Competitive parity vs status quo pricing

8B17A049

Teaching Note

TELUS: THE PUBLIC MOBILE BRAND ACQUISITION DECISION

Professor Michael Taylor, Brooke Cooper, and Sarah Dickson wrote this teaching note as an aid to instructors in the classroom use of the case TELUS: The Public Mobile Brand Acquisition Decision, No. 9B17A049. This teaching note should not be used in any way that would prejudice the future use of the case.

Copyright © 2017, Richard Ivey School of Business Foundation Version: 2017-09-18

SYNOPSIS At the end of 2013, TELUS Communications (TELUS) acquired the small wireless telecommunications carrier Public Mobile Holdings Inc. (Public), which operated in the lower, price-sensitive tier of the market through 400 retail stores in Toronto and Montreal. TELUS had previously not competed in the lower tier of the market, which had a history of low revenues per customer and low customer retention. David MacLean, director of Mobility Marketing at TELUS, faced the decision of what to do with this newly acquired firm. He was considering the market positioning options, brand portfolio implications, and financial impact of his decision. MacLean’s options included migrating Public’s customers to one of the company’s existing brands, continuing to operate the firm as an independent brand, and repositioning the brand to improve profitability. At the time of acquisition, Public had just finished 2013 with a loss of CA$55 million.1 The case provides a detailed description of TELUS’s competitive environment at the time it purchased the small brand Public. TELUS is one of the “Big Three” telecommunications companies in the Canadian mobile carrier market; the other two are Bell Canada Enterprises (Bell) and Rogers Communications Inc. (Rogers). The case includes financial performance data for all three companies, as well as a market map of how each competes within the three price/service tiers of the market. It is a complex market, and the core offering of each of the major competitors is relatively undifferentiated. The case describes some of the market complexity to give students the opportunity to explore how a firm can differentiate in a market with little product differentiation. The case examines the mobile phone business and the elements that drive profitability for mobile phone carriers, including average revenue per user (ARPU), churn rate, and customer lifetime value. TELUS serves several market segments with a portfolio of brands. The case specifically examines the company’s purchase of a small, independent, money-losing, low price-point competing carrier and the resulting decision that the company faces for integrating the new brand into its portfolio of offerings without diluting the company’s profitability.

1 All currency amounts are in Canadian dollars unless otherwise specified.

This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization.

Page 2 8B17A049 LEARNING OBJECTIVES This case provides students with the opportunity to complete the following objectives: • Analyze the strategic options for integrating an acquired brand, within a broader strategic positioning

and profitability framework. • Conduct a systematic value map and evaluation of the acquired firm’s competitive advantage, relative

to different segment needs/priorities, and relative to the advantage (or parity) with competitors. • Evaluate a multi-tier, multi-brand portfolio in a complex competitive environment. • Analyze and understand a capital-intensive, hyper-competitive subscription business. • Evaluate differentiated brand positioning in a market with few tangible points of differentiation. POSITION IN COURSE This case is suitable for both undergraduate and MBA programs, in a core marketing course. It also fits well in a competitive strategy course and a brand management course. It provides a good opportunity to teach complex decision-making, positioning, market dynamics, and competitive strategy. RELEVANT READINGS • David A. Aaker and Erich Joachimsthaler, “The Brand Relationship Spectrum,” California

Management Review 42, 4 (2000): 8–23. • David A. Aker, Building Strong Brands (New York, NY: Free Press, 1995). • Frederik D. Wiersema and Michael Treacy, “Customer Intimacy and Other Value Disciplines,” Harvard

Business Review (January–February 1993). Available from Ivey Publishing, product no. 93107. • Neil T. Bendle and Charan K. Bagga, “The Confusion About CLV in Case-Based Teaching

Material,” Marketing Education Review 27, no. 1 (27–38). ASSIGNMENT QUESTION This case allows the instructor to use a general assignment question, such as the one detailed below. Alternatively, the instructor can select questions from the teaching plan, in the section that follows the general assignment question, to provide more specific assignment questions. General assignment question: David MacLean, the director of Mobility Marketing at TELUS, is considering several options to integrate the acquired brand Public. What is your recommendation for MacLean? How can MacLean use this opportunity to strengthen TELUS’s market position and profitability in the competitive wireless telecommunications business?

Page 3 8B17A049

TOPIC

Introduction, Decision Criteria, and Constraints Opening remarks 1. What are the three alternatives available to TELUS for the newly acquired firm? 2. What should be MacLean’s overriding goals when considering the Public decision? 3. What issues should MacLean consider to make his decision about the Public brand? 4. What are the constraints that MacLean must work within?

Brainstorming 5. What alternative should TELUS select? 6. What are the merits of one brand versus a portfolio of independent brands?

TELUS 7. How do companies maximize profits in a high-fixed-cost, service-subscription

business like the wireless carrier business? 8. What is your assessment of TELUS’s performance—financially and in the market?

Differentiation and Competitive Advantage 9. Within the three-tier market structure, how does a firm such as TELUS create a

sustainable competitive advantage? 10. How are wireless competitors differentiated in the same market? What are the

points of differentiation in each tier of the market? 11. What points of differentiation are opposing brands attempting to compete on within

each tier?

Wireless Consumers 12. The case discusses three tiers of customers in the market. What is the main

difference between these three high-level segments? 13. What metrics and criteria should be used to determine which segments are most

attractive (e.g., most lucrative or most strategically important)? 14. Which tier is most attractive? 15. What buying criteria do consumers in various segments use to select a wireless

carrier? 16. Why does everyone not simply focus on the top tier, the most lucrative customers? Price-Sensitive Wireless Consumers 17. Where is Public positioned in this three-tier market? 18. What are the main buying criteria of each of the four price-sensitive segments? 19. How attractive is each of the four price-sensitive segments?

Public Mobile 20. What did TELUS get for its investment in Public? 21. What is your assessment of Public’s performance? 22. Why did 222,000 customers choose Public as their service provider? What does this

mean for TELUS’s decision? 23. What is your assessment of the strength of the Public brand?

Evaluation of Alternatives 24. What is your assessment of the three alternatives? What Happened

Page 4 8B17A049 ANALYSIS Introduction, Decision Criteria, and Constraints Opening Remarks We are all familiar with mobile phones from a user’s point of view; however, the case provides a view of the wireless business from the following perspectives: • The carrier • Profitability • A multi-brand portfolio management TELUS is one of the Big Three wireless service providers in Canada, and it has a clear overarching goal of sustained profitable growth. 1. What are the three alternatives available to TELUS for the newly acquired firm? • Shut down the Public brand and migrate customers. This alternative assumes that customers will

migrate to one of the other mid-market TELUS brands; most likely, Koodo Mobile (Koodo). Then, merge operations and re-banner the retail locations under the new brand.

• Maintain the status quo (i.e., continue to operate the firm as an independent brand). • Reposition Public for profitability. 2. What should be MacLean’s overriding goals when considering the Public decision? MacLean’s goals should include the following objectives: • Choose on an alternative that will have a positive effect on TELUS (market position and financial

impact). • Strengthen the firm’s market position to drive profitable growth as follows:

– Provide a competitive advantage for a target segment. – Leverage TELUS’s competitive advantage to create high likelihood to recommend (L2R)2 ratings.

• Have a positive financial impact on the company as follows: – Have a positive impact overall on corporate performance, including earnings before interest, tax,

depreciation, and amortization (EBITDA), ARPU, and churn rate. 3. What issues should MacLean consider to make his decision about the Public brand? For the analysis of this question, the instructor can prepare a keyword list of considerations and decision criteria on the board. MacLean should consider the following potential issues: • The decision’s overall benefit to corporate performance (EBITDA, ARPU, churn rate)

2 The Likelihood to Recommend rate is measured by dividing the number of people who respond “Probably” or “Definitely” when asked if they would recommend a service by the total number of survey respondents.

Page 5 8B17A049 • The role the decision plays in the portfolio (e.g., how will it help the firm acquire a new customer

segment and how will it help build a funnel of customers that can be migrated from prepaid to postpaid)

• Whether the plan instils shareholder confidence • Upholding L2R and corporate values • Feasibility and ongoing operating structure • The effect of his decision on existing customers and employees • Adherence to federal government acquisition requirements • Minimizing undue implementation challenges • Choosing an alternative with a high likelihood of success 4. What are the constraints that MacLean must work within? MacLean must work within the following constraints: • Adhere to federal government acquisition requirements (e.g., TELUS must maintain a $19 plan until

December 2014). • All customers must migrate to TELUS’s High Speed Packet Access network. Brainstorming We often find it useful to have a short brainstorming session early in the case discussion to allow opposing ideas to be presented and many issues and factors to be identified. This is done before we structure the analysis and apply some of the learning concepts of the case. This brainstorming section is intended to surface a lot of information, but not necessarily reach any conclusions. 5. What alternative should TELUS select? There is a detailed response to this question in the latter sections of this TN. At this point in the discussion, it is important to find supporters of each of the three alternatives, and ask them why this is the optimal approach, or why other alternatives are not optimal. 6. What are the merits of one brand versus a portfolio of independent brands? This is an opportunity for instructors to introduce the spectrum of brand strategy alternatives, ranging from a single unified brand to a brand portfolio strategy. The instructor can prepare a keyword list of considerations and decision criteria on the board. Draw a sample brand spectrum on the board, such as the one shown in Exhibit TN-1, or you can also refer to the board plan (see Exhibit TN-15). The brainstorming discussion should raise the following topics, among others: • Brand equity (awareness, preference, image) • Cost of marketing separate brands • Positioning and target segment fit (resonance)

Page 6 8B17A049 • Diversity of offerings within the company’s portfolio • Diversity of distribution and service, and the cost to deliver customer value TELUS 7. How do companies maximize profits in a high-fixed-cost, service-subscription business like

the wireless carrier business? A series of major factors contribute to financial success in this high-fixed-cost business, which relies almost entirely on subscription revenue. The main contributing factors are listed below: • Revenue maximization is the key driver of success in this very high-fixed-cost business. The

performance indicators are calculated as ARPU × number of users. • There will always be a need to control the operating expenses and capital expenditures of the network

(which is not within the scope of this case decision). • The variable cost to serve each customer is very low. Not all customers are the same, which ignores

network utilization rates and other more complicated technology issues related to serving different types of client usage.

• Success is driven by the ability to reach the following goals: – Maximize revenue, which consists of growth in the number of customers and ARPU. Growth

could be generated from data consumption beyond the consumer plan, price increases, and/or the customer’s rate plan selection.

– Minimize cost of acquisition (e.g., sales and marketing costs such as device offers, bundling offers, and rate plan discounts).

– Minimize churn, which means managing the cost of retention. – Achieve operational efficiency. For example, improve market access to maximize value to the

customer, and lower the cost to operate in that location. A key driver in this industry is revenue maximization (as noted in the first item above). Over 7.8 million subscribers contribute an average of $61 each (see case Exhibit 5). The total number of customers in the market is 28 million users (as mentioned in the case). The market extends from premium to price- sensitive consumers. To understand how to capture 7.8 million customers across a price spectrum of segments, we need to consider demand curve economics. Demand Curve Economics Demand curve economics, as shown in Exhibit TN-2, and the company’s goals to maximize total revenue raise the following implications: • At each point in the market, there are some customers who are willing to pay a given rate for service. • The network has a finite amount of capacity. • The goal is to maximize revenue by attracting high ARPU rates. • Ideally, to maximize revenue, the capacity of the network should be filled solely with Segment #1

(premium-tier) consumers. However, this is the primary target for all competitors. • The network has capacity for more than solely Segment #1 users. • The marginal cost to serve one more customer is very low.

Page 7 8B17A049 • Because there is excess network capacity beyond Segment #1, Segment #2 supplements the revenue;

because there is excess network capacity beyond Segment #2, Segment #3 supplements the revenue; and so on.

• Because the network has a finite amount of capacity (as mentioned in the second item above), the firm will never want to displace a Segment #4 customer with a Segment #6 customer.

• The firm needs multiple price levels of products to fit each segment. • Multiple price-point offerings alone are insufficient to attract customers in each segment. Beyond

price level, multiple market positions each require a target segment, a value proposition, a brand position, and offering-packages with characteristics that provide a competitive advantage to attract different segments.

• Price and product alone are insufficient. In this highly competitive field, with very little tangible difference between competitors’ products, it is important to have unique positioning and consumer brand messaging.

8. What is your assessment of TELUS’s performance—financially and in the market? TELUS seems to be a strong financial performer, based on the following factors: • Its EBITDA is 45.8 per cent of revenue, only slightly behind industry leader Rogers, and ahead of Bell. • It has become one of the Big Three and leveraged its first mover advantage to generate 28 per cent

share of the wireless market in Canada, slightly behind Rogers, which has 34 per cent. • Its blended ARPU is $61, which is higher than either Bell or Rogers. • Its cost of acquisition is lower than direct competitor Bell (Rogers’s cost of acquisition is not known). • Its blended churn rate is 1.41 per cent, which is the lowest of all three main competitors. TELUS seems to be doing well in the market, based on the following factors: • The company’s brands in the premium and mid-market tiers (TELUS, Koodo, and PC Mobile) have

the industry’s top L2R ratings, a key driver in low churn rate and customer retention. • The company has created a clear market position for each of its brands, which seems to be resonating

with each brand’s respective target in each market tier. • The TELUS brand has a clear differentiated market position of high customer service. Its strong L2R

rating, at 69 per cent, is the highest among premium-tier competitors. In addition, while complaints to the regulator across the industry rose by 26 per cent, complaints about TELUS decreased by 27 per cent in 2013. With an industry-leading churn rate of 1.03 per cent in postpaid subscribers, it appears that real service performance and perceived market position as a superior service provider are aligned.

• The Koodo and PC Mobile brands have the highest L2R rating in the industry. Each mid-market brand has a strong brand image—independent of TELUS. Koodo has a set of volunteer brand ambassadors who propagate the brand’s strength. PC Mobile has a brand association with one of the strongest private labels in Canada (President’s Choice).

• Sustainable superior customer service is difficult to achieve, and usually can occur only when customer service is a core plank of the organization’s culture. It is even more difficult to achieve in large, widely distributed, and decentralized organizations that have multiple customer touch points (e.g., retail, online, and telecentre). It seems that TELUS has had some success in this area. If this is a core part of its culture, it can be a sustained competitive advantage because it is hard to duplicate.

Page 8 8B17A049 DIFFERENTIATION AND COMPETITIVE ADVANTAGE 9. Within the three-tier market structure, how does a firm like TELUS create a sustainable

competitive advantage? To evaluate competitive advantage, it is important to consider direct competitors in the same target market (e.g., TELUS versus Bell or Rogers; or Koodo versus Fido Solutions or Virgin Mobile). Depending on the value-oriented segments, differentiation can be achieved through service (e.g., customer service or channel outlets), offerings (e.g., rate plans and features such as long distance and roaming), phones, price, network, and company values (e.g., community involvement, corporate social responsibility initiatives, and sustainability). Companies can also create barriers, which can either make it challenging for new entrants to enter the industry or make customers reconsider their willingness to leave. Competitive barriers include the high capital cost of entry in this industry, among other considerations (e.g., cost of the network, spectrum availability, type of spectrum, and the ability to provide multiple product offerings such as Internet, television, home phone, and wireless). Retaining customers and enticing them to stay may include various methods, including loyalty offers, bundling discounts, brand stickiness, contract structure (e.g., requiring customers to pay out the outstanding balance on their device if they leave), and considerable effort to change suppliers (e.g., having to move multiple subscribers from one account). 10. How are wireless competitors differentiated in the same market? What are the points of

differentiation in each tier of the market? Classical thinking indicates that a firm can choose to create a competitive advantage under one of three leadership categories: product (or technology) leadership, cost (or operational excellence) leadership, or customer intimacy (or the best total solution).3 The instructor should draw a three-dimensional axis on the board like the one shown in Exhibit TN-3 and ask students how the Big Three players differentiate and compete under the three main categories. The three-axis model can be applied to assess the level of differentiation and competition among the Big Three companies in the Canadian wireless carrier business (see Exhibit TN-4). The primary competitive area is the struggle for customer relationships. To compete in this area, the three companies use a multiple-brands portfolio, unique brand positioning within each tier, customized offering packages to attract specific customer sub-segments in each market tier, and multiple differentiated customer interface/service points (e.g., retail, kiosk, online, call centre, and others). Ultimately, the biggest differentiator for a company in the telecommunications industry is the customer’s perceived level of service, which refers to friendliness and helpfulness through multiple touch points of the organization. This differentiation is difficult to achieve for a company with a variety of support mediums, and it is challenging to replicate across the organization. However, once the firm has won the loyalty of a customer thanks to its level of service, the customer is less likely to leave for a competitor and more likely to use positive word-of-mouth marketing or refer friends.

3 Frederik D. Wiersema and Michael Treacy, “Customer Intimacy and Other Value Disciplines,” Harvard Business Review (January–February 1993). Available from Ivey Publishing, product no. 93107.

Page 9 8B17A049 11. What points of differentiation are opposing brands attempting to compete on within each tier? The case identifies a series of points of differentiation that each of the brands uses to compete in this market. Exhibit TN-5 summarizes the various potential differentiators. Within each tier, each competitor emphasizes a different strength to gain advantage and add value in the market (see Exhibit TN-6). Note to the instructor: These charts can be difficult to reproduce on the board in a classroom. Therefore, a supplemental PowerPoint file is available (product no. 5B17A049) with this teaching note that includes a set of charts from the case as an aid for instructors. Observations of Top-Tier Competitors • Very little differentiation exists; all three companies have competitive parity on most elements. • Although TELUS and Bell share a network—which means that their networks are identical—Bell has

positioned itself as offering superior network coverage. On the other hand, Rogers claims that it offers a seamless international roaming connection (potentially negating Bell’s advantage) for a segment whose customers travel internationally (e.g., business travellers).

• TELUS has identified service as a competitive weakness of its competitors. The company has exploited this fact by adding resources into developing service capability for TELUS’s advantage.

Observations of Mid-Market Tier Competitors • Very little differentiation exists; all three companies have competitive parity on most elements. • Fido Solutions (Rogers) and Virgin Mobile (Bell) both offer loyalty programs that generate discounts,

while Koodo (TELUS) does not. • Koodo (TELUS) has identified service as a competitive weakness of its competitors. The company

has exploited this fact by adding resources into developing service capability for Koodo’s advantage. If it is difficult to duplicate—and if there is a segment that values this feature over loyalty program discounts—service capability can be a sustainable advantage.

Observations of Price-Sensitive Tier Competitors • Very little differentiation exists; all three companies have competitive parity on most elements. • Wind Mobile has managed to create a point of differentiated advantage in its rate plans and customer

interface compared to other discounters, but these advantages are competitive parity to the mid- market competitors.

• TELUS has the ability to deliver superior customer service, which is a potential point of differentiation for Public.

What do the above points tell us? We now know which competitive elements within each tier offer TELUS, Koodo (and PC Mobile), and Public a differentiated advantage. Analyzing the various customer segments can determine which of them values those elements that are strengths for the firm.

Page 10 8B17A049 WIRELESS CONSUMERS 12. The case discusses three tiers of customers in the market. What is the main difference

between these three high-level segments? The case describes the high-level segmentation of the three market tiers, which are graphically depicted in the Market Segmentation diagram (see Exhibit TN-7). The main difference between tiers is price and the value added that each segment is willing to pay for. The prepaid segment discussed in the case is split predominantly between the mid-market and price-sensitive tiers. Segmentation usage profiles (see case Exhibit 7) provide some insight into why a customer within each tier would select or prefer one brand over another. 13. What metrics and criteria should be used to determine which segments are most attractive

(e.g., most lucrative or most strategically important)? The following metrics and criteria should be considered when determining which segments are most attractive: Value Creation • Value proposition:

– Where does the company add value? • Fit:

– How well does a company’s offering fit with the customer’s needs or wants? – What is the impact of a customer’s life stage and how does it relate to the company’s ability to

meet the customer’s needs (e.g., data usage or migrating from postpaid to prepaid). Competitive Environment • Competitive intensity:

– How many competitors are fighting for a share of a segment? – What is the stickiness of customers, or willingness of customers to move to a competitor?

• Competitive advantage: – Where does the company have an advantage and a likelihood to be preferred over the

competition? Value Capture • Market size:

– Where is there a market opportunity that is sizable enough to make the effort worthwhile? • Market growth rate:

– Which segment is growing the fastest, representing future revenue growth? • Customer profitability and value:

– Which customer types are most valuable or profitable? – What is the customer lifetime value and churn rate? In a service subscription business, these two

elements are interlinked.)

Page 11 8B17A049

– What is the cost of acquisition and retaining customers? – What is the cost to serve customers? – What bundling (i.e., upselling) opportunities are available?

At this point, the instructor may choose to give a mini lecture on customer lifetime value, with information from Neil T. Bendle and Charan K. Bagga, “The Confusion About CLV in Case-Based Teaching Material,” Marketing Education Review 27, no. 1 (27–38). 14. Which tier is most attractive? The variable cost to serve a typical customer in each segment does not vary greatly. Therefore, the most profitable customers are those who are least price sensitive—the premium tier. Due to the customers’ life stage, this segment seems to also have the best bundling or upselling opportunity. 15. What buying criteria do consumers in various segments use to select a wireless carrier? The priority of the buying criteria differs by segment and sub-segment. As the case indicates, the following factors are considered when consumers select a carrier: • Type of phone (top-tier phones such as Samsung or iPhone always available from Big Three carriers) • Customer support • Proximity to store • Network coverage, reliability, and speeds • Rate plans • Previous experiences with carriers, which influences decision-making Based on information provided in the case, Exhibit TN-8 outlines the priority of the top three buying criteria for each market tier segment. 16. Why does everyone not simply focus on the top tier, the most lucrative customers? The case provides the following reasons why the sole focus on the top tier is not optimal: • The top tier sees the most intense competition between the Big Three as they fight over the most

lucrative customers. • The overwhelming majority of the Big Three’s revenue comes from postpaid customers, who consist

largely of the top two tiers and account for 83 per cent of the total market. By service provider, postpaid customers account for 86 per cent of Bell’s customers, 85 per cent of Rogers’s customers, and 87 per cent of TELUS’s customers.

• Market growth is flattening, and is expected to be stagnant in three years. Almost no growth will come from this saturated market segment.

• The case indicates that some brand stickiness develops over time. Once consumers become a little less price sensitive, they stick with their existing brand. Therefore, it is important to get these new customers early, in the hope of keeping them for a long time. There are almost no new customers entering the market directly into the premium tier. Any new growth has to come from the mid-market and price-sensitive tiers.

Page 12 8B17A049 PRICE-SENSITIVE WIRELESS CUSTOMERS 17. Where is Public positioned in this three-tier market? Public’s business is focused on the price-sensitive tier segments. The case provides a perceptual map of where each segment is broadly positioned relative to price sensitivity and value added. This allows us to see the differences between the three market tiers and to gain some insight into the price-sensitive tier. There are four potential targets in the price-sensitive tier: life hackers, deal seekers, new immigrants, and frugal by necessity. 18. What are the main buying criteria of each of the four price-sensitive segments? The usage profiles described in the case (see case Exhibit 7) can be used to identify the priorities of each segment. Exhibit TN-9 outlines the profile observations and top priority for buying of each segment. 19. How attractive is each of the four price-sensitive segments? To answer this question, we can use the same evaluation criteria outlined in Exhibit TN-9. Each of the evaluation criteria is listed in Exhibit TN-10. The information in the table can also be depicted on a value curve (see Exhibit TN-11). Observations The four price-sensitive segments have very different profiles. Overall, all four segments have a very low ARPU, so none of these segments are highly attractive. • Life Hackers: Although life hackers purchase lower value-added services overall, they desire

flexibility so they can customize a package to get a lot, but pay a little. This is the largest segment in the price-sensitive tier, and it may want a more expensive device, representing an increased hardware revenue opportunity. These consumers are likely a low cost to serve. No competitors are currently focusing on life hackers, so it may be a good time to take a substantial market share of this segment. The attractiveness of life hackers is moderate–good.

• Deal Seekers: Deal seekers are value shoppers, but they are not the lowest-price buyers. Similar to life hackers, this segment may want a more expensive device, representing an increased hardware revenue opportunity. Their deal negotiating behaviour may make them unattractive from a revenue generating perspective, but they are likely to use self-serve online support, reducing the cost to support them. This segment makes up 28 per cent of the price-sensitive market, and is one of the two main targets of the other discount carriers. The attractiveness level of deal seekers is moderate.

• New Immigrants: New immigrants may be in the price-sensitive segment because this is the easiest way for them to interface with a carrier—through a neighbourhood store. They are the least price- sensitive of the lower tier, and there may be an opportunity to modestly increase the ARPU without losing them. Public’s current retail, locations, and service capabilities are strongly suited to serve this segment. However, this is the smallest of the four price-sensitive segments. The attractiveness level of new immigrants is moderate.

• Frugal by Necessity: Frugal by necessity customers have no option but to be low-price buyers. They also require higher customer service from the most expensive service avenue—retail representatives.

Page 13 8B17A049

The combination of lowest revenue and higher cost to serve may make them less attractive. The attractiveness level of frugal by necessity is low.

PUBLIC MOBILE 20. What did TELUS get for its investment in Public? TELUS achieved the following goals by pursuing its investment in Public: • It gained 222,000 customers, who were typically price-sensitive, aged 30–70, new immigrants or

sponsored children, not very tech-savvy, and needing a great deal of customer support. – A large number of these customers (up to 70 per cent) interrupt their subscription, due to lack of

ability to pay. – Their average subscription life is 13 months—six months or less for 35 per cent of these

customers—resulting in an overall churn rate of over 6 per cent. • It gained between $69 million and $76 million in incremental revenue. Across Public’s five rate

plans, ranging from $19 to over $50, the ARPU is $26 (as noted in the case). Note: The ARPU calculated from the data in provided in case Exhibit 3 is $29.50.

• It inherited an organization that had generated a loss of $55 million in 2013. • It made a commitment to continue to offer the $19 per month plan for one year. • It gained an established brand in the market, in two of Canada’s largest urban markets (Toronto and

Montreal). • It gained 400 retail locations and a retail management network. • It obtained a license to operate in the G band frequency spectrum, which seems of little value, and

will be shut down. • It managed to eliminate a low-cost competitor. • It blocked one of the other Big Three from getting Public. 21. What is your assessment of Public’s performance? The following points can be made about Public’s performance: • In just three years, this start-up company secured a spectrum license, became operational, and grew

rapidly to 400 retail locations. • Public created and implemented a marketing strategy that attracted 222,000 customers. • The company failed to drive enough revenue to become profitable, reporting a loss in 2013 of $55

million. • Public currently targets new immigrants (179,000), deal seekers (359,000), and frugal by necessity

customers (215,000), for a total market size of 753,000. • Some of Public’s customers are in the mid-market price range, not the low-price tier. Approximately

20 per cent of customers have a $45 or $50+ rate plan (see case Exhibit 3). • Of all Public customers (222,000), 80 per cent are in one of the price-sensitive segments (178,000).

This represents a 24 per cent market share of the target segments. • Public does not target life hackers, which represent 538,000 potential customers, or over 40 per cent

of the price-sensitive tier.

Page 14 8B17A049 22. Why did 222,000 customers choose Pubic as their service provider? What does this mean for

TELUS’s decision? The case does not segment Public’s customer base, but it does give information about some of Public’s market strategy, as well as market segmentation. We can conclude that a large part of its customers signed up with Public because of the following three drivers: • Comparison shoppers selected Public as the best solution to fit their needs. The devices are not

differentiated. Many of Public’s customers are very price sensitive, so the low-price rate plans (or rate certainty) are likely the main section criteria. – Driver (competitive advantage) = Low price – Likely segment = Deal seekers, frugal by necessity, sponsored youth

• Local shoppers made purchases at their nearest neighbourhood retailer where they experienced friendly, helpful service. – Driver (competitive advantage) = Local proximity, and good service – Likely segment = Frugal by necessity, new immigrants

• Shoppers referred friends to Public, which are very powerful in the new immigrant community. – Driver (competitive advantage) = Positive customer experience, and word-of-mouth promotion – Likely segment = new immigrants, sponsored youth

23. What is your assessment of the strength of the Public brand? Using the David Aaker model of brand equity,4 we can make a high-level assessment the Pubic brand. • Brand Awareness

– The case does not provide any data on aided or unaided awareness, but we know that Public is likely known only in Toronto and Montreal. The company’s tight financial situation has likely prohibited large-scale advertising; instead it relies on its storefront presence to create awareness. 400 stores in two metropolitan areas have likely created substantial market presence, and some brand awareness.

• Brand Preference/Loyalty – Likelihood to recommend is one measure of brand preference. Pubic has a 70 per cent L2R rating,

which is quite good for a low-cost supplier. Only Wind Mobile has a stronger rating in the price- sensitive tier.

– A high churn rate is often cited as a measure of customer dissatisfaction, but in this case, it seems the high churn rate is an indication of the consumer’s ability to pay, rather than the consumer’s dissatisfaction.

• Brand Perceived Quality – Perceived quality in a service business is usually a combination of product performance (in this

case, cell phone hardware and network performance) and customer experience. We know that the devices sold by Public were lower-tier. The case hints at the G band spectrum having limited capabilities, presumably speed. Overall, the perceived quality is likely consistent with a low-cost, low-value provider. (You get what you pay for.)

• Brand Association/Image (Product Image, Company Image, Personality, and Symbol) – The case does not provide much data on consumer opinions, the impression, or image of the

Public brand, but we do know that it is known as a low-cost alternative to the Big Three cell

4 David A. Aker, Building Strong Brands (New York, NY: Free Press, 1995).

Page 15 8B17A049

phone companies. Likely, some immigrant communities in Toronto and Montreal see Public as both a friendly and a confusing way to get a cell phone and wireless service.

EVALUATION OF ALTERNATIVES 24. What is your assessment of the three alternatives? A detailed evaluation of the three alternatives available to TELUS is provided at the end of this teaching note (see Exhibit TN-12). WHAT HAPPENED By 2017, three years after TELUS acquired Public, the brand had gone through a significant transformation. MacLean and his team had ultimately made the recommendation to refresh Public’s brand and change its value proposition. Despite the executive team’s concern around adding another brand to the wireless portfolio, they bought into the recommendation. In order to create a path to profitability, and to differentiate between TELUS, Koodo, and PC Mobile’s target markets, Public chose to pursue prepaid customers in the life hacker and deal seeker customer segments. While price was an important consideration for these segments, similar to Public’s original customer base, life hackers and deal seekers did not require as many value-adding features from their carrier (see case Exhibit 8). Accordingly, the team chose to provide only subscriber identity module service (or SIM-only service)5 and online-only support, and to close Public’s retail locations, limiting sales to be available only online. The pricing structure was also changed, and designed to provide customers with ultimate choice. Customers were able to choose the length of their plan, along with the type or amount of talk, text, and data they needed, so that customers had to pay for only what they required (see Exhibit TN-13). After much planning and preparation, these changes were implemented in August 2015. Given that the new value proposition was drastically different from the old one, the team chose to “grandfather” the customers who joined Public prior to the brand refresh. These customers, referred to as Pioneer or Legacy customers, were able to keep their original rate plan at the price they were used to paying, while receiving improved coverage from TELUS’ 4G LTE6 nationwide network. Pioneers also had the choice of migrating to an in-market plan, if it better met their needs. An important consideration throughout the brand refresh was ensuring that Public’s brand familiarity was not lost, while also making sure that customers understood that the value proposition had changed. Along those lines, the team chose to maintain the same name, but update Public’s logos, reflecting the new SIM-only service (see Exhibit TN-14). While it had been challenging to make some of these decisions—and there were many times when the correct path was unclear—the team was beginning to reap benefits from the changes. Since the brand refresh, Public was able to increase its customer base, while significantly increasing ARPU and churn. The next challenge for the team would be learning how to increase brand awareness, while efficiently scaling acquisition efforts. The Public team was excited for what was in store.

5 SIM-only service meant that Public no longer sold phones, but rather that customers would need to bring their own device. 6 4G LTE = fourth generation long term evolution

Page 16 8B17A049

EXHIBIT TN-1: BRAND SPECTRUM

Single Unified Brand

(e.g., Starbucks or Boeing)

Endorsed Brands (e.g., General Electric and GE Jet Engines)

Parent Brand and Sub-Brand

(e.g., General Motors and the sub-brand Chevrolet)

A Portfolio of Individual Brands

(e.g., Unilever or Proctor and Gamble)

Source: Prepared by case authors using data from David A. Aaker and Erich Joachimsthaler, “The Brand Relationship Spectrum,” California Management Review 42, 4 (2000): 8–23.

EXHIBIT TN-2: DEMAND CURVE ECONOMICS

Source: Prepared by case authors.

EXHIBIT TN-3: HOW THE BIG THREE PLAYERS DIFFERENTIATE

Source: Prepared by case authors.

Brand Spectrum

Page 17 8B17A049

EXHIBIT TN-4: SOURCES OF DIFFERENTIATED ADVANTAGE

Product Leadership (or Technology

Leadership)

Cost Leadership (or Operational Excellence)

Customer Intimacy (or the Best Total

Solution) Competitive Elements

• The package of voice and data offerings is available for all to see and easily copied by any of the competitors.

• Each player has access to the same devices to sell to consumers.

• Network speed, reliability, and coverage is the primary technology in this industry. The network technology and coverage of each player has some minor regional differences, and some leapfrog advances as new technologies are rolled out, but overall, the networks are very similar.

• Each competitor has different roaming connections and agreements, which means the ability to seamlessly roam without interruption of service is different between competitors.

• We do not have sufficient information in the case to analyze the cost advantage of one competitor over the other.

• EBITDA is not a very granular measure cost advantage, but it may be a reasonable indicator of operational efficiency. On the other hand, this is a high-fixed-cost industry, so EBITDA is likely to vary with network utilization, and is thus not a good indicator of operational efficiency. A review of the financial highlights in case Exhibit 5 indicates that EBITDA margin as a percentage of revenue is fairly consistent across all Big Three competitors – TELUS 45.8% – Bell 43.6% – Rogers 46.8%

• Each of the Big Three have other non-wireless offerings (e.g., television, home phone, and Internet service), and there may be an opportunity for competitors to bundle offerings. Although there are regional differences, all competitors have similar bundling capabilities overall. This is more of a pricing/bundling issue, rather than a true cost advantage.

• Although each of the Big Three compete in each of the market tiers, they have each carved out a unique product/market focus, which creates some differentiation between each of the Big Three. The unique positions include: – Multiple brands

portfolio – Unique brand

positioning within each tier

– Customized rate plan packages to attract specific customer sub-segments in each market tier

– Multiple differentiated customer interface/service points (retail, kiosk, online, call centre, etc.)

Degree of Differentiation Between the Big Three

Low–Medium

Low

Medium–High

Note: EBITDA = earnings before interest, tax, depreciation, and amortization Source: Prepared by case authors.

Page 18 8B17A049

EXHIBIT TN-5: POTENTIAL POINTS OF DIFFERENTIATION

Source: Prepared by the case authors.

EXHIBIT TN-6: POINTS OF DIFFERENTIATION

Page 19 8B17A049

EXHIBIT TN-6 (CONTINUED)

Source: Prepared by the case authors.

Page 20 8B17A049

EXHIBIT TN-7: MARKET SEGMENTATION

Source: Prepared by case authors

EXHIBIT TN-8: CONSUMER BUYING CRITERIA

Source: Prepared by case authors.

Page 21 8B17A049

EXHIBIT TN-9: PROFILE OBSERVATIONS OF EACH SEGMENT

Segment Profile Observations Implied Top Priority Buying Criteria

Life Hackers • Frugal by choice • Heavy phone user • Value customization and

flexibility • Device expert

• Rate plan customization • Value buyer (versus lowest

cost) • Diversified device selection

High Usage Deal Seekers

• Get the most for their money • Very heavy phone user • Multimedia user

• Rate plan customization • Value buyer (versus lowest

cost) • Diversified device selection

New Immigrants • High need for in-person service

• Cost certainty considered important

• Minimal usage

• In-person customer service (native language speaker)

• Referral of a friend • Low (but not lowest) fixed price

Frugal by Necessity • Low price and cost certainty • Customer service • Aspiring for a better phone

• Lowest fixed price • Customer service • Mid-range phone selection

Source: Prepared by case authors.

Page 22 8B17A049

EXHIBIT TN-10 EVALUATION CRITERIA Evaluation Criteria Life Hackers Deal Seekers New Immigrants Frugal by Necessity Value Creation Fit with customer as the top priority buying criteria

Without more flexibility in rate plans and device offering, Public does not meet customer needs. This seems to be easily solved with some support through TELUS.

Without more flexibility in rate plans and device offering, Public does not meet customer needs. This seems to be easily solved with some support through TELUS.

Public is meeting the needs of this segment.

Public is meeting the price and service needs of this segment, but not the mid-range device needs. This seems to be easily solved with some support through TELUS.

Competitive Environment Competitive intensity

Low Moderate Moderate Low

Competitive advantage

Without an improved offering, Public is at competitive parity with other discount competitors. With back-office support from TELUS on selected device availability and rate plan options, it is possible to create a competitive advantage.

Without an improved offering, Public is at competitive parity with other discount competitors. With back-office support from TELUS on selected device availability, it is possible to create a competitive advantage.

Without an improved offering, Public is at competitive parity with other discount competitors. It is likely that native language service capability would provide a competitive advantage.

Without an improved offering, Public is at competitive parity with other discount competitors. With back-office support from TELUS on selected device availability, it is possible to create a competitive advantage.

Value Capture Market size (1.291 million users = 100%)

538,000 (42%) 359,000 (28%) 179,000 (14%) 215,000 (17%)

Market growth rate Moderate Moderate Moderate Low Customer profitability

May require online support only, which

is a much lower operating expense.

May require on- line support

only, which is a much lower operating expense.

Requires expensive retail

stores.

Requires expensive retail stores.

Customer profitability (ranking taken from case Exhibit 8)

#2 #3 #1 #4 (lowest in the price- sensitive segment)

Overall attractiveness

Moderate–Good Moderate Moderate Low

Source: Prepared by case authors.

Page 23 8B17A049

EXHIBIT TN-11: PRICE-SENSITIVE CUSTOMER PROFILES AND FIT WITH PUBLIC MOBILE

Source: Prepared by case authors.

Page 24 8B17A049

EXHIBIT TN-12: EVALUATION OF ALTERNATIVES

SHUT DOWN Shut down the brand, migrate customers to one of the other TELUS

brands, and merge operations

MAINTAIN STAUS QUO Stay the course—make no change

REPOSITION Re-launch and reposition Public Mobile for

profitability Impact on Market Position • Gain 222,000 new Public Mobile customers. • Potentially unlocks any implied customer stickiness to Public Mobile

when customers are migrated, allowing competitors the opportunity to acquire customers.

• Does not increase any positioning in the price-sensitive tier. • Does not create any growth potential, by missing the opportunity to

create a value proposition for any new segments. • Missed an opportunity to target the underserved life hacker segment. • Potentially missed an opportunity to diversify the wireless portfolio

away from the postpaid segment (which is slowing) and tap into the growing prepaid market with an established brand and customer base.

• Public Mobile has 24% market share of its target segments (new immigrants, deal seekers, and frugal by necessity). The positioning has been successful, but growth potential may be limited against three other strong competitors in this tier.

• There is an opportunity to leverage Public Mobile’s brand and position in the market.

• Aggressive promotion to grow market share may cannibalize some mid-market consumers from the company’s other brands.

• Missed opportunity to target underserved life hacker segment.

• There is an opportunity to discontinue lower rate plans (after the required wait period), to improve ARPU, but this may reduce the number of customers and reduce overall revenue; although higher ARPU is important, this is only beneficial if overall total revenue increases in this high fixed- cost business.

• Provides an opportunity to reposition the brand to capture a new piece of the market.

• There is a good opportunity to use TELUS’s superior service core competencies to create a competitive advantage to attract new immigrants at a mid-market price level.

• Presents an option to curate an offering to attract multiple segments; life hackers are a great choice due to segment size and no competition, but additional segments could be attracted for more financial benefit.

• There is some risk because TELUS is not experienced in this space and no other carrier supports life hackers.

• If the market position changes, some current customers may feel alienated.

Financial Impact • As indicated earlier, Public Mobile will increase TELUS’s revenue by

approximately $70 million. • Public’s 2013 $55 million loss should be reduced when the G band

spectrum is shut down. The case does not give any indication of how much the OPEX savings might be. In a simple view, the $70 million revenue should have only brand marketing and selling as a direct expense, after all customers are migrated to the existing brands.

• There will be some one-time costs in new signage, information technology integration, and other onboarding costs (assuming the retail network will continue to operate under one of the two mid- market brands, likely Koodo Mobile).

• The company’s short-term blended ARPU, churn rate, and cost of acquisition/user will take a hit while net additions will improve.

• Long term: positive—migration to other portfolios (higher rate plans) positively affect EBITDA.

• The company invested $229 million, so it is important to ensure that the firm has a high retention rate to receive that value from those customers.

• Short-term and long-term financials would be negatively affected due to Public Mobile’s high churn, low ARPU, and expensive distribution/support structure.

• This option does not improve financial positioning of the brand, and will dilute overall TELUS financials in the long term.

• Short-term and long-term financials would be positively affected, with improvements in the support/distribution structure and an adjustment to the rate plan/device line-up structure (incentivize step-ups).

Page 25 8B17A049

EXHIBIT TN-12 (CONTINUED) Implementation Challenges • Successfully migrating 222,000 customers while minimizing

customer churn to competitors • Retaining customers in segments that the company’s current

positioning is not positioned to attract – Public Mobile’s current customers had the option of selecting

PC Mobile or Koodo Mobile before, but opted to purchase from Public Mobile.

– Neither Koodo Mobile nor PC Mobile is positioned to attract customers in the price-sensitive segment. Creating a new low price offering within either brand could cannibalize the company’s current higher rate plans.

• Knowing the right levers to pull to ensure profitability (e.g., how much you can increase price or what expenses you can eliminate or reduce without customers churning)

• Creating a value proposition that will resonate with the new target market and deliver a competitive advantage. (E.g., will you have phones? Will you have stores? What other types of customer service will you have? What price will your rate plans be? How does this affect your financials?)

• Ensuring that target market transition does not alienate the existing customer base (For example, should they keep their current rate plan, for how long, what level of customer service will they be provided? How will these differences affect new customer behaviour?)

Other Considerations • This alternative maintains focus on the three core TELUS wireless

brands. • It protects TELUS’s long-term ARPU and churn metrics.

• This alternative requires the least effort to implement.

• This may be an efficient way to enter this growing market, with an established brand and customer base.

Likelihood of Success The likelihood of migrating most customers to higher rate plans and retaining most customers is low.

There is a moderate likelihood of some growth in market share with and improved profitability by shutting down G band operating costs. There is a low likelihood of overall ARPU or churn rate improvements. Public Mobile profitability may improve, but it is unclear if it will be profitable.

The challenge will be simultaneously repositioning the brand, attracting a new segment (without alienating existing customers), increasing ARPU, and reducing churn rate. The likelihood of success is medium.

Note: ARPU = average revenue per user; EBITDA = earnings before interest, tax, depreciation, and amortization Source: Prepared by case authors.

Page 26 8B17A049

EXHIBIT TN-13: PUBLIC MOBILE’S REFRESHED RATE PLAN STRUCTURE

Source: Company files.

EXHIBIT TN-14: PUBLIC MOBILE’S LOGO Before the Transformation After the Transformation

Source: Company files.

Page 27 8B17A049

EXHIBIT TN-15: BOARD PLAN

Source: Prepared by case authors.