Improving reception

Editor's note: Richard Schreuer is senior vice president, and Polly Staman is project manager, with Chadwick Martin Bailey, Inc., a Boston, Mass., research firm. Jim Higgins is vice president cable marketing, Greater Media Inc., an East Brunswick, N.J., cable company.

For years now, the cable industry has been bracing for competition as new technologies create alternative means for signal delivery, while potentially offering greater channel selection and improved picture and sound clarity. No longer an abstraction, competition has arrived in many systems across the U.S., often in multiple forms. Cable companies, many operating with a "utility mentality," (i.e. "We're the only game in town") must adopt more proactive and dynamic strategies to compete successfully in this increasingly crowded market.

The extent of the threat to an individual system varies according to the presence of competing technologies and the loyalty of the system's subscribers. But regardless of whether the threat is massive and immediate, or moderate and long-term, all systems are vulnerable to erosion of their market share. The companies that thrive will be those that change from a complacent mindset to an entrepreneurial one, making the strategic, managerial and organizational changes that are called for in this market environment.

Companies that make this transition may well emerge stronger than before. By necessity, they will increase customer loyalty by providing top-notch customer service, fostering relationships with their subscribers and offering new products. In short, they will become more customer focused, nimble and innovative.

Information is a critical factor in making this transition to a competitive mindset. Cable systems that haven't yet internalized the reality of the competitive threat need to be jolted by realistic projections of market share and revenue loss. Systems that already recognize the threat need information to assess the effectiveness of specific offensive and defensive strategies.

Cable providers no longer have the luxury of taking a trial and error approach to marketing. Before launching new products, service guarantees or other innovative offerings, system managers must understand their impact on loyalty, market share and revenue. And this information is needed now. The sooner companies respond with a comprehensive and integrated strategy, the more effective they will be in overcoming the vulnerabilities to new competitors.

What information, then, is needed? Requirements are many, but at the very least they include:

  •  estimated future market share for the cable company and competitors;
  • profiles and destinations of likely defectors;
  • revenue implications of shifts in market share;
  • root causes of weak subscriber loyalty; and,
  •  product and service configurations that can build loyalty and attract new subscribers.

Below is a case study in which a cable system answered these questions through an innovative application of conjoint analysis.

Using information to confront the competition

In the summer of 1994, a mid-size cable company located in an urban east coast area was faced with new entrants in its market. Cable had approximately 46 percent of eligible homes. Microwave had taken about 2 percent of the cable providers customers. Mini-satellite dish providers Prime Star and DirecTV were preparing to enter the local market and had begun pre-launch advertising and marketing; The local Baby Bell, although not yet offering video signals, was forging ahead with its plans for cable services in the region and had received widespread publicity.

The challenge of the research was two-fold:

  • predict the future market share revenue distribution in a simulated market with up to four competing technologies; and;
  • assess the impact of different product and service offerings on customer retention and acquisition.

The research was based on a quantitative study of current subscribers and non-subscribers living within the system's geographic boundaries. A self-completed questionnaire mailed to random samplings of subscribers and non-subscribers was used to collect data. The questionnaire was structured to support conjoint analysis.

Conjoint is a multivariate technique which is used to understand respondents' preference for products and/or services by forcing them to make tradeoffs, often between product/service features and price. Widely used throughout the consumer products and services industries for supporting product development decisions, conjoint analysis enables the marketer to generate models to predict purchase behaviors under different market scenarios. Estimates of market share and plots of price-demand curves provide marketers with actionable information for developmental decisions.

In this case, a fairly simple conjoint design was employed. Using input from the client and exploratory interviews with subscribers, we developed a list of nine attributes for inclusion in the model, including monthly fee charged, flexibility of channel selection and on-screen programming information. In the questionnaire, respondents indicated their likelihood of subscribing to 16 different packages, each of which included a method for receiving signals, a monthly fee and a selection of service and product options.

In addition to the conjoint-related question, we asked respondents about issues expected to influence their selection of television viewing technologies, such as their satisfaction with cable and other service providers, and their awareness of emerging competitive technologies.

Competitive disadvantage

The research revealed that the cable company was at a competitive disadvantage in its market. It had the lowest customer satisfaction score among five service providers tested. In fact, on a zero to ten scale ranging from extremely dissatisfied to extremely satisfied, the cable company earned a 6.5 - a weak rating that was 1.3 points below the telephone company's moderately strong rating of 7.8. More troubling was the finding that 38 percent of the cable company's existing subscribers rated the telephone company higher than the cable company, while only 11 percent rated the cable company higher.

These figures sound an early warning. Based simply on customers' perceptions of quality of service, one would expect the telephone company to capture, at least initially, a reasonable portion of the cable company's customer base.

Given its comparatively low satisfaction score, the cable provider is fortunate not to have had its customers' loyalty seriously tested. The telephone company has not begun offering service, and very few people indicate they are well-informed about companies offering satellite dish or microwave reception. The big question of course remains: what will happen once the competitors become widely known? Where will customers gravitate on a level playing field? This is where the conjoint procedure is valuable; it predicts what may happen in the future because all respondents are given information about all their options 1.

In order to anticipate this future market environment, we created two simulations. The first, a three-competitor market, pitted the cable company against direct broadcast satellite (DBS) and microwave antenna. In this simulation, we created a market in which all competitors charge the same monthly fee ($35), offer pre-selected sets of channels (as opposed to a la carte programming), and offer no add-on services (such as on-line services, video-on-demand, etc.). True to reality, we limited the channel availability on DBS to reflect only cable (not local broadcast) channels, while the other competitors offered the full channel array. Furthermore, respondents were made aware that in order to receive DBS, they would have to purchase a satellite dish costing about $800.

In the second simulation, we added the telephone company, which also charged $35 per month, offered pre-selected channels, no add-on services, and both cable and local broadcast stations.

Under the three-competitor market scenarios, the cable company loses 36 percent of its current subscribers and attracts only 24 percent of the total pool of new subscribers 2. In the four-competitor scenario, the cable company loses 53 percent of its current subscribers, and adds about 15 percent of the new subscribers. In this four-competitor scenario, the telephone company presents the greatest threat, grabbing 25 percent of cable's existing subscribers and another 24 percent of the new subscribers. The huge threat posed by the telephone company should not be surprising given its relatively strong quality of service scores.

Notably, DBS does not appear to pose an immediate threat, at least not to the extent of the phone company or microwave antenna. This is not surprising, because the study also documented the importance of high quality reception of local broadcast channels. Equipment costs may also be a factor in the decision. Both conjoint and other findings in the study show that existing subscribers and, particularly, potential new subscribers, are price sensitive.

When market share estimates are combined with financial data, the bottom line implications of the changing marketplace become readily apparent. In the four-competitor market described above, the cable company's monthly revenue could drop from about $3.1 million today to $2.0 million - losing about $1.1 million in out-of-pocket monthly revenue to other technologies. In addition, $1.4 million in new market opportunity could be forfeited monthly as new subscribers enter the market by selecting other technologies over cable.

The question still remains, however, as to what can be done to stem the attrition and retain market share. Analysis of data from market simulations based on conjoint utility scores and certain market assumptions shows that the greatest impact on customer retention is achieved by increasing customer satisfaction with the cable company's service. If the cable provider's score is raised to the level achieved by the phone company, customer retention will increase by 12 percentage points.

Other actions that will have a reasonable impact on market share, include being the first company to offer on-line services, and undercutting the competitions' price, though the latter is clearly not an acceptable long-term strategy.

Next steps

To effectively compete in the new market, cable companies must create organizations that not only provide first rate customer service, but are innovative and entrepreneurial as well. Around the country, cable systems are at different stages of development. For some companies, improving customer satisfaction must be the top priority. Certainly, some others already enjoy strong ratings and must now focus on new product and service offerings.

Regardless of a system's current status, effective use of information can help drive change. The system whose study is discussed here is driving its quality improvement effort through a problem detection analysis that ranks the frequency with which customers report specific service and product related problems. It is also revamping its customer satisfaction tracking program so it produces highly specific action priorities for increasing customer loyalty.

Information on customers' reactions to new product and service offerings is also essential. A feedback loop that demonstrates the market potential of new product and service offerings can fuel the creative process by allowing for continual experimentation.

Ultimately, cable companies must create entrepreneurial, innovative, customer-focused organizations. Whether it serves to motivate, by clarifying the consequences of inaction, or give guidance in targeting performance improvement activities and marketing strategies, effective information will be critical in helping create the organizations of tomorrow.

Notes

1 Of course these predictions are not inviolate. Particularly effective marketing strategies by one competitor will alter market share. But assuming roughly equally competent marketing strategies among the competitors, the predictions derived from the conjoint procedure tend to be quite accurate.

2 We estimate that as more technologies become available, about 60 percent of current non-subscribers will enter the market.