Margin Squeeze in the MVNO Market: Four practical ways to protect profit
It’s always important for MVNOs to celebrate when subscriber numbers go up. But growth alone doesn’t guarantee a healthy business. I’ve lost count of the number of times I’ve seen MVNOs struggle to understand why good levels of customer acquisition and increased share isn’t generating a healthy profit.
Dig a little deeper and lack of focus on the bottom line or failure to understand the dynamics of a marginal business are often the root cause.
Why margins are under pressure
Average revenue per user (ARPU) has been declining for some time, but today’s economic environment has made the impact much more significant.
Many network operators have responded by introducing annual inflation-linked price increases. Although this helps offset rising costs, it often damages customer relations and can lead to increased churn, something MVNOs have benefitted from.
Few MVNOs have this luxury. They may win customers from MVNOs who price hike, but there’s little point in the long-term if they can’t make sufficient margin to cover the acquisition cost.
There’s also the backdrop of wholesale arrangements, which can restrict the choices MVNOs have when it comes to making price adjustments.
For instance, for MVNOs offering large data bundles or even unlimited, and relying on customers to use than they buy, (known as breakage), will find relatively few heavy users will break the model and erode all the margin. Edge cases really do matter in the breakage model. have this model broken and all the margin eroded by a relatively small number of very heavy users.
Edge cases matter in the breakage model because in effect, the MVNO is paying more for wholesale data, yet unable to raise prices to compensate. The breakage that once contributed to healthy margins gradually disappears and the result is a steady erosion of profitability.
Even MVNOs that purchase fixed data bundles from their host network shouldn’t assume they are immune. While these arrangements may currently shield MVNOs from some of the risk, wholesale providers continually monitor usage trends. As customer behaviour changes, wholesale pricing is likely to evolve too, reducing today’s advantages over time.
There is no single solution
Margin recovery rarely comes from one dramatic change. Instead, the strongest results usually come from improving several areas of the business at the same time.
Small commercial improvements, operational efficiencies and product enhancements can combine to create a meaningful improvement in profitability. The trick is to do it without fundamentally changing the customer proposition.
So, what are the four things we recommend?
1. Start with the wholesale agreement
For most MVNOs, wholesale costs represent the largest single expense, making them the obvious place to begin.
A contract review may uncover opportunities to negotiate improved commercial terms, marketing support, growth incentives or revised pricing structures.
However, successful negotiations require realistic expectations. Any concession from an MNO will almost certainly come with commitments in return, whether that’s longer contract terms, customer growth targets or other commercial obligations.
It’s also worth recognising that host networks are experiencing many of the same financial pressures. Their infrastructure costs are increasing, while their own retail businesses face similar margin challenges. Negotiations are therefore most effective when both parties can identify mutual long-term value rather than simply seeking short-term price reductions.
2. Understand your negotiating position
Before entering any wholesale discussions, it’s essential to understand the balance of power within the relationship. Read our negotiations blog here.
Suggesting a move to another network can be an effective negotiating tactic—but only if it’s genuinely viable and you are prepared to do it. Migrating customers between host networks carries significant operational risk.
The risk mainly lies in customer disruption which can increase churn, increase customer support costs and reduce lifetime value. Host networks understand these risks and will challenge an MVNO’s willingness to switch.
For that reason, any negotiation strategy should be based on careful commercial planning rather than tactical brinkmanship.
3. Focus on acquisition quality, not just volume
Another opportunity to steady margin lies in customer acquisition, or rather, attracting a better quality customer.
Of course, reducing acquisition costs is valuable, but winning higher-quality customers often delivers greater long-term returns.
It’s therefore vital MVNOs understand which customer segments generate the greatest lifetime value. [JG1] Bear in mind, it’s not always the customers on the biggest bundles. I’ve seen MVNOs be very successful with a good mix of medium to low users who are happy to spend a relatively small amount, use little data and stay forever.
With this knowledge, they can invest in the most effective acquisition channels while reducing spend on lower-performing ones. Since channel performance changes over time, it’s crucial to do regular reviews of commission structures, incentives and marketing effectiveness.
If you take this path, then be aware that the objective isn’t necessarily to acquire the largest number of customers. A smaller base of loyal, profitable subscribers will often create more value than a large pool of price-sensitive, high-data users.
4. Create additional sources of value
Be warned that cost management alone won’t solve the margin challenge. Sustainable profitability also depends on increasing customer value.
Many MVNOs have opportunities to strengthen their proposition through complementary products and services. There are examples all over the world to take inspiration from. Everything from device insurance and cyber security services to family safety features, handset financing, entertainment bundles and broader multi-play offerings.These services can generate incremental revenue while also strengthening customer relationships. We’ve proven numerous times with our clients that value-added services improve retention, increase customer lifetime value and create additional differentiation in highly competitive markets.
Building healthier margins
Margin pressure isn’t going to go away. In fact, it will probably get tougher. Rising data usage, changing customer expectations and increasing operating costs mean MVNOs will need to continually adapt.
The brands that succeed will be those that treat margin management as an ongoing discipline rather than a one-off exercise. They will also understand that combining stronger wholesale agreements, employing better acquisition strategies, developing smarter customer segmentation and introducing enhanced propositions, will build more resilient, profitable businesses that are well positioned for long-term growth.
If you need help negotiating better wholesale arrangements to drive margin improvement, then talk to us. We’ve helped MVNOs all around the world adopt strategies for continuous margin management and grow their business as a result.
For further reading, see our ‘The art of the wholesale deal:5 things Every MVNO must do‘ blog.
