Syphone - a Cell Phone Company Case Study

SYPHONE Case

Company Overview

SyPhone is a cell phone company that sells cell phone contracts to small to medium-sized companies. Typically contract covers 5 to 500 cell phones and includes phone equipment, support, service, maintenance, and unlimited phone calls. The customer base is very sensitive to price, but only if service quality is high. For new customers, SyPhone also needs to understand their potential profitability before offering them a contract. In the past, SyPhone has offered various discount rates to prospective customers. Customers who obtained the largest discounts are the least profitable in the short-term, but they have a lower churn rate. These customers tend to stay with the company longer and do not switch as much to competitors. Syphone now wants to know if offering large discounts is really profitable for the company in the long term.

Question 1. What is the lifetime value of a typical customer in each of the four segments, in current dollar values? Compare these figures to the “Gross margin” figures in the original spreadsheet. What can you learn from this comparison?

Gross margin (GM) variation is not directly proportional to customer lifetime value. This means that there are factors which influence the CLV other than GM.

Within their “Large accounts” segment, it benefits Syphone to incentivize loyalty as much as possible before offering rebate. Since there is such a significant loss in both GM and CLV when an account is discounted, managers may want to focus on customer relationship management as a measure of preventative maintenance to retain customer within this segment. Management will not need to target the “Large accounts, rebate” segment, because the lower margins offered to rebate customers should promote a longer-term relationship.

For the “Small accounts” and “Small accounts, rebate” segments, a customer’s GM and CLV are both less affected by their conversion into the rebate segment. Further, although the GM is reduced by 33% by rebating within this segment, the CLV is reduced by less than half of that (15%). This is due in part to the higher turnaround associated with these segments. Therefore, management strategy should be less focused on customer retention in the small account than with the large accounts.

Question 2: Of the 15,000 customers SyPhone has today, how many will still be SyPhone customers in five years? What is the overall churn rate after five years? Answer the same questions, segment per segment.

We see a big drop in customers through all 4 segments, but especially in small and large accounts with no rebates. This data is troubling for SyPhone because of how large the customer drop off is across the board