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.

1. PERSPECTIVE
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.
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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2. PERSPECTIVE
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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3. PERSPECTIVE
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
Voice
120000
Traffic
Off-peak Peak
100000
80000
60000
30x
40000
20000
Hour of
0
the day
1 6 12 18 24
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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4. PERSPECTIVE
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
For more information on the issues
Value Partners assists 13 of Value Team IT Consulting & raised in this note please contact
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