Pricing Mobile Services for Success

Service bundles have both short- and long-term benefits for mobile operators, and will be at the heart of future pricing

By Alastair Brydon and Mark Heath, with Alex Zadvorny

With voice revenues under increasing pressure, mobile operators need to find ways to increase the revenue from both existing and new services, and pricing has a crucial role to play in their strategies. However, the diversity of mobile services makes pricing a significant challenge. Bundled pricing of voice services has been widely deployed in the U.S., where mobile operators have been successful in generating high voice usage and average revenue per user (ARPU). The practice of bundling mobile voice services is also becoming increasingly common in Western Europe. However, there are few examples of bundled pricing being applied to a wide range of voice and data services. Bundled pricing will have even greater benefits when applied across a mobile operator’s service portfolio, which will put it at the heart of future pricing strategies:

• in the short term, bundled pricing can be used to increase voice and data service take-up, usage and revenue;
• in the longer term, bundled pricing provides a means of developing strong customer relationships, of minimizing churn and price competition, and increasing ARPU.

SMS messaging has already been included in service bundles by a number of mobile operators, but there are many more opportunities for operators to add services to bundles across the wider service portfolio. For example, if mobile operators add new services to an existing service bundle at low (or no) cost, customers can be encouraged to try out the new services. Customers may then increase their usage (and spend) as they begin to value those services. Given the high proportion of prepaid users in many countries, bundled pricing solutions for prepaid tariffs are another important short-term opportunity.

Bundled pricing also has important strategic benefits as a means of developing strong relationships between mobile operators and their customers, helping to reduce churn, minimize price erosion, and increase service usage and ARPU in the long term. By learning from customers’ usage of service bundles, mobile operators can adapt their bundles over time in order to deliver a combination of services that optimize the value to the customers and the revenue to the operator. By developing service bundles that are tailored to the needs of a specific market segment, mobile operators will be in a strong position to defend against churn and increase ARPU.

Ultimately, the greatest business benefit of bundled pricing may come from offering individual customers their own unique service bundles, and mobile operators need to consider how to achieve this in a pragmatic and cost-effective way. This will be a challenging objective, but can be achieved using a phased approach, as shown in the figure. Implementation will require significant enhancements to service management, billing and customer communication systems. These systems must enable operators to evaluate the service requirements of individual customers, communicate with them effectively to offer new and improved service bundles, and manage these bundles on a customer-by-customer basis.

Flat-rate pricing is an extreme form of bundled pricing, whereby customers can make unlimited usage of one or more services for a defined price. There is growing interest from mobile operators around the world in flat-rate pricing, driven in part by its introduction in Japan and South Korea. For mobile users, it has an advantage over alternative pricing schemes, as there are no usage constraints, while for mobile operators it may increase ARPU from some customers. However, mobile operators need to design flat-rate pricing with great care, as there are a number of major pitfalls. While flat-rate pricing may prove valuable in attracting customers and increasing revenue for some services, when applied in a controlled and limited fashion (e.g. as part of bundles), widespread adoption across all mobile services is likely to lead to increased price competition for mobile operators and an inability to generate extra value from new mobile services in the future.

Actions for Success

In pursuing a bundled pricing strategy, mobile operators should:

• consider the individual characteristics of each service to achieve effective pricing
• review the opportunities to make bundled pricing a core feature of their service pricing
• confine flat-rate pricing to services that will not incur excessive costs for them, or use strategies to constrain heavy usage
• develop bundles of services to suit different levels of affordability
• develop bundled pricing that appeals to specific target market segments
• continually review and modify their bundled pricing, as part of ongoing customer relationship management
• implement highly effective billing, service management and customer relationship management systems

Summarized from “Pricing mobile services for success” by Analysys. Analysys provides strategy and management consultancy, information services and start-up support throughout the telecommunications, IT and media sectors. Information about the full report can be accessed at www.analysys.com.