Mobile Operators Should Abolish Pre-Paid Top Up: Strand Consult Report
The first mobile operator that abolishes their top up scratch cards will most probably experience no negative side effects on their competitive situation at all, and their competitors will quickly realise that the financial benefits of following their lead are enormous.
Strand Consult has had two employees assigned on a large research project for the past two years. The main purpose of the project was to examine whether mobile operators can optimise their prepaid business case – thereby benefiting both their customers and shareholders.
Our analysis of the costs an operator has on producing, marketing, distributing and selling airtime via prepaid scratch cards shows that operators easily use between 18 and 27% of their scratch card revenue to cover the both the costs of the physical distribution of scratch cards and the various commissions to the retail channels.
The same analysis of airtime distribution via electronic topping up shows that costs vary from 3 to 12%, depending on the type of electronic top up channel being used. The cheapest type of electronic topping up is achieved by using bank cards, credit cards and ATMs and the most expensive via convenience stores, supermarkets and other retail channels.
In a recent research note Prepaid scratch cards, we recommended that those operators that still offer scratch cards should discontinue that sales channel and instead use various types of electronic topping up. We believe that the immediate return for an operator is an improvement of their EBITDA margin of 3-5 percentage points.
During our research of this area we have met operators that believed that being the first operator on the market to discontinue the traditional scratch cards and instead offer various types of electronic topping up, would have a negative influence on their market position. We totally disagree.
When we project how a market will react to a transition away from traditional scratch cards, we see the following developments:
1. The first operator announces that they will discontinue prepaid scratch cards over the next three months. The purpose of this is to minimise fraud and theft surrounding the physical handling of the scratch cards (e.g. employees steal cards etc) and reduce the costs of production, marketing, stocking, distribution etc of the cards.
The overall objective is to reduce costs and increase margins in this area, thereby making the individual operator more profitable.
2. The first operator’s investor relationship department releases a statement to the stock market regarding the financial benefits that can be gained by discontinuing traditional scratch cards. The statement includes an expectation that the other operators on the market will be quick to implement the same strategy to thereby gain the same financial improvements – this will automatically put pressure on the other operators.
3. There are then two possible scenarios; the other operators follow the first operator and discontinue their scratch cards (resulting in all operators inproving their margins), or alternatively that one operator massively focuses on scratch cards to differentiate themselves from the other operators (most probably resulting in increasing top up costs and decreasing revenue for that operator).
4. After a while, all operators will admit that discontinuing the traditional scratch cards will quickly and easily reduce an operators costs and improve margins – and all without needing to increase turnover or market shares – all you need to do is to marginally change your distribution strategy.
Our analyses show that the financial rewards for both operators and retailers are so substantial, that there are simply no reasons left to continue offering traditional scratch cards. All areas that have mobile coverage can offer the possibility of distributing airtime, either via special point of sale terminals, or by using peer-to-peer solutions based on ordinary mobile phones, or via Smartphone top up applications.
Based on our research in this area over the past two years, Strand Consult has developed a workshop concept, where we together with an operator’s strategic personnel and product managers examine the many opportunities operators have to optimise their revenue within the prepaid business area.
During the workshop we will examine the over 100 initiatives that we have identified and that operators can implement without any greater costs, initiatives that can help reduce an individual operator’s costs and significantly increase their revenue.
Strand Consult is convinced that it is realistic for an operator to improve their EBITDA margin by 3-5 percentage points within a horizon of 3 to 6 months.
Please do not hesitate to request more information about how operators can optimise their prepaid activities and about the 10 Mega-trends we have identified in the prepaid area. To receive more information about Strand Consult’s unique prepaid market workshop please click here.
Source: Strand Consult