The costs and benefits of customer self-service      By Claus Skaanning (CEO, Dezide ApS, Denmark) Published by The Wise Marketer in November 2005. This white paper analyses the return on investment (ROI) for Internet Service Providers (ISPs) when investing in next generation self-service solutions that increase the quality of support services... Editor's Note: The Wise Marketer wishes to thank Claus Skaanning, CEO for Dezide ApS in Denmark, for granting permission to reproduce this insightful ROI analysis, which is based on data collected from various ISP industry experience, reports and analysts. A table of references is provided at the end of this article. A large percentage of an ISP's costs are spent on customer service, typically between 30% and 60%[1], depending on size and other factors. Many ISPs employ large help desks, either in-house or outsourced, manned by hundreds or even thousands of customer service representatives (CSRs). The CSRs typically spend 3 to 6 minutes on each incoming support call, and the typical cost per call is often given as Euro 4 - 8 (US$5 - US$10). For an ISP, many calls are naturally related to email and connection issues. These problems often constitute at least 20% of the calls but, due to their greater complexity and difficulty, generally constitute significantly more than 20% of the total time spent on calls. Cost focus During the past 4 to 5 years the primary focus among ISPs (and the telecom industry in general) has been to reduce the cost of support while secondarily improving the quality of support. As the economy improves this is changing, and new investments are now being made to increase revenue and profits, as well as to improve service quality. One way for an ISP to reduce costs, increase revenue and profits, and increase service quality is by introducing self-service solutions. These solutions enable the subscriber to manage their own usage pattern and invoicing. Increasingly these solutions also allow the subscriber to resolve both simple and more complex problems without involving a CSR - a true win-win situation, where it can be achieved. Subscribers increasingly prefer to resolve their own problems if possible, rather than spend time waiting on the phone. If they have the option to use self-service to resolve their problems in a user-friendly, efficient and effective manner - while getting the same or a better level of quality they would get from a skilled CSR - then many subscribers will opt to do so. ROI calculation It is easy to make an ROI calculation for self-service technologies based on support cost reductions. Some self-service technologies have the potential to transfer 20% of calls to the self-service portal. With 100,000 calls per month, a 20% reduction in calls implies direct monthly savings of at least Euro 80,000 (US$96,000). Next generation self-service solutions are not inexpensive, considering implementation costs (internal and external resources), but with annual savings of almost Euro 1 million (US$1.2 million) - it is quite easy to build a convincing business case for even the most expensive self-service technologies. However, the goal of this article is to analyse another element of the business case: How much can be gained in reduced subscriber churn by improving the quality of service with self-service technologies? First, we have the retention business case, followed by an analysis of its underlying elements: A) Typical ISP churn rate is 10-40% per year. For this analysis, we assume 25% of subscribers switch ISP every year. B) Availability and quality of tech support is the 2nd or 3rd most common motivator for switching ISP, between 20-40%. We use 25% in this analysis. Due to increased similarity of pricing and speed of ISP offerings, this percentage is expected to increase. C) Acquiring a new customer is much more expensive than retaining an existing one. In this analysis we use Euro 320 (US$400) as the cost of attracting a new subscriber and Euro 80 (US$100) as the cost of retaining a subscriber. The cost of attracting new subscribers is increasing as ISPs are increasingly "stealing" subscribers from each other. D) Furthermore, we assume that 50% of subscribers will use self-service solutions rather than the help desk, if the quality is equal or better. We further assume that 80% of these 50% will become increasingly satisfied and loyal based on the ability of next-generation self-service technologies to effectively and efficiently resolve their problems. Example 1: ISP with 100,000 subscribers 25,000 cancel their subscriptions each year Cost of acquiring 25,000 new subscribers: Euro 8 million (US$10 million) Cost of retaining 25,000 subscribers each year: Euro 2 million (US$2.5 million) 25% of the 25,000 subscribers switch due to poor service quality: 6,250 By introducing a next generation self-service solution, 40% of these 6,250 will become increasingly loyal (50% of 6,250 = 3,125 and 80% of 3,125 = 2,500): 2,500. Assuming none of these 2,500 subscribers will switch, this corresponds to a 10% reduction in churn - a significant potential gain in profits - with annual savings exceeding Euro 500,000 (US$625,000) assuming that 50% of the 2,500 subscribers could have been retained and 50% would have had to be replaced by new subscribers. The ROI on the above example, using a US$100,000 project cost, is less than 2 months. Example 2: ISP with 1,000,000 subscribers This time a 10% reduction in churn leads to 25,000 fewer cancellations each year. This again leads to potential significant gains in profits with annual savings exceeding Euro 5 million (US$6.25 million) to attract a similar number of new subscribers. The ROI on the above example, using a US$1 million project cost is less than 2 months. Note: These examples are based only on an improved churn rate and will be enhanced by the additional savings from the reduced supports costs. ISP churn rates Most ISPs admit to a churn rate between 25-33% per year - ISP Planet, 2002[2]   ISP churn rates average 4% to 8% per month (48 to 96% per year) - newfusion.com, 2002[3]   EarthLink's (US-based ISP) churn rate in 2002 was 47% per year[4]   Most ISPs state that their churn rate is 2-3% per month, or over 25-33% per year - 1999[5]   A fourth of Internet users in the US plan to switch their service provider in the next six months - ComScore Networks, 2004[6]   16% of Internet users will change ISPs in the next six months, World Research survey, 1998[7]   NTL, a UK-based ISP, had quarterly churn rates of around 12-14% in 2004[8]   22% of small and medium sized enterprises are currently looking for a better ISP. Australian ISP Services Report, 2001[9]   Customer churn rates amongst ISPs is as high as 24% per annum in the UK, 2005[10]   United Online, a US-based ISP, had churn rates around 4-5% per quarter in 2004[11]   ISP churn in the UK was 24% in 2004[12]   NTL, a UK-based ISP, reports monthly churn rates between 1.2 - 1.6% in 2004[13] Based on the above, we can conclude that an average annual churn rate of 25% is realistic for many ISPs in 2005, and for the foreseeable future. It seems that churn rates have been dropping from 1998 to 2005, most likely due to increased stability of Internet connections and increased similarity between ISP offerings, thus reducing price and speed differences. As the ISP quality of service increases, the churn rate is expected to drop even further. Reasons for churn: service quality The majority of subscribers plan to change because they want a faster connection. The second most popular reason for switching ISPs was price. ComScore Networks, 2004[14]. Among the other main reasons: Gartner estimates that 7% of ISP churn is directly attributed to spam. 75% of all Internet users believe that their ISPs should be responsible for fixing spam problems[15]   25% of customer complaints referred to the ability to receive service, unresolved support issues, and the inability to get useful support, iSTAM 2004[16]   Customers are becoming more sophisticated. In the early years of the ISP business, most churn was caused by customers looking for a lower price. Now a lot of churn is coming from customers looking for value-add from their provider, and that includes the level of service they receive, particularly for technical support. Fujitsu Australia, 2001[17]   From five years of experience working on an ISP help desk, the top issues are not being able to connect, long wait times for tech support, e-mail problems and billing issues[18]   Speed - or the lack thereof - was the primary reason to switch - 34% said they moved to get broadband access. The second most common motivator - limited bandwidth - was cited 33% of the time[19]   Availability and quality of technical service is the third most common reason for switching ISPs, cited by 32% of those that changed providers in the past year. Other common reasons for switching are price and slow connections/busy signals, given by 30% of switchers, and too much down time, mentioned by 22%. Slow web page downloads motivated 19% of recent switchers, followed by slow e-mail delivery and billing problems, mentioned by 15%[19]   31% of customers surveyed complain of poor phone responsiveness, 30% of inadequate technical support, and 26% of poor diagnosis and repair of problems[19]   Customers focused on price aren't loyal[27] Based on the above indications, it seems reasonable to assume that the major motivators for switching are still the speed/bandwidth of the connection and the price. The third motivator invariably seems to be service availability and quality. Different percentages are reported but it seems reasonable to assume that on average, 25% of subscribers switch primarily due to dissatisfaction with customer service. Dissatisfaction with service can stem from poor phone responsiveness, difficulties in communication, inadequate technical support, poor diagnosis, failure to correct and/or repair problems, etc. Since ISP offerings are becoming increasingly similar it seems likely that poor customer service will become an increasing important churn factor. There is a percentage of subscribers that will always switch due to price differences - always "chasing the lowest price". These subscribers are very difficult to retain under any circumstance. Costs of customer acquisition and retention The cost of acquiring a new ISP subscriber averages US$400, while the cost of retaining one is about US$100[20]   Churning costs the nation's (US) largest dial-up ISP at least US$10 billion per year[21]   Industry experts put the cost to acquire new DSL users in the range of US$600 to US$1,000, compared to US$105 for picking up a new dial-up customer, ISP-Planet, 2001[22]   It is far less expensive to keep a good customer than to win a new one, Group 1[23]   It costs 30-40 times more to attract a new customer than to retain an existing one, Gartner Group, 2002[24]   Gartner predicted that the cost of acquisition of a new subscriber for an ISP would be US$125 in 2003[25]   A 5% increase in customer retention, translate into 25-55% increase in profitability, Gartner 2001[26] The cost of customer churn due to technology-based service failures, such as faulty cash machines and interrupted internet access, can be as high as 6%, which corresponds to £8 million (US$12M) for every one million customers. The study shows that 5% of the UK adult population would be "certain" and 28% "likely" to change service providers as a direct result of technology-based service failure if problems were experienced on a regular basis. Earlier research revealed that 23% of the population are already experiencing technology problems at least once a week. These combined findings highlight the real cost of poor IT-based customer service. A company with 5 million customers could be losing up to £40 million (US$60 million) in customer churn due to technology-based failures (even at the low end it's about £1 million (US$1.5 million) per one million customers). They're also consistent with published overall churn figures of around 20% for typical service companies. The research also shows that the people most likely to change providers are in the AB socio-demographic grouping and have mortgages, in other words, exactly the sort of high value customers that ISPs do not want to lose. "Companies need to ask themselves if they understand service delivery from a customer perspective. They need to look at what they can do to improve customer service and provide service assurance. Essentially they need to start looking at how to deliver service excellence."[28]... NTL, a UK-based ISP, reports ARPU (Average Revenue Per User) around £40 (US$60) per month in 2004[13]   Providers need to retain subscribers long enough to make a profit - usually several years. The key differentiator that retains subscribers is superior service, as the industry is now painfully learning[30]   Support costs are much higher for new customers. Service/support calls once cost over US$100/new customer, and probably remain over US$40 for the first 90 days. They drop to US$20-30 per year after the initial period - even without moving the call centres abroad, DSL Prime, 2003[31]   A little extra support is far cheaper than the US$300 or so it might cost to find the replacement of a subscriber[31] As the above indicates, there is no doubt that it is much more expensive to acquire new customers than to retain existing customers. As ISPs are increasingly "stealing" subscribers from each other, this difference should grow even larger over time. Estimates on acquiring new customers range from US$125 to US$1,000 for ISPs. It seems to be more expensive to acquire broadband customers than dial-up customers. It is probably less expensive for the larger ISPs to acquire new customers than it is for smaller ISPs with less visibility and brand-awareness. With average annual per customer revenue around Euro 650 (and US$500 in the US) it is obviously very significant to lose 25% of customers to churn every year. It has a huge impact on the ISP's profitability and ability to grow. Gartner estimates that a very small increase in customer retention (5%) can infer a 25% - 55% increase in profitability. If customer satisfaction and retention can be improved by making a minor investment in next generation self-service solutions, this can easily have a major impact on profitability. Improving customer satisfaction and retention Due to improvements in the quality of customer service, NTL (UK-based ISP), has managed to reduce the customer churn from 14.4% in the third quarter, to 13.2% in the fourth quarter[8] Verizon, a US-based ISP, cut churn in half by balancing immediate profit against long-term customer satisfaction. Instead of going for immediate cash in hand or yielding to the pressure to "make the numbers this month", they did what was right to keep the customer satisfaction high month after month[20] Based on Dezide's experiences with its own clients, customer satisfaction can be significantly improved through this kind of self-service system. In one case, the Dezide Advisor solution was able to resolve 97% of all customer cases within a specific area. These customers did not have to wait for assistance, and almost all of them found a solution in just a few steps. Assuming that this is better than the quality of service they would get from the help desk, it results in increased customer satisfaction and therefore has a similar effect on retention. Conclusion Self-service solutions can deflect a significant number of calls, often as many as 50%. This means that a very large proportion of the subscribers will experience the self-service solution - and if the quality of the self-service is as good as or better than that delivered by the help desk, a large percentage of subscribers will experience significantly increased quality, resulting in greater customer satisfaction and retention. People are increasingly becoming familiar with the Web and are better able to exploit information and services available on the Web. As such, it is expected that more and more ISP subscribers will attempt to use self-service solutions before calling the help desk. More and more subscribers will end up preferring self-service rather than phone-based services. And when this is the case, overall customer satisfaction can be improved by introducing what the customers want most: high-quality, user-friendly, efficient and effective self-service solutions. Many providers of self-service solutions in the marketplace are able to quote numerous customer references where they reduced the call volume while maintaining customer satisfaction. Meanwhile, users of the Dezide Advisor system also experienced a marked increase in customer satisfaction. References: [1] Internet Market Outlook, Potaroo, 1999 [2] ISP-Planet, 2002 [3] Forrester, Lisa Pierce, 2002 [4] iStam Attrition Research, Bob Stamper, 2002 [5] HowToSell.net, weekly column, 1999 [6] ComScore Networks, 2004 [7] Survey: ISP churn rate still high, Graham Lea, The Register, 1998 [8] NTL cheers lower losses, Netimperative, 2004 [9] Australian ISP Services Report, 2001 [10] Group 1 Software report, 2005 [11] United Online Inc. Earnings Conference Call, Internet Summary, 2005 [12] The Danger of Defection, Group 1 Software, 2005 [13] NTL Annual Report, 2004 [14] Lust for speed driving ISP churn, CBS Marketwatch, 2004 [15] Bridging the Infrastructure Gap: the Importance of Service Control in Broadband Networks, Cisco White Paper, 2003 [16] AG Releases Top Consumer Complaints List, Office of the Attorney General, 2004 [17] Outsourcing the key to cost control, customer service and code compliance, Fujitsu Australia, 2001 [18] Churn, churn, churn. ISP-Planet, 2001 [19] Need for speed drives customer churn, Interactive Week, Rebecca Wetzel, 2001 [20] Forrester Research, Lisa Pierce, 2002 [21] Churn: are rural telcos immune? Rural Telecommunications, 2002 [22] ISPs Say Profitability is Priority No. 1, Patricia Fusco, ClickZ Network, 2001 [23] The Danger of Defection, Andrew Greenyer, Group 1 Software, 2005 [24] Gartner Group, 2002 [25] Gartner Group, 2003 [26] Maintaining customer service loyalty during economic downturns, ZDnet, Kolsky Esteban, 2001 [27] The Zen of Customer Retention, Lee Godden, 2003 [28] Cost of customer churn due to IT service failures stretches into £ millions reveals new research, Tertio Research, 2005 [30] Broadband Growth: The Crucial Role of Service and Support, Bruno Teuber, Motive, 2005 [31] DSL Prime: The Secret Cost of Churn, Dave Burstein. DSL Prime, 2003 [32] Customer Experience Scores Your Value to Them, Georgia Patrick, Duct Tape Marketing, 2005 Loyalty marketing... for real facts, figures, research, case studies, best practices, practical how-to's, technologies & examples, The Loyalty Guide 4 is the world's most complete report (1,000+ pages) that covers it all. Costing less than a conference pass, details of this electronic report's contents, chapter samples, pricing, and ordering details are online now at www.TheLoyaltyGuide.com. For more loyalty marketing feature articles: http://www.thewisemarketer.com/features   CUSTOMER LOYALTY & ENGAGEMENT: all you need to know in one 1,000+ page report...   Click here to tell a friend Copyright 2005 Dezide ApS / The Wise Marketer     About the author... Dezide Advisor is a software tool for self service and knowledge management. The Advisor assists enterprises in reducing support costs by allowing customers to solve problems on their own, and by providing support agents the tools to improve quality, speed and precision. Dezide can be contacted online at http://www.dezide.com   Looking for permission to reproduce this article?   We are usually pleased to permit the reproduction of our Feature Articles in other trade journals (but not 'blogs'). 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