Lifetime Value: 2009 Update

Over the last twenty-five years, the wireless industry in the U.S. has experienced rapid growth from a fragmented base of small rural carriers and regional telco operators to the current situation where nearly 95 percent of the subscriber base is controlled by just a handful of carriers. The subscriber base in the U.S. now exceeds 270 million, compared to less than ten million in 1992.

But as the market has grown, it has become clear that the traditional operations inherent in telcos do not always have application in the wireless world. This report outlines the differences in detail and explains the changing operator economics that have led operators to adopt Lifetime Value models.

Lifetime Value
Lifetime Value is the term used to describe the monetary value of a customer to a company over the customer’s lifetime. In its simplest form, LTV is the net present value of the customer’s business over a future period of time. LTV is best defined by an example. Consider a market segment where the average subscriber remains with an operator for two years, generating monthly ARPU of $50. If the cash cost per user per month is $32 and the acquisition cost (cost per gross add) is $300, then the LTV is $102 ($50 x 24 months - $32 x 24 months - $300, discounted using a discount rate of 10% per annum). Obviously, any improvement in any of the component metrics will improve the LTV. Although there is no single application dedicated to the task, the calculation and tracking of LTV does require specific systems and applications. For example, once an ‘attractive’ subscriber has been prospected and activated, their account must be managed – this requires monitoring of their usage and behavior with appropriate action and follow-up triggered by specific events. Fraud detection, prediction and prevention systems fall into this category. Churn prevention must be taken into account. Transactions must be appropriately billed and rated, in some cases based on customized rate plans specific to that subscriber or market sub-segment. Customer self-care applications are also required for those subscribers who wish to manage their own accounts.

Obviously, tracking the Lifetime Value of a subscriber is challenging, as many factors are at play at the same time. The variables mentioned above and others are discussed in this market brief, as is the importance of LTV and the impact it can have on an operator’s business.

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