Valuing Wi-Fi When There is No Fee for Usage

 

In my previous blog post, I outlined a high-level payback analysis for a small metro Wi-Fi project. In the analysis, I assigned $25 as the “Value Per User.” In this post, I’ll spell out how a free service can generate this value. 

“Comes With” vs. “Goes With”

Pie picture

But first, a story.

At a New Jersey diner, I ordered a slice of pie. The waitress said “you know it goes with vanilla ice cream.” I said, “Great!” She brought it out and they were delicious together.

When the bill came, I noticed the scoop of ice cream was counted as a separate line item, adding $4 to the charge. I asked the waitress why, since the ice cream came with the pie.

She corrected me. “No, it goes with the pie, not comes with it.”

Customer Valuation

Whether Wi-Fi “goes with” broadband or “comes with” broadband is a sales tactic question, but most service provider sales teams are not as successful upselling as my Jersey waitress. So, Wi-Fi most often “comes with” broadband. There are several reasons for this:

  1. It results in much higher adoption;
  2. It allows for off-loading from stressed macro cell networks;
  3. Lower priority services are placed on “best-effort” networks;
  4. Value is still captured even when directed charges are not.

Service providers have several options to measure this last point:

Option A: Acquisition costs. Calculate the annual investments in marketing and acquisition and divide that number by the number of completed sales. Here’s an example:

Item Annual
Acquisition Marketing $100,000,000
Installation +$150,000,000
Total Acquisition Investment $250,000,000
Completed Sales 500,000
Customer Value A(Acquisition Costs per Sale) $500

Unfortunately, sales and marketing are never that simple. If companies could add customers at will, and for a fixed cost, they would. However, customers are worth far more than their (saved) acquisition costs.

Option B: Transaction value. Companies are bought and sold on multiples of cash flow, yielding a cost per subscriber.

Item Annual
Time Warner Cable Sale Price $78,700,000,000
Customer Relationships ÷ 15,500,000
Customer Value B (Transaction Value) $5,077

This is an impressive figure. However, most companies cannot operate with their liquidation value in mind. Rather, they must behave as going concerns.

If acquisition costs are “too cold,” and transaction valuation is “too hot,” what is the “just right,” Goldilocks zone?

Option C: Subscriber life. This defines how much an individual subscriber is worth during their customer lifetime, or lifetime value (LTV), and is the ideal solution for measuring value. (Some of these numbers are drawn from articles and blog posts on the Web – click on them for more background.)

Item Annual
Broadband ARPU $43.05
Broadband Margin x 85%[1]
Median Subscriber Life (at 2% Churn) x 36 months
Customer Value C (Subscriber LTV) $1,317

Value Creation

Our customer without access to Wi-Fi is worth $1,317, but how much is a customer with Wi-Fi access worth? Service providers have records of the behavior of Wi-Fi users. These records compare users’ churn with non-users.

Few operators have made their numbers public, but the figures below are conservative estimates:

Item Annual
Customer Value C (LTV without Wi-Fi) $1,317
Churn Improvement from Wi-Fi, among Wi-Fi users x 19%[2]
LTV Lift from Wi-Fi Use $250

Given this, it’s estimated that each Wi-Fi user added generates $250 in broadband lift!

The final step in this exercise is to allocate the LTV lift to access points. Today’s data-obsessed, wireless network operators know their customers’ behaviors. These mobility “habits” are, on a macro level, highly predictable. The average network user routinely visits just a handful of locations – below, we’ll assume 10:

Item Annual
LTV Lift from Wi-Fi Use $250
Access Points Visited per Customer ÷ 10
Value per User (per AP) $25

There you have it – the value of retention lift from a single Wi-Fi user on a single access point. That $25 becomes fungible “currency” to apply toward projects:

If a Project Captures: Wi-Fi Spend Cap:
10 Unique Users <$250
40 Unique Users < $1,000
100 Unique Users < $2,500
1,000 Unique Users < $25,000

 

If you liked this:

Steps to Measure Wi-Fi Network ROI

Finding Greener Pastures for Wi-Fi Network Expansion

Wi-Fi’s Not Dead (Yet), But Operators Still Need to Prepare for Other Options

Steps to Measure Wi-Fi Network ROI

[1] Reduced from the Huffington Post analysis – (97%) which did not reflect staffing and other shared expenses.

[2] Reduced from Shaw discloser of 25%.

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