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The Service Bureau
Could it Be Your Best Choice?
By Len Bittner
Many phone card distributors make a mistake by overlooking the use
of a service bureau for some of their phone card product offerings.
Call it a service bureau, virtual switch, virtual platform, prepaid
services partition, usage-based services or switch condo; it all
means basically the same thing. Instead of investing your own capital
on a switch/platform, you simply outsource this function to a company
that allows you to rent space on their platform. This can give you
the ability to control your product and how many minutes you’re
quoting and delivering to your target destinations, build your own
brand and increase your profit margins at the same time.
One of the major reasons hard card distributors cite for not using
a service bureau is that they don’t really have a good handle
on what their current phone card products are delivering in terms
of actual minutes and call quality. Those who do rate decks for
the popular phone card products have gotten very good at making
their products “appear” to offer more minutes than they
actually do. In fact, the numbers don’t seem to make sense
at first glance: the rate advertised on the card to call a specific
destination is often equal to the cost for buying minutes on the
open wholesale market to that destination—and this is before
the distributor discount or commission is factored into the equation.
If you look a little further at your current product offerings,
you’ll quickly find that you can be competitive by looking
beyond mere minutes and highest discounts per market to offering
a quality product that delivers what you’re advertising on
your posters, or as close as possible.
The Prepaid Death Spiral
For most distributors, the old axiom -- “If you can’t
beat ‘em, join ‘em!” -- is their answer. This
means that distributors often end up reselling and building someone
else’s brand rather than their own. But when you dance with
the devil, you’re in for trouble, as many distributors have
found. Building someone else’s brand isn’t always the
best for your business in the long run. Many distributors selling
someone else’s brand eventually get caught in the classic
squeeze play. Poachers come into their markets selling the popular
brand at a lower discount to your stores and sub-distributors, often
operating on 1% margins or less causing you to lose precious sales.
Payment terms often change, sometimes overnight, and that can put
you into a cash flow crunch. Minutes delivered to the cardholder,
are often decreased with no advance notice, causing sales to drop
off dramatically. In extreme cases, this can lead to the dreaded
returned cards phenomena. These problems have put many distributors
out of business. But there’s a growing contingent of savvy
distributors who have taken the high road and are building their
own brand. Some have become wildly successful in their respective
markets. Plus, they’re the ones who are in control of their
own destiny.
Squashed Under the Platform
Numerous growth-minded distributors have also taken the path to
owning and operating their own switching platform, many with less
than positive outcomes. Many distributors went out of business trying.
You know who they are, so I won’t embarrass them by listing
them here. They quickly found that running a platform is not such
an easy thing to do. And at the end of the day, even if they are
successful, their platform is costing them at least a penny per
minute to operate, plus they have a whole new set of headaches to
worry about. They also found that it costs twice as much as they
originally anticipated and that it took at least twice as long as
was planned to deploy, and that’s if they were lucky. For
many, it was more like a tenfold difference. Money and time spent
building and running their own platform might have been better spent
on building their brand—advertising and promoting their brand
in their markets.
Carrier-ed Away
Finding and managing carriers also turned out to be a nightmare.
At first glance, a distributor looks at the rates advertised on
a competitor’s card and automatically assumes that there must
exist, somewhere, a carrier who will sell them rates, with good
quality, at 30% to 40% below the rates on their competitor’s
cards. They often end up chasing their tail, wasting precious time
and money, trying every carrier deal that comes their way in the
hopes of finding the magic supplier who has rates that are well
below the going market rates but with exceptional quality. What
they soon learn is there is no such thing as a magic carrier and
“You get what you pay for.” Cheap rates equate to poor
quality, period.
Service Bureau Takes Away the Headache
Going with an experienced and reliable service bureau allows you
to hand off all of these problems to someone else who is equipped
to handle them. This leaves you time and money to focus on building
your brand.
‘But, the numbers don’t make sense,’ you say.
At first glance, I have to agree. How do you buy minutes to a particular
destination at say 5 cents and then turn around and sell them at
the same 5 cents less a 30% discount for 3.5 cents? What’s
really happening is that you’re going to be selling at an
effective rate that is more like seven to nine cents. More on how
to do that later.
Feasibility Analysis
Understanding your competitor’s products is the first step
in determining whether or not it’s feasible to run a particular
product on a usage basis. Sure, they say that they are giving 500
minutes to Mexico on a $5 card but what are they really delivering
to the consumer? How many minutes is the product delivering on one
long call? Are they delivering 80-90%? Plus how many minutes are
being delivered on multiple average length calls? Is it 50%, 75%,
or what? Some simple testing of a competitor’s card will easily
help you figure out what is happening.
What Is Your Break-Even Point?
The next step is to determine how many minutes you can deliver.
To do that you’ll need to know what your break-even point
is. Here’s what you’ll probably find: Even though the
poster says 500 minutes to Mexico City, you were only able to make
10 phone calls averaging 12 minutes each for a total of 120 minutes,
a far cry from the advertised 500 minutes. You then calculate your
break-even minute at 150 minutes and you see that you can easily
offer 120 minutes and make a tidy profit. Plus, all of those calls
to higher margin A-Z destinations help out your margins nicely,
too.
Determining your break-even point is as simple as dividing your
carrier costs into the value for which you’re selling your
card. For instance, a $5 card that is discounted 30% sells for $3.50
and your carrier inbound & outbound costs are 3-cents, you’ll
divide $3.50 by 3-cents which yields a break-even of 116.7 minutes.
Now compare this to what your current product is delivering. Sure
you’re going to be upside-down on those few long calls when
someone talks for 300 minutes, but, statistically, that rarely happens.
Don’t Overlook The Quality
Next, how is the quality of your cardholders’ calls, really?
In making ten test calls, how many times does the cardholder actually
get what they expect, which is the ability to talk to the person
they’re calling. Don’t be surprised that you can’t
get through 10 out of 10 times to some third world countries, even
though that’s what you probably think is happening with your
existing products. So don’t get excited when you make some
test calls on your service bureau’s network and ten out of
ten calls don’t go through either. You’ll probably find
you can do a better job at this than your competitors so long as
you choose the right service bureau company as your provider.
What To Look For In A Service Bureau
Making the Service Bureau solution work for you is contingent upon
selecting the right company for the job at hand. You’ll need
to consider factors such as:
• How long the service bureau provider has been in business?
• What version of software they’re running (hopefully
not 1.1)?
• What type of switch are they using?
• Do they have redundancy?
• What is their pricing model for their services?
• How is carrier quality measured and assured?
• Can you bring in a few of your own carriers?
• Do they use SS7 signaling, VoIP?
• What aspects of your product can you directly control?
• What reports are available for tracking profitability, recharge
activity, customer service activity, traffic flows, and more?
This is where experience and longevity of a Service Bureau are crucial.
You’re better off going with companies that have been primarily
in the service bureau business, not just as a sideline, and for
as many years as possible. This means their software has already
gone through multiple updates, catching many of the bugs and problems
that can negatively affect your level of service to your customers.
You’re taking a risk if you go with a company using the first
or second version of software. Good software is an evolutionary
process.
Training and support for you and your staff are also important.
You’re going to need help building rate decks and in learning
how to use the software. Slick graphics and bright colors are nice
but are not as important as actual functionality.
Quality – The New King of Prepaid
Quality is more important today than ever. This is one of the most
major shifts to occur in the industry. Consumers are no longer tolerant
of poor connections in favor of a good rate—they want both
competitive rates and good quality. Ask your prospective service
bureau providers how they handle this. You’re looking for
software systems that track various quality stats like ASR (call
completion ratios), ACD, Post Dial Delay, repeat callbacks after
only a few seconds, and other stats so that poor performing carriers
are automatically pulled from routing. The more carriers a Service
Bureau provider is connected to the better. This gives them the
ability to route to other carriers who can complete the call. This
is where SS7 signaling comes in. Make sure your Service Bureau provider
uses it. Without it, your customer’s calls are thrown on the
floor when the underlying carrier’s route becomes congested.
With SS7, calls that reach congested or problematic routes are handed
back to the carrier so that the call can be re-routed to a carrier
who can complete the call for you—very important and often
overlooked. With SS7, this process takes milliseconds.
Getting the best rates possible with good quality are as important
as ever. But remember that you get what you pay for. What good is
a low rate if it doesn’t work and you can’t complete
calls? The big competitors have figured this out a long time ago,
and prefer to work with Tier 1 carriers and those carriers with
their own direct routes.
Rates Still Rate
It’s imperative to know what your rates are in advance. It’s
hard to be profitable with the tight margins of the prepaid business
if you don’t know what your rate is going to be in advance.
Some Service Bureau providers say they’ll give you their rates
at cost and then charge a small switching fee to make their profit
margin. How do you know you’re really getting their costs?
Service Bureau providers who use the cost-based pricing model are
not very motivated to find the best rates for you—they get
paid either way, whereas the carrier who offers fixed-rate pricing
is highly motivated to shop for the best rates possible for you.
Otherwise, he’ll lose money. So go with a fixed-rate pricing
model for best results.
Great rates are also affected by the volume of minutes your Service
Bureau provider is running to a particular destination. The more
minutes they have the better rates they can get from their underlying
carriers, although there is a point at which the rate simply does
not get any better. See if the service bureau will allow you to
connect your own carriers into their platform so that you can use
them to terminate your calls. This also keeps your Service Bureau
on their toes and gives you additional leverage with them—they
don’t want your traffic going to another carrier. Expect to
pay a small switching fee for this option, if the Service Bureau
provider offers it. Remember, if you were running your own switching
platform, it’s going to cost you about a penny per minute
when you factor in all of the associated costs, so paying a switching
fee of a half a cent per minute or so is a bargain both financially,
and for your own peace of mind.
You’ll also need to know what type of switch, or preferably,
switches, are used in the platform. Look for large “carrier
grade” switches that have lots of capacity. The Nortel DMS250/300,
Lucent 5E, Siemens, and DSC600s are the 18-wheeler equivalents of
the switching industry. They are very efficient and cost effective
for running large volumes of traffic. Stay away from smaller “scalable”
switches that need to be strung together to mimic the big iron switches.
This will force the Service Bureau to operate multiple switching
platforms which is very difficult, not to mention, expensive, to
do. Keeping one switch running is tough enough. Plus, if a call
comes in on one switch and needs to terminate on another switch
to get the best rate, it may not be possible. This ends up costing
you money in the form of higher rates. These smaller switches are
probably suitable for a distributor’s own traffic but are
not as robust for use in a Service Bureau application. Both classes
of switches will most likely use a combination of VoIP and legacy
TDM connections to hand off calls to their carriers. Redundancy
is also important. If a switch goes down or if the city the switch
is located in is negatively affected by the forces of nature, it’s
nice to be able to switch the traffic over to another switch in
a different part of the country.
Building Your Brand
Promoting your brand online is a great way to eliminate the highest
cost of distribution and build a residual revenue base that prepays
for its minutes—a nice cash flow position to be in. If selling
on-line is one of your business objectives, then your website needs
to talk with your Service Bureau’s platform. At a minimum,
you’ll need features that will enable to your website to automatically
recharge PINs using your customer credit cards when their phone
card reaches a certain predefined balance level. You’ll also
want to be able to pull CDRs from the switching platform so that
your on-line customers can see their call records and charges for
them. What you’re looking for here is whether or not your
Service Bureau provider has an API. This is what is used to allow
your website to communicate with the switching platform for these
and other important functions.
Building your brand, not someone else’s, is ultimately more
rewarding both financially and from a “control” perspective,
and is not a difficult thing to do if you can invest your limited
capital in promoting your brand rather than buying equipment that
may be obsolete and worth 10-cents on the dollar in one year or
less. Think about leaving the expensive and all important task of
running the switching platform to the experts, the right experts,
and you may actually get ahead in the ever competitive game in the
world of prepaid.
Len Bittner is Vice President of Sales for the prepaid services
division of NetworkIP. He can be reached at 951-244-8887.
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