Averages lie: Using smart segmentation to find growth

Mobile’s long-term trend is clear: data is rapidly increasing year over year. The share of voice has dropped from over 80 percent five years ago to about 20 percent today. Diverse activities drive this growth in mobile data: everything from streaming music and gaming to accessing social networks and watching online video – only a short time ago, all of these would have required a traditional PC.

Like Western Europe’s people in general, its mobile users are quite a diverse bunch. Some burn through their monthly allowances streaming music or downloading games. Others dip in and out of news sites and blogs. Others still send dozens of messages via e‑mail, SMS, social networks, and instant messaging. As access to mobile data climbs (about a third of Europe’s mobile users in 2010 and 60 percent just two years later), subscriber usage remains extremely varied and incredibly polarized.

As McKinsey’s iConsumer research shows, the top quartile of Western European mobile users consume a full 75 percent of all mobile data with individual consumption 30 times that of the median and 60 times greater than the 95th percentile. Using averages for marketing purposes and to gain a broader understanding of the customer base can sometimes be misleading. These do not account for the complex underlying usage patterns.

Moving beyond averages

Both usage diversity and polarization necessitate a more nuanced approach to understanding mobile users for successful marketing, product development, service operations, and other key business functions. By applying advanced analytical methods to proprietary data sets, McKinsey has developed a segmentation approach based on actual usage patterns and spending behaviors for mobile voice and data (Exhibit 2). This goes far beyond what traditional age- or income-based segmentation might offer. Given that the most significant implications lie in the realm of data offerings, this article focuses primarily on smartphone users.

Traditionalists. At 29 percent of all mobile users and 48 percent of smartphone users, traditionalists represent the largest segment, characterized by a relatively conservative approach to mobile usage. In terms of age, they are the oldest (65 percent are over 35, versus only 50 percent for all smartphone owners). For them, the mobile phone remains primarily a voice communications device. Their limited use of data is largely focused on more basic browsing and e-mail services. These users are price-conscious – though no different in income from groups that spend close to twice as much on mobile services – and highly value their carrier’s reputation. Despite their large share in the user base, they represent only 23 percent of voice volumes and 6 percent of all data consumed.

Practicals. Representing about 10 percent of users overall and 18 percent of smartphone users, Practicals have relatively low voice usage but higher levels of data activity. For them, data consumption is focused on the “functional” activities of communications (e-mail and social media) and Internet browsing. These users are younger adults (32 percent are 25 to 34 years old versus 25 percent of smartphone users in general), but are almost indistinguishable within the smartphone population in terms of income. Yet, they have twice the number of installed apps as traditionalists, and their spending on a range of digital products (including music, news, movies, and other apps) is 3.4 times greater.

Entertainers. With a size similar to the Practicals (10 percent overall and 17 percent of smartphone users), Entertainers are also characterized by relatively low voice usage and higher data levels. For them, however, using data is much more about entertainment, as they stream music and video and play online games. This segment skews even younger (29 percent in the 18 to 24 age group, versus 23 percent overall) but includes users across the age spectrum. Their number of installed apps is 36 percent greater than that of Practicals, and they spend twice as much on digital products. Due to their dataintense activities, this relatively small segment accounts for about 20 percent – or twice their “fair share” – of all data volumes.

Omnivores. Making up only 8 percent of all mobile users and 14 percent of smartphone users, Omnivores are the smallest yet most dynamic segment – as well as the youngest, with 75 percent under 35. They are by far the biggest data consumers, accounting for almost two-thirds of total data volumes. They spend up to ten times longer per day on data-enabled mobile activities than Traditionalists. Unlike Entertainers and Practicals, however, they also heavily use traditional voice. And they are big spenders – not just on monthly voice and data services, but on a host of digital products (apps, books, music, etc.), spending seven times more than Traditionalists.

While Traditionalists represent the largest segment by number, they account for only a small share of the data revenue opportunity. Entertainers and Practicals spend about 50 percent more per month than Traditionalists. Omnivores spend 80 percent more. Since value is distributed unequally, many mobile network operators (MNOs) that fail to adopt a sufficiently granular segmentation driven by data usage will not have optimally priced offerings. Considering their openness to large data plans and relative insensitivity to price, Omnivores may very well represent the biggest value potential for MNOs.

Segment-driven products, pricing, and up-selling

Given the imbalance in data usage and value among smartphone users, MNOs would be well advised to go beyond the traditional “SMS-voicedata” services portfolio and think much more specifically about how to develop offerings that speak directly and powerfully to members in a specific user segment. Some of the most successful strategies have come from operators who have restructured their mobile portfolios to up-sell on data and services variables on top of a foundation built on the willingness of various segments to pay (Exhibit 3). Targeting Entertainers and Practicals, for instance, operators might put forward speed, special phone features, an apps budget, and multi-SIM services. For Traditionalists – for whom price and voice are essential – operators should focus, for example, on targeting them with lowerend phones and service bundles with limited data.

Based on McKinsey’s research, numerous elements beyond price and usage allowances can flow into more segmented offers with differential appeal: tiered data/speed ceilings, OTT access, multi-device sharing, content and apps, smartphone subsidization level, and tiered customer experience. Breaking down the elements of mobile data and being mindful of segment preferences and sensitivities, MNOs can look to a few categories to increase value within those segments with the biggest appetites for data.

Handset pricing. Even though the price of handsets is the single most important decision factor for all user segments, its relative importance is 33 percent higher for Traditionalists than for Omnivores. With careful construction of different subsidy and service level combinations, carriers could target each group to win share or improve margins. This would also provide an advantage on the cost side, since the advent of smartphones (over 60 percent penetration in major European countries and rising) has put strong pressure on operator’s gross margins since acquisition and retention costs have soared in recent years.

Multi-device bundling. Sharing a pool of data between multiple devices could hold value for some users. Omnivores and Entertainers show the highest interest – 30 and 26 percent respectively – and Omnivores are 54 percent more likely to consider multi-device data bundling as part of their next service plan. As tablets continue to proliferate, MNOs can expect the addressable pool of multidevice owners to increase.

Speed. The Omnivores, who consume an extreme amount of both data and voice, may represent only 10 percent of all mobile users, but over one-third of them say they are willing to pay for faster data on their mobile devices. The Entertainers and Practicals represent 20 percent of mobile users, and between a quarter and a third of them express willingness to pay for faster data. Even a few low-data Traditionalists might be tempted by a wellpositioned premium up-sell offer, since 39 percent indicate they are willing to pay for faster data.

Content. Up-selling mobile content is another data variable that could enhance basic service. Whether sports, music, premium video, unlimited access to certain portals (e.g., social networks, VoD sites), or other enhanced content or apps, data-hungry users highly value access to the right content. Interest among Omnivores lies at 29 percent and 25 percent among Entertainers. Carriers could strike creative partnerships to deliver exclusive content to their subscribers, maintain a separate (perhaps even unlimited) usage pool for partner data services, or devise other creative offers.

Evolving the digital channel to reach the data-hungry segments

Getting the segment-based offer right is just one part of the value creation equation. Operators must also ensure these right-priced, segment-specific offerings get to the subscribers who value them most. As each segment has its own channel preferences, MNOs will fall short by assuming that channel type doesn’t matter when it comes to marketing. The touch points throughout the entire customer decision journey need to be rethought in consideration of the different ways that customers choose to engage in the purchase process.

McKinsey’s study shows that online research is the most important factor for all user segments in discovering a mobile phone service. Mobile products occupy the space between products that have gone almost completely digital in terms of research and sales (e.g., computers) and those that are still solidly “in-store” products (e.g., groceries). Nearly half of the customers who recently purchased a mobile product – a device or plan – reported going online to find what they wanted, and nearly as many made their actual purchases online. As digital gains greater sales importance, MNOs need to dedicate significant senior management time and attention to the online channel.

The channel focus must also be aligned to segment differences. One example: social network influence is more than three times greater for Omnivores than for Traditionalists. This factor could drive major changes in marketing allocation depending on the specific user focus. Prior brand experience counts less among Omnivores; they are more willing to try new and innovative products. This insight could be part of an offer design with messages tailored to that segment. The overall channel strategy needs to be developed with a fuller understanding of the role each channel plays, not just as a function of user segment but relative to where a consumer happens to be on the customer decision journey.

Mobile data consumption is on a steep upward trajectory. For many smartphone owners, data has indeed become the primary reason that they use mobile devices. For a large and persistent segment, however, data is a “nice to have” factor, but is far from being the most important aspect of the mobile experience. Telcos able to first identify their customers as members of a few distinct user segments – based on real preferences and patterns and not on assumptions – and then cater to their specific needs based on tailored offerings – as opposed to aiming for the average with a “one-size-fits-all” product – will have the best chance at revitalizing business success in this new era of mobile communications.