Why Sprint is targeting prime customers to improve its churn rate
Why Sprint's stock plunged after the earnings announcement (Part 3 of 16)
Sprint’s churn rate continues to increase
The churn rate is an important metric in the telecom industry. A lower churn show customers’ loyalty. However, Sprint’s (S) churn rate continues to be the highest in the industry.
In “ Why Sprint’s churn rate remains the worst in the industry ,” we discussed Sprint’s churn rate. In contrast, AT&T’s (T) churn rate is the best. Verizon (VZ) and T-Mobile’s (TMUS) churn rates are also better than Sprint’s. The main issue with a higher churn rate is that subscribers move out of a network too often. This increases the costs associated with acquiring a new customer for the company.
In the last quarter, Sprint hoped that its churn rate would improve. Management mentioned that its churn levels started to improve in the markets where its network replacement is 70% or more complete. However, the improvement in the churn rate never happened. As the chart below shows, Sprint’s churn rate continued to increase from 1.99% in fiscal 2Q13 to 2.18% in 2Q14.
iPhone 6 could help control Sprint’s churn
Clearly, Sprint’s prediction of an improved churn rate last quarter was wrong. One of the reasons management cited for the increase was the lingering perception in the minds of consumers about its network performance. This was the main reason for the increase in voluntary churn.
However, the involuntary churn also increased. Involuntary churn is the churn created due to Sprint letting its customers leave the network if they can’t pay their bills. These are the sub-prime customers with poor credit history.
Sprint mentioned that the company added too many sub-prime customers this year. This means that its churn rate will go up even more in the next quarter.
Sprint is hopeful that its churn rate will improve by fiscal 4Q14—by March 2014. It’s seeing early signs of people upgrading their devices instead of leaving its network for a competitor once the contract is finished.
Sprint mentioned that 8% of its postpaid base upgraded their devices due to the successful launch of Apple’s (AAPL) iPhone 6 last quarter. Sprint expects this upgrade rate to increase to 12% in the next quarter. It will have an even higher upgrade rate in the fiscal fourth quarter.
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