Wednesday 23 June 2010

Incremental vs. Absolute Sales - giffgaff mobile

In recent weeks I’ve noticed an increasing number of advertisements for a mobile operator called giffgaff.

They are being marketed as being a more ‘community’ based company with support coming in the shape of on-line member forums rather than call centres. In return they are offering quite competitive rates.

On further examination the company is owned (but independent from) O2 so is to some extent an aim by O2 to increase market share by appearing to be a new challenger to the existing brands rather than a brand extension.

In the saturated mobile phone market, a new customer for giffgaff will be coming from either O2 itself or one of their few other competitors. As giffgaff uses the O2 network the people most likely to switch over will be current O2 customers (of which I am one), not least because O2 customers will be able to use O2 locked handsets on giffgaff.

From an analytical perspective the key is the overall incremental profit made between O2 and giffgaff combined, the numbers below are purely speculative but give an indication of the kinds of things that need to be thought of when acquiring sales.

The incremental profit depends on the proportion of O2 customers being cannibalised and the profit giffgaff make from a customer compared to how much O2 were making from the same customer.

In the calculations below I’ve taken a very basic £5 a month lower profit as this is the drop in price for some of the equivalent tariffs. The figures are purely for illustration only showing a potential scenario:

Example Figures for use in calculating incremental impact:

Proportion of giffgaff customers that are from transferring from O2 – 30%

Average monthly profit from a giffgaff customer - £8.75

Average monthly profit from a customer on O2 prior to moving to giffgaff- £13.75

Average incremental monthly profit – £4.63 (70% of base providing £8.75 and 30% costing £5 a month)

In the example above the level of incremental profit is just over half of the figure when cannibalisation is not taken into account.

There are lots of other factors to throw into the mix such as Advertising and Operational costs and how giffgaff impacts on retention (better a move to giffgaff than T-Mobile), but the figures above show how if you concern yourself with absolute rather than incremental sales, you could end up spending a lot of money for little incremental gain.

Dan Barnett
Director of Analytics


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