Number crunching at distributors and dealers went long into the night on the eve of the launch of O2’s ongoing commissions, which went live on Wednesday last week (1 October).
Distributors had to clear their diaries on the back of the news at the end of September. Finance, marketing and sales were building the new models, trying to guess what rivals were doing and assessing the multitude of risks. And just when it appeared that all bases were covered, a new potential threat emerged.
With the possible exception of the cashback crisis last year, the move to ongoing commission is the biggest change in how dealers and distributors run their businesses, and more specifically, how they will be paid. The new payment scheme means virtually no more up-front cash, instead a revenue share system where payments are spread over the lifetime of the contract and based on how much the end user spends.
O2 has revealed its terms, and Orange plans to launch its own scheme from January. So, with dealers and distributors digesting the new terms, what’s the verdict?
Distributors plan commercials
One distributor has been on the phone to dealers all week: ‘It’s quite a straightforward split. Dealers bringing in customers spending over £35 per month think it’s great. And the ones not delivering quality are not happy.’
Another distributor adds: ‘We don’t want to disillusion our dealer base, but we’ve had to tell them: “What do you expect? The networks won’t keep giving you more and more money without seeing a return”.’
‘You have to make sure your customers are hitting £40 per month or you’re screwed. This will kill some small independents.’
O2 has been planning its move for over one year and has been in discussions with distributors to get the format right before getting under the bonnet to adapt the systems, processes and billing for the new scheme.
O2’s business sales director, Ben Dowd, tells Mobile: ‘We want to drive the right behaviour from our partners and a key part of our strategy is to push for better-value customers.’
Distributors and dealers have complained to networks that ‘their behaviour’ is simply responsive to how they are paid. So, if there was a high level of customers downgrading their tariffs after three months, that was simply because all the incentive was piled into signing someone up to the network. If there was high churn, that was a result of more commission being paid for a new connection compared with an upgrade. If they weren’t pushing data services and encouraging customers to use their phone more, it was because there was no commission incentive to do that.
This has all changed. Now the messy business of presenting the first set of commercial terms under the ongoing method begins. The big question is: how much of the up-front commission does the distributor pass on to the dealer?
Avenir presents pricebook
Avenir was among the first to send its pricebook to the dealer community last week, with the additional piece of news that it will only be signing people up to O2 on 24-month deals.
The biggest concern for dealers and distributors is the impact on cashflow from the outlay at the point of sale, which would in effect leave the retailer at a loss until around 12 months into the customer’s contract.
O2 has offered a 14-month cash advance to start things off, with a reconciliation of the actual commission after that period based on the customer’s spend. After that, the dealer or distributor is on a rolling monthly revenue share.
Avenir reveals on its published memo that it will offer dealers 35% of the customer’s spend. It also says it will advance all the 24-month commission up-front, and switch to the rolling 35% once the first two years have elapsed.
O2 is believed to be paying distributors 48% of ARPU for the first 14 months, after which the commission changes to ongoing. The operator has factored in the implications of customers spending more or less than £40. They will be either compensated or clawed back through an automated payment mechanism.
That system will have to be robust or risk the anger of dealers and distributors.
The new model also makes it much more difficult for dealers to switch between distributors, because their commissions are ongoing throughout the contracts. O2 must approve any changes of distributors by dealers.
Most dealers are worried about the impact the new commission structure will have on their cashflow. They will no longer receive the commission payment up-front, so some dealers won’t be able to find the money to subsidise handsets.
Dowd says that O2 will be paying dealers some commission up-front, but the fear is that it will not be enough to subsidise handsets. Some dealers warn they will have to start increasing the retail price on high-end handsets, while others say they will be outgunned by operators’ own stores.
Despite O2’s claims that it has been working on the scheme for over a year and has been in open dialogue with partners, one of the biggest criticisms from the dealer community on the changing commission structure has been the lack of communication from the network.
Gokhan Yilmaz, a dealer from Hexham, says: ‘The networks should give dealers at least two to three months’ notice to get their cashflow prepared. In the long run this could be good, but the way they brought it to the market is wrong.’
The new structure could also put strain on the relationship between dealers and distributors. Dealers say there is a huge lack of transparency in the commission structure. They don’t see the customers’ bills, so they have to completely rely on the distributors to tell them the ARPU – and what their share of it – is.
Dealers split over impact on churn
Some dealers believe O2’s move to ongoing commission may end up hurting the network. If dealers are unable to offer subsidised handsets with deals on the network, customers will go for the competing operators’ deals.
‘If O2 costs more to customers up-front, they’re at a disadvantage. From our point of view it will be unlikely that we will be selling many O2 connections. It’s all customer driven,’ one b2b dealer says.
Most agree that the playing field will be evened out, as the ‘back-bedroom dealers’ will not be able to offer ridiculously unrealistic deals and cashback. O2 believes it is reflecting its commercials for indirect with its retention targets, and also improving the conditions for well-run dealers.
It expects churn to be cut as the commission will be the same for upgrades and new customers. Until now some dealers have been disconnecting and reconnecting customers rather then doing a straight upgrade because the amount of commission networks pay for new connections is so much higher than what it is for upgrades.
And the best dealers are likely to emerge better off with the new model because they know how to sign on high-spending customers. But the changes mean that dealers will have to adapt their businesses to the new model. ‘Cashback will go out of the window, which is a good thing. We will probably have to increase the price on high-end handsets and charging for services that we used to do for free,’ Yilmaz says.
‘Dealers are very resilient,’ he adds.