: a customer who delivers high revenue but at a loss might be equally or more of a loser if you sell him other services. Traditionally, telcos have gone for the "low hanging fruit" when cross-selling and up-selling. However it could be that the ones that are most resistant to marketing activities are the ones that will deliver greatest average margin per user (AMPU) — though they require a more individualized approach. It's only when you can integrate customer intelligence with financial intelligence (for example, using activity-based costing methods) that you get a true picture of how much it is worth investing to secure the cross or up-sell. Don't forget that the real cost of some campaign's might involve increasing expensive network capacity for new discounted services and packages. From the CFO's point of view, your campaigns won't be successful if your operating costs exceed your increased revenue.

Intelligent churn management is about identifying the high margin customers, and focusing your resources on ensuring that they don't churn. Moving forward, success in the industry will therefore depend increasingly on the ability to integrate all of the data that a telco generates — every bit of it tells you a part of the story on revenue and/or costs — and using it to analyse profitability at the level of the individual customer.

But the profitable operator will be able to go further and identify who will be the profitable customers in the future. It is not worth spending time and money on customers who are going to be unprofitable over the course of their lifetime: clearly, the money will never be recovered. Successful long-term customer relationships will be built by retaining the good customers — not necessarily the "important" high-spending accounts but the ones who can be developed through cross and up-selling activities, the ones who deliver revenue above costs year in year out, and the ones who will help to recruit new good customers.

Customer intelligence has revealed that customers tend to change their behaviour just before they decide to switch to a competitor. The trick is to pick up on the clues that indicate change in behaviour, and to predict what sort of offer will entice the customer not only to stay on board, but to stay profitable. Such changes in behaviour are virtually impossible to identify without analytical techniques and software.

Because churn management is a business-critical activity, an effective solution must be able to drive not only customer but also product, channel, content and network strategy: in today's more difficult environment, the ability to move faster than the competition in these areas will be a vitally important factor in keeping valuable customers on board.

For the next few years there will be even tougher times for the telecommunications industry. That is indisputable. The industry is in the process of redefining itself and customer intelligence will be part of that process, helping to redefine the industry as an exciting and profitable one that investors really want to be a part of. Those organizations that come through the tough times will emerge much stronger and customer intelligence will be essential for any company seeking to stay on course in good times and bad.

Michael Turney is Telecommunications Strategy Manager, SAS Canada