ROC for mobile industry 2


8 October 2005

Somebody commented that our previous analysis of the Return on Customer formulas for the mobile industry did not take into account the change in the overall number of subscribers.

This is true, and while keeping the overall number of customers constant is very much in the spirit of the book as we discussed in our review of Return on Customer, it is easily remedied and may provide additional insights.

If \(N\) is the number of customers, then the Return on Customer (ROC) formula for the enterprise is:

\[ ROC = \frac{N×FC_{i} + ∆(N×CE_{i})}{N×CE_{i-1}} \]

Following the calculation through as before gives us

\[ ROC = Churn - \frac{∆Churn}{Churn} + \frac{∆FC}{FC} + \frac{∆N}{N} \]

Again the change elements broadly make sense. In our simplified model you make more money by increasing the number of customers, increasing the free cash flow from each customer, or reducing the churn rate.

And again the initial \(Churn\) element seems out of place. Lower churn is good, but presumably higher ROC is good, unlike what is suggested by the formula.

In fact we have shown empirically that the enterprise value is determined only by the change in customer equity for the UK mobile industry, i.e. by the last three change elements. ROC does not appear to predict anything obvious.