Thinking the unthinkable

Date: Tue, 01/10/2012 - 19:56 Source: By Dr. Ekkehard Stadie

Future pricing strategies in the global telecommunication industry
Thinking the unthinkable Dr. Ekkehard Stadie

The global telecommunication industry launches innovation after innovation but has not been able to increase its market value in terms of revenue. Despite mobile data, DSL and mobile voice services, available to nearly everyone, the industry today is worth 10% less in real terms. What went wrong? Prices dropped even in saturated markets, innovations were not monetized, price models made companies spend more capital without capturing value, and competition focused on the low-value segment — often with aggressive wholesale pricing. The telecom industry can’t afford another decade like the last one. The industry delivers so much value to its customers with products that have become must-haves. So who are the new, cool kids on the block now? The OTT providers use an excellent  infrastructure to make money and/or to take it away from the telecoms (additional cost, cannibalized revenues). In fact, the telecom operators have stopped growing. That’s why pricing needs to return to the agenda of all CEOs, CMOs and CFOs throughout the industry. Managers need to maintain a true profit culture, making sure that people focus on profitability instead of market share or volume.
In the past, pricing was only one tactical instrument to penetrate markets quickly and get customers on board. Pricing strategy and pricing excellence are now becoming key strategic elements to return to profit growth.

The hot topics for the boardroom

1. Overcoming flat pricing in data
Most data plans are currently marketed as unlimited, but in fact speed is limited after a data threshold is reached. Basically customers buy a bucket of megabytes they can eat up at full speed. After reaching the threshold, the fun stops. But how would the travel and leisure industry view this pricing model? Let’s imagine for a moment that we’re in a Club Med resort where guests pay a daily fee that includes five drinks. Would the club operator ever refuse to sell a sixth or seventh drink to holidaymakers who have used up their daily allowance? Would staff be told to deliver drinks more slowly after the fifth is drunk and a sixth is ordered? Certainly not! Telecom operators basically do what other service industries would never do: limit sales AND reduce the customer experience. Data pricing has to change in the next year or two. CFOs will be reluctant to invest more capital in additional capacity if there is no upside revenue case. We expect much more differentiated and tiered pricing, based on a system with buckets rather than flat rates. Full speed will remain but requires a premium. Other price dimensions will become relevant: priority, plans differentiated by maximum speed, temporary speed boosters, extra volumes and a relaunch of time-based pricing to cope with peak demand.

2. Turning innovations into money with pay-per-screen models
The industry cannot continue to charge by minutes and megabytes forever, otherwise it becomes a commodity business. The pay-per-screen model is a viable alternative. Here, customers pay for each device they use, and all available services (access, content, security, etc.) are included in the monthly fee per device. For customers and households using several devices, the price per additional device goes down. This gives telco providers three critical advantages. First,the market for devices is one of the few that continues to grow. Second, providers can create their own platform from which they can gain customer loyalty by offering new services. Third, the model combats the industry’s major weakness: turning innovation into profits.
With a service package based on used devices, innovations could help companies to stay ahead of the competition, to defend higher price points and to gradually introduce new products to customers without the initial entry barriers. It’s a revolutionary price model that’s incomparable to any other.

3. Securing profits from text messages, voice and data
If we consider typical postpaid plans we detect a pattern. Mobile voice is subject to flat fees or buckets, text messages are pay per use, and packs and flat fees are offered as bolt-ons. Mobile data basically has a flat fee structure with some restrictions. Although it is gaining importance, mobile data’s impact on revenue potential is not only positive. It threatens profitable products such as text messages, which are a source of large profits with extremely low costs. Text messages now account for up to 20 percent of mobile communication firms’ profit. Providers have to find a way to secure SMS revenue. New offers must focus on customer value and integrate the advantages of competing technologies. For instance, concepts similar to chatting by SMS with short response times could be priced lower than standard text messages. Voice services will in the future be subject to fees with potential new dimensions such as quality and priority. Text messages will move away from pay-per-unit pricing towards a flat fee on top of a voice flat fee or completely new pricing metrics. Data itself will go from flat fees to a much more differentiated pricing model.
All of these changes will require investments in pricing. Other industries realized this long ago. Now it’s time for the telecom sector to follow their lead.

Dr. Ekkehard Stadie is a partner with Simon-Kucher & Partners and head of the company’s telecommunication and e-business competence center. He specializes in marketing strategies and pricing for national and international clients.
Simon-Kucher & Partners Strategy & Marketing Consultants is a global consulting firm with more than 570 professionals in 23 offices worldwide focusing on Smart Profit GrowthSM. Founded in 1985, the company has more than 25 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.

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