The Indian cellular industry is at crossroads. The explosive growth of the subscriber base over the last few years has been catalyzed by price wars among mobile operators. Prices are now at the lowest levels in the world, and have little scope of falling further. As the market matures and transitions to the next phase, operators must shift their focus from acquiring customers at all costs to segmenting them for maximize revenue yields.

It has been argued that cellular operators in India have dived far too quickly into the retail segment, causing mobile bandwidth to become increasingly commoditized. As a result, only 5 percent of the Indian users fall in the high ARPU range (more than Rs 5,000 per month), while more than 60 percent yield an ARPU of less than Rs 1,000. Moreover, there is little difference between the ARPUs of different operators in the same geography, indicating widely standardized products and services.

Given the scarcity of mobile bandwidth, cellular operators must ensure that low contribution customers do not consume a disproportionate share of the total resources. By expanding rapidly in the low-value segments, Indian mobile operators have however exposed themselves to the harsh laws of retailing where a majority of acquired customers are not profitable.

In contrast, in the US, businesses were the early adopters of enhanced mobile services. Consequently, price differentials between product families could be maintained easily, creating a natural method of segmenting customers. Businesses were the high-value customers willing to pay for premium services, while the consumer segment remained satisfied with cheaper call plans accompanied with lower service levels.

The Indian Corporate Segment
So far Indian mobile operators have attempted to penetrate the market by targeting the individual user. Products attractive to specific customer segments have been rolled out only recently (for example, GPRS by BPL mobile), and that too in an ad-hoc fashion. In order to target appropriate users for value-added services, it is necessary to first identify the customers who are more likely to pay for the added value. While there are several methods for segmenting users, a needs-based segmentation approach is probably the easiest to implement. Given that the communication requirements of businesses are sufficiently distinct from those of the individual user, a strong opportunity exists for developing new strategies to cater to this segment.

Why segmentation... Only 5 percent of the Indian users yield an ARPU of more than Rs 5,000 per month More than 60 percent spend less than Rs 1,000 per month This makes customer segmentation necessary for maximization of revenues

There are close to 100,000 large-scale (employment > 500) public and private enterprises in India, according to the ministry of commerce and industry, government of India. If we conservatively estimate 10 potential users per company (say, senior executives and sales staff), the size of the target segment is roughly 1 million. In addition, there are several organizations (for example, central and state governments) that would be interested in consolidating, optimizing and preventing misuse of their cellular subscription. The whopping 3.2 million small and medium enterprises (employment < 500) cannot be ignored either—they are the engines for growth of the Indian economy, poised to grow larger in the next few years.

Nextel: A Segmentation Success Story In the US, the strategy has exemplified a strong focus on corporate customers. While the average US mobile operator struggles to maintain an ARPU of $38 with a 2.6 percent customer churn per month, Nextel’s ARPU exceeds $70 and it has a churn of just 1.5 percent (the lowest among all mobile operators). A typical Nextel corporate contract (30-40 users) brings in about $2,000 in revenues per month. This focused strategy has enabled the company to maintain high margins while offering differentiated services to its business customers. In addition to regular cellular service, Nextel offers a unique digital cellular radio service to its customers. Termed as ‘direct connect’, this feature allows instant one-to-one or one-to-many communication with the push of a button. This unique feature permits corporate employees (or taxi/truck fleets) to be connected quicker and more cost-effectively than the traditional cellular services. Other Nextel business features include wireless Internet connectivity, access to office productivity tools, including e-mail and calendars, mobile messaging services for groups, and worldwide roaming plans. Nextel also offers customized contracts for larger organizations. Despite signing up the cream of the customer crop, Nextel has only been able to return profits in the most recent quarter. This has been due to the financial pressures of creating a recognizable brand and operating a highly capital-intensive network. Since the Indian corporate market is much smaller than that of the US, selling cellular services solely to the Indian business segment (a la Nextel) does not justify the capital investments involved. It is useful to note that the proposed MVNO-like approach requires relatively minor investments for rolling out additional features and products.

Corporate users most likely end up using the same service provider for both business and personal calls. Corporate contracts also have the benefit of locking in customers for a fixed period (usually much larger than the break-even period for the operator). This increases ARPU, decreases churn, and improves the profit margins for the service provider.

Implementing Segmentation
A segmentation strategy can only be as successful as its implementation. Even after the potential user segments have been identified and customized product bundles rolled out (both non-trivial tasks), modifications will be required throughout the activity chain to support implementation. These changes are either related to core network operations or require the operator to enter into external agreements (or new businesses) to support new products. The table on next page includes a sample list of changes required to roll out special products or features for the business community.

How should mobile operators brand their products to cater to different user segments? Promoting a single brand for carrying products for different types of customers is an expensive proposition that requires large marketing and advertising budgets. Indian mobile operators lack experience in brand management, making a single brand-umbrella for all products a rather risky proposition. In today’s conservative climate, it is imperative to find a cost-effective method of becoming the preferred carrier for personal users and businesses alike.

An inexpensive arrangement for swiftly rolling out differentiated products to niche users is the mobile virtual network operator (MVNO). An MVNO does not operate its own network or own any cellular spectrum. Instead, it leases bandwidth from an incumbent operator. This model of simply reselling bandwidth implies that the MVNO must create specialized products to maintain sustainable profit margins. Thus, while the operator concentrates on making the network more efficient (reduce costs), MVNO concentrates on product development and market penetration (increase revenues). So far, this model has been used to deliver special applications like GPRS and 3G to segments of consumers on the strength of the MVNO’s brand. In the UK, Virgin leased One2One’s bandwidth and within a year was carrying 10 percent of all the traffic (600,000 users) on One2One’s network.

The strongest argument against an MVNO arrangement is that of cannibalization. Due to the hazy boundaries between customer segments, an MVNO can gradually start eating into the incumbent operator’s market share—a reason often highlighted for the failure of Virgin Asia in the Singapore market. However, since business communication requirements are distinct from those of any other user segment, an MVNO’s marketing expertise can be productively harnessed to sell cellular services to corporate users.

We propose that a standard MVNO arrangement be slightly modified (to a joint venture) for targeting the Indian business user community. Under this arrangement, the incumbent operator should run the network while the MVNO partner should develop and distribute focused products (unlike a standard MVNO arrangement, billing, customer service, product technology, etc, remain the responsibility of the incumbent mobile operator). On the basis of such an agreement, it is not inconceivable for American Express, for example, to bundle cellular services with its business products like credit cards, insurance, and travel services. Contracts can then be signed with the network operator to share the costs. Incidentally, a recent Forrester Research survey of executives at 30 European mobile operators found that the average interviewee expects to host two MVNOs by 2004. Additionally, they expect MVNOs to contribute 6 percent of operating profits for that year. Achieving these targets will require strong cooperation between the partners for developing successful products.

Conclusion
Now that the Indian cellular community has gained critical mass, operators can apply customer segmentation techniques to improve their revenue yields. The Indian corporate community (as described here), is lucrative enough to be targeted with additional value-added features bundled into products. An MVNO-like arrangement is a good vehicle to roll out new products without incurring large expenses or disrupting the existing customer base.

Rahul Jain is with Interwave Communications, California, US Anurag Bajaj is with Booz Allen Hamilton, London