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The mobile industry is becoming increasingly competitive. There is a constant battle to acquire, grow and retain subscribers. The competitive intensity is evidenced by a surge in price promotions, often with one operator launching a campaign, which in turn is quickly followed by competitors responding with their own ‘counter’ promotion. In the past, this has usually resulted in wave after wave of cutting service prices, but now operators are more careful in targeting their promotions not only to reduce price but also to drive usage, and potentially subscriber tenure.

However, in this maelstrom of frequent discounts, even well-intentioned promotions can have undesired effects – at best, they may not increase Minutes of Usage (MoU), customer acquisition or Average Revenue Per User (ARPU); at worst, they could harm the operator’s brand while considerably impacting its Average Revenue Per Minute (ARPM) and profitability.

What are these?

Our experience shows there are five deadly sins to avoid in pricing mobile services in competitive markets. These are:

1. Thinking that use of simple and cheap tariffs alone will lead to success;

2. Resorting to further price cuts to drive customer acquisition, even though the operator’s tariff plans are already the cheapest in the market;

3. Targeting popular single services with very aggressive price cuts to switch competitors’ subscribers;

4. In search of competitive differentiation, offering cost-blind, flat-rate tariffs; i.e. not accounting for variations in cost to serve at different times of the day;

5. Developing acquisition-focused pricing for SIM starter packs without considering SIM disposability;

Indeed, price reductions, however innovative, may help in the short-term but do not fully address the problem nor are sustainable in the long-term.

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Five deadly pricing sins to avoid in a competitive mobile market

In response to increasing competition, mobile operators tended to cut service prices. But now, operators are more careful in targeting their promotions not only to reduce price but also to drive usage, and potentially subscriber tenure. Nonetheless well-intentioned promotions have not had the desired results. In this article we set out the reasons and the pitfalls to avoid.

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1. Thinking that use of simple and cheap tariffs alone will lead to success From Virgin Mobile in the US to more recent examples in Asia, new mobile operators believe they can build their business by attracting customers through simple and very low tariffs. This strategy is successful in attracting the price-sensitive segment of the market – either ‘new-to-mobile’ or existing subscribers, at least in the short term. However, retaining these subscribers and turning them into profitable consumers has proven more elusive. We have seen in the highly-competitive Indonesian mobile market that having the lowest tariffs in the market over a period of time has not resulted in the expected number of customers. Market research has shown that customers do wish to have affordable tariffs and that some operators have successfully managed to create the perception of affordability without having the lowest tariffs for a significant period of time. Simple tariff structures do not have to be the cheapest, at least not at every time of the day and for every single service offered. A deep understanding of the market and the different key selling points for various segments can help operators build ‘fencing’ mechanisms, allowing them to attract key segments while capturing value; for example, by setting attractive tariffs for say the two most popular services per segment, and less competitive pricing for other services.

2. Resorting to further price cuts to drive customer acquisition, even though the operator’s tariff plans are already the cheapest in the market

In highly competitive markets, mobile operators often revert to dropping prices as an acquisition tool. They hope to sway the price-sensitive segments of the markets towards switching to their attractive pricing plans. When this does not work, failing to realize that pricing alone may not be a successful core value proposition to attract new customers, even price-sensitive ones, operators persist with further drop in their prices. At best, subscriber acquisitions will increase but often marginally, but this approach is likely to significantly damage operators’ profitability. When caught in such an unsustainable situation, operators need to step back and address the acquisition challenge through other levers of growth from their marketing mix, such as identifying the product offerings with voices, sms, internet access, etc. for selected customer segments and the right marketing message.

3. Targeting popular single services with very aggressive price cuts to switch competitors’ subscribers

Some operators decide to introduce a hugely attractive price promotion on one of their services, or even give them for free altogether, hoping to switch their competitors’ price sensitive subscribers via a single service. As such, over the past few years, we have often seen mobile operators in Asian markets giving free on-net SMS to their subscribers with the hope of cross selling other services. More often than not, the results have been disappointing: they have managed to drive acquisition and to build a relatively stable base; however, often, these price-sensitive subscribers have long understood how to best take advantage of these attractive prices strategies, at the cost of the very operators that initiated them. As a result, operators will get limited ‘share of wallets’ from their newly-acquired subscribers, as their subscribers carry multiple SIM cards and do not hesitate to switch from one to the other as best suit their needs, taking advantage of the cheapest tariffs at any given time by any given operator for a specific service

In many Asian countries, it is not uncommon to see subscribers use one operator’s SIM when they want to text their friends on the same network and they do not mind the inconvenience of switching SIMs when they need to reach people on a different network. This process has recently spread further with the increased popularity of handsets that can accommodate multiple SIMs – including CDMA and GSM SIMs – doing away with the need to carry multiple handsets – which is easier today due to low-cost handsets – or to manually swap the SIM. Realizing this opportunity, some mobile stores in Indonesia have even gone further and now offer a service that input two mobile accounts – from two different providers – into one unique SIM card. Needless to say, the ARPUs for each SIM remain extremely low. In pricing their services, new entrants need to be wary of this phenomenon and at the very outset devise strategies to make their SIM become the primary card, and potentially the only card used. One possible avenue lies in operators offering rewards for receiving calls, thus ensuring that new subscribers actually give their new mobile number to their friends, and, in the case of off-net calls, capturing call termination revenues.

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4. In search of competitive differentiation, offering cost-blind, flat-rate tariffs; i.e. not accounting for variations in cost to serve at different times of the day

Subscriber behavior the world over dictates that every operator is confronted with huge variations in voice and SMS usage at various times of the day, with peak hours usage sometime surging at more than 30 times that of off-peak usage. To ensure high-quality of service and a consistent customer experience, operators have to take these usage spikes into consideration and size their radio networks, back haul and core networks accordingly. Even with ‘settling’ for minor network capacity inconveniences, this translates into higher capex required per minute of use during peak hours, and under-utilized assets during off-peak hours. Consequently, most operators offer preferential tariffs during off-peak hours, and increase their pricing during peak-hours, sometime hoping to alter subscriber behaviors and to better balance their network loads.

Average peak-hour traffic can be more than 30x higher than that of off-peak hour traffic

However, often new entrants offer a simple flat price throughout the day in the hope to gain customers. Although this pricing structure is simple enough for customers to understand, it fails to take into accounts the reality of the telecom economics – i.e. subscribers should pay a premium for using the network during time of capacity scarcity. This results in poor management of the operators’ assets. Furthermore, as the competitors maintain a peak / off-peak price discrimination, the flat price fails to capture potential incremental revenue. This phenomenon usually occurs as the competitors’ marketing messages focus on communicating the (attractive) off-peak pricing, and avoiding mention of peak-time prices.

Interestingly, the recent introduction of dynamic pricing – real-time adjustment of price based on network load – by some operators who have positioned it as ‘price savings’ has been met with success. This innovative implementation of peak/off-peak price discrimination further demonstrates subscribers are used to being charged higher tariffs during peak hours than during off - peak periods.

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5. Developing acquisition-focused pricing for SIM starter packs without considering SIM disposability

In a similar fashion, in the hope of boosting subscriber acquisition in what are now crowded markets and to break the affordability barrier, operators are introducing starter packs at price points lower than ever. In fact, these prices are so attractive that price-sensitive subscribers have realized that it was more beneficial to buy a new SIM card than to reload their existing ones, even if they stick to the same operator! Such aggressive pricing tactics have created a new phenomenon: the calling card effect, i.e. buying a brand new SIM just to avail of an aggressive starter pack promotion, and which the user will never reload. This is estimated to be costing millions of dollars worth of SIM cards for operators across emerging Asia, an asset from which they will never recover their investment, especially accounting for the incentives to channels and other costs included in the Subscriber Acquisition Cost (SAC). Indeed, as the total activation cost can be 40 times the cost of the ‘physical’ SIM itself.

Conclusion

Apart from very few exceptions, most mobile markets, especially in Asia, are already crowded, both in terms of subscribers (high penetrations) and in number of players. Defining a viable approach is very challenging, but there is way to succeed. For instance, operators should not fall into the trap of using price as the only lever to acquire and grow their subscriber base. Instead, through careful market segmentation based on a deep understanding of customer needs and affordability levels, they should devise offerings – inclusive of tariffs plans – that are distinctive and focused on capturing pockets of the market which will be value creative. Use of innovative sales channels, simple and effective communications to subscribers should reinforce these differentiated service offerings and help operators build sustainable businesses.

About Value Partners

Value Partners assists 13 of the top 20 telecoms operators worldwide in Europe, Asia, Middle East and Latin America, as well as number of smaller and start up operations in our markets. Over the last 15 years we have delivered real benefits for our clients building on our deep industry insights into the key issues for the sector.

Founded in 1993, Value Partners is a global management consulting firm that works with multinational corporations and high-potential entrepreneurial businesses to identify and pursue value enhancement initiatives across innovation, international expansion, and operational effectiveness. It comprises two sister companies: Value Partners Management Consulting and

Value Team IT Consulting & Solutions.

With 15 offices across Europe, Asia, South America and MENA, Value Partners expertise spans corporate strategy and financial business planning, cost transformation & organizational development, commercial planning, technology decisions, and change management. Its 3,000 professionals, from 25 nations, combine methodological approach and analytical frameworks with hands-on attitude and practical industry experience developed in executive capacity within their sectors of focus: media & telecoms, luxury goods, financial services, energy, manufacturing and hi-tech.

For more information on the issues raised in this note please contact virat.patel@valuepartners.com, olivier.letant@valuepartners.com, junkai.chong@valuepartners.com, andrew.huang@valuepartners.comor one of our offices below. Find all the contacts details on www.valuepartners.com

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