Bundling to reduce customer churn and erect competitive barriers

CASE STUDY: As deregulation in the US telecommunications industry leads to an increasingly competitive environment, existing local exchange companies (LECs) are realizing that much of their customer base is at risk to impending competition. Bell South has responded with an innovative bundling strategy to help retain its customer base and to raise the barriers for new entrants.

Background

In the face of deregulation, Bell South - the incumbent LEC for several southern states and the largest regional Bell operating company - recognized the need to develop a strategy that would defend against imminent new entrants and protect its customer base. The result was a massive effort to re-fortify its brand image and the development of a customized bundled package of telephone services known as -Bell South's Complete Choice".

In the short-term, Complete Choice is expected to increase customer usage of a variety of calling features while reducing overall calling feature churn. Bell South believes that the flexibility and superior value of Complete Choice will offer customers a reason to choose and keep an enhanced service package. Ultimately the program is designed to assist in counteracting market penetration tactics from new entrants in the local exchange market in order to maintain Bell South's customer base.

Bell South's Strategy

Bell South recognized the need to strengthen its brand equity, and more specifically, to provide its customers with clear reasons to

remain loyal. Strengthening the Bell South brand name was initiated by undertaking the largest ad campaign in the company's history. However, the challenge of actually delivering real value to customers in the marketplace had to be met.

One of the responses to that challenge was Complete Choice, a program that allows customers to customize their own telephone service feature bundles. For a standard flat rate the customer can choose from a number of calling features. Furthermore, if the customer decides to change the features in the bundled package at a later date, the same flat rate continues to apply. This encourages customers to try unfamiliar service features without encountering undue risk, while ensuring revenues from the customer's account remain constant.

Bell South's Complete Choice provides maximum utility of telephone service by offering customers the option of self-selecting their ideal service feature package. Bell South is able to demonstrate that Complete Choice provides substantial value to customers over and above standard or more structured telephone service offerings.

In considering pricing approaches, Bell South concluded that most customers were unlikely to pay for five or six individually priced features, even at discounted prices.

It was considered probable, however, that many customers would pay a premium flat rate for a self-selected bundled product. Such a pricing structure could allow Bell South to sell more of its features, maintain the integrity of its pricing across its service portfolio, and reduce overall service feature churn within its customer base.

The Results

To date Bell South's Complete Choice program has been offered in a number of its operating markets with an encouraging level of customer interest. The program has met its short-term objectives of reducing calling feature churn and increasing trial of new calling features. At the same time Bell South has been able to convert many of its "call waiting' customers to the Complete Choice program; the effect has been to increase revenues to between $12 and $15 over base rate, from only $4 over base rate previously paid by "call waiting' customers.

The jury is still out on the long-term success of Complete Choice and its effectiveness in retaining Bell South's customer base in the local exchange market. It is hoped that as new competitors enter the local exchange market in Bell South states, they will find it a daunting task to develop and offer service packages with as much breadth, depth, and flexibility as Complete Choice.

In order to remain the undisputed market leader Bell South will need to continue to demonstrate through service innovation that its customers are making the correct choice in staying with Bell South as their preferred local exchange company.

Lessons Learned

Bundling strategies can enable a company to identify relatively price insensitive customers who are willing to pay for demonstrated product and service value. The result can provide opportunities for revenue enhancement by developing value-added bundled offerings for specific customer segments. Innovative bundling of product and service features can provide customers with lower risk for trial and lead to broader acceptance of new product and service offerings. Potential barriers to competitive entry can be erected through the use of bundling as would-be entrants recognize that an equivalent level of perceived value at competitive prices is unlikely to be achieved

Over Deliver & Under Price: How Much is too Much? by Tammy Power

CUSTOMERS ARE AFTER TWO THINGS: the best price and the best value for their money. Naturally, you want to provide the highest level of value for the lowest price and still make a profit. Think that's easier said than done?

When price outweighs value, customers simply will not buy. When value outweighs price, customers will buy, yet companies won't reap the rewards they're entitled to. In trying to deliver the best product-service offering to customers, companies sometimes give away too much, leaving significant incremental revenue unrealized. So, how can you tell if you are delivering too much value at too good a price?

To understand if your company is over-offering, it's necessary to understand the price/value relationship. In a price/value map (far right), customers' perceptions regarding the fairness of price are plotted against their perceptions of the fairness of value in order to give a strategic overview of the competitive situation. The diagonal through the graph can be described as the fair value continuum. Any point along this line is where price matches value-whether or not this is the best point or your company is relative to where your competitors lie. In general, residing on the line is a good place to be when competitors reside on that line as well.Value-based pricing requires constant price adjustments to ensure all potential revenue is being captured. Pricing too high will result in your customers migrating to the competitor who seems to offer more value at a better price. On the flipside, providing an abundance of value for too little a price will undercut your own profit. In that situation, it's advisable to either raise the price or to reduce the amount of value by unbundling the product-service offering.

When a company charges too low for a high-value product, customers may start to question quality. Since price plays a role in the perception of a product's quality, a low price may convey the image of a low value product. This organization was extremely concerned with value, as delivering superior value to the customer was entrenched in all branches of its product offerings. Consequently, as the organization did not want to unbundle the value, it raised the price.The decision whether to reduce price or to reduce value is a strategic one and should be aligned with the company's goals and values. Understanding and communicating the delicate balance between price and value will result in customers who feel they are getting the most for their
money and allow organizations to optimize their profits.