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.

The post Margin Squeeze in the MVNO Market: Four practical ways to protect profit appeared first on Graystone Strategy.

In terms of size alone, there are more than 2,100 MVNOs worldwide. Together they serve around 5% of the world’s 5.8 billion mobile subscriptions. 

In the last ten years, the sector has grown by 60%, which equates to around 800 new MVNO launches. By my calculations, that results in the need for 500 wholesale negotiations every year, either between new entrants and MNOs, or existing MVNOs renegotiating their contracts or attempting to change network partners.

With so many negotiations happening day to day, you’d think there would be plenty of knowledge on how to do it well and get the result you want. Sadly not.

Firstly, in my experience, many MVNOs approach wholesale negotiations with the wrong mindset. I don’t want to use the word haggle, but it’s probably the quickest way to sum up the problem. It just doesn’t work to go in thinking you can get a rock bottom price, and it won’t secure the deal you need for launch, growth or stability.  

A negotiation of any kind requires thorough preparation, which includes a full understanding of the host’s objectives. When you know what their strategy is you can show how your MVNO will help them achieve it. 

What’s more, this approach always breeds good relationships and respect, which is critical for developing a long-lasting partnership. 

There are five things we recommend you consider to get match fit. These are taken from our popular masterclass ‘The art of the wholsale deal’. 

1. Why would operators work with you?

As we’ve already said, knowing how you will help an MNO be successful is fundamental to your MVNO’s success. 

Many MVNOs spend weeks refining what they want from a wholesale deal but very little time understanding what the operator wants from them.

Operators typically enter wholesale partnerships for one of six reasons: 

• to monetise spare network capacity
• satisfy regulatory requirements
• access new customer segments
• enter new verticals
• drive wholesale margin growth 
• or simply prevent a competitor from winning the business

Your pitch should clearly demonstrate how your MVNO helps the operator achieve one or more of these objectives. The stronger the strategic fit, the stronger your negotiating position becomes.

2. What’s your pitch?

Before wholesale pricing is discussed, operators assess whether an MVNO is worth their time.

The sorts of things they look for are sources of credible funding, a differentiated proposition, realistic forecasts (easy to get wrong, hard to get right), access to customers, strong distribution channels, experienced leadership and a clear understanding of the technical and commercial requirements of launching a mobile service.

It’s clear from that list that you’ll need to present a compelling business case built upon robust customer insight. You must also have a realistic set of growth assumptions. This instils confidence in the team too. 

But remember, launching is one thing, attracting customers, keeping them and acquiring more is quite another. Be prepared for a lot of scrutiny at this stage. 

3. What levers do you have? 

The best negotiators enter the ring knowing what levers that have to pull. For a new MVNO, leverage may come from access to a unique customer base, a powerful brand, regulatory support or a proposition that addresses an underserved segment. 

But be aware that you also have vulnerabilities when you’re the new kid, like limited telecoms experience, forecasts that carry assumptions or a lack of technical or operational capability. Knowing how you bridge the gaps is important to show you’ve thought everything through and are in control of a strategy that can stand up to the challenges of trading. 

In comparison, trading MVNOs have (usually) proven they have the ingredients to be successful and are generating wholesale revenues for their host. 

It’s not all plain sailing though. Churn, acquisition costs and competition can all be a thorn in the side. 

Whatever your situation you need to be ready to justify your plans and show evidence it’s founded on data not a hunch. 

4. Is a low price really all you want?

The wholesale rate card and margin ire important for start-up MVNOs, but many of the most valuable elements of a contract sit elsewhere.

Access to new technologies, service level agreements, the pricing review process, clear frameworks for dispute resolutions and timetables for contracts reviews will all have a significant impact on long-term profitability, your ability to trade competitively and flexibility to move host. 

Make sure if 6G launches in the next 3-5 years you have access. Consider your plan for D2D satellite communications or eSIM. What if an AI customer management tool is made available by your host but you can’t use it? If you can’t get access to things that improve margin, proposition and customer experience then you significantly undermine all the efforts for launch. 

5. Are you ready to negotiate with professionals?

Wholesale teams negotiate every day. They use well-established negotiating techniques ranging from extreme opening positions and strategic concessions through to “good cop, bad cop” tactics and last-minute requests before signature. It’s a game you need to be ready to play.[JG1] 

I know because I have sat on both sides of the table and written the playbook. In fact, when we deliver our masterclasses at conferences, the MNOs visibly blanche with embarrassment when we get to the part warning MVNOs of the techniques MNOs use. 

The best defence to these tactics is preparation. Understand your objectives, know your walk-away position, maintain alternative options wherever possible and remember that the goal is not simply to win a negotiation but to build a partnership that can support sustainable growth. 

And if you still don’t know where to start, get someone who does on your team. 

If you take one thing from this list, then it’s prepare. And do so strategically. You need a compelling proposition, a clear understanding of operator motivations and a contract that supports long-term success.

Whether you are launching a new MVNO or preparing to renegotiate an existing agreement, investing time in planning your wholesale strategy will almost always deliver greater returns than focusing exclusively on price.

Learn more about our masterclasses and how they can help you prepare here.

And if you want to talk specifics for a forthcoming negotiation or even appoint us as your negotiator then get in touch. It’s what we do.

The post The art of the wholesale deal: 5 things Every MVNO must do appeared first on Graystone Strategy.