Cell Phone Carrier Customer Loyalty Programs to Reduce Churn

Wireless carriers in the U.S. are under pressure from the Feds and consumers to either eliminate or pro-rate early contract termination charges. Carriers argue they need to charge customers who break their contracts due to marketing and discounted handset costs, while wireless subscribers want the freedom to switch carriers at any time.

The major U.S. carriers--AT&T, Verizon, Sprint and T-Mobile--face class-action consumer lawsuits, a Federal Communications Commission investigation and Congressional action to trim or eliminate "lock-in" contracts preventing wireless subscribers from jumping ship. Meanwhile, Sprint/Nextel continues dealing with high monthly churn rates.

A recent BusinessWeek article --"Hanging Up on Early Exit Fees"--summarizes the carriers' dilemma. If they drop or pro-rate early termination fees, their profits drop. On the other hand, consumer demand for contract elimination--and class-action lawsuits--will cost carriers much more than simply dropping contracts entirely. Read my earlier post on the subject.

Unlike other industries that recover marketing and other customer acquisition costs during the initial purchase--say, a kitchen stove or audio system--mobile carriers in the U.S. recover some of their marketing costs on the back-end when customers break contracts and leave. Yet, carriers, like other businesses, lose money every time customers cancel service, requiring additional marketing costs to replace them.

Rather than punishing subscribers by charging early termination fees, the carriers should reward customers who choose to stay using customer loyalty programs.

For example, most credit card companies--including CitiBank via the "Thank You" program--offer points convertible into merchandise or cash. Internet companies, such as GoDaddy.Com continually reward customers with "15% off your next purchase." American and other airlines issue points redeemable for airfare discounts. Zappos.com, a successful online shoe e-tailer, thrills its loyal customers with guaranteed purchase satisfaction and free shipping on initial and returned purchases. Successful companies increase customer satisfaction by using the carrot--not the stick.

To avoid further consumer disaffection or Federal intervention, wireless carriers should build stronger customer relationships by rewarding loyalty, offering reasonable pricing and improving customer service levels.