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Marketing and Competing

Fortnightly Magazine - April 15 1997

difference between indicating the intention to switch long-distance providers and actually doing so (see Table 2). Interestingly, this practice is largely dependent on the initial long-distance provider. While 27 percent of AT&T customers indicated they would consider switching long-distance providers, only 10 percent did so. Not so for MCI. They had the highest turnover rate with 46 percent of their customers indicating a likelihood to switch. Almost 30 percent of these customers actually switched. With the exception of AT&T, the ratio of expressed willingness to switch to actual switching exceeded 60 percent.

Two inferences can be drawn from this data, although proving either is difficult. The first is that customers who have switched at least once are more likely to switch. AT&T therefore has the most conservative customer base (since all non-AT&T customers have already switched at least once). The second, a corollary to the first, is that AT&T has the strongest loyalty due to longtime use and image recognition.

Switching Decreases Loyalty

Closely related to customers' willingness to change providers is the rate at which they do so, which is known as the churn rate. Again, the long-distance market can provide some insight into the rate of customer change using data from the 1994 and 1995 ReQuest surveys (see Table 3).

The data, while insufficient for detailed analysis, illustrates some significant cost issues. If this type of switching performance continues, customer acquisition cost will become critical. The average "life" of an AT&T customer currently exceeds 11 years, based on the churn rates. By comparison, the average lives for MCI and Sprint customers are both about 3 years. In essence, AT&T's longer retention rate provides a strategic advantage, if it has the same cost per customer acquired as the other two, it's average marketing costs are about 25 percent of its competitors.

More than 90 percent of AT&T customers remained loyal over the two ReQuest surveys. MCI posted the lowest retention rate of existing customers with 66 percent remaining with that carrier over the year.

The issue of what happens to a customer who leaves AT&T is worth noting. If an AT&T customer went to Sprint, and subsequently left, they were more likely to go to MCI (14.9 percent vs. 11.3 percent) than return to AT&T. This tendency is not only an absolute advantage for MCI, but noteworthy considering that AT&T has 7 times the base market share. If an AT&T customer went to MCI and left, they were more likely to return to AT&T than go to Sprint (18.2 percent vs. 12.5 percent). This statistic is deceptive: Sprint has less than 7 percent of AT&T's market share, and getting 38 percent of the customers who leave MCI is a tremendous victory.

The data shows two competing patterns. First, AT&T has a very loyal customer base. Second, if an AT&T customer does leave, however, AT&T's chances of getting them back is far below its current market share. Loyalty once lost is difficult to regain.

Using Price as an Inducement

Although the study's three price points limit the sophistication of the analysis that