Recently read about the dynamic pricing plan from Uninor offering up to 60% discounts to its customers on the call costs based on the location and the time when the call is made and and the discount increases in areas with lower network traffic and during off-peak hours .
Many emerging market operators have introduced this plan in various countries and many more are considering to do so. It is believed that this will result in the increase in the MOU and also bring down the burden on the networks where they are really clogged. MTN Group was the first operator to introduce dynamic pricing with its MTN Zone tariff in Swaziland and South Africa in February 2008, and has since rolled it out to 11 of its 21 operations.
Vodacom South Africa quickly followed suit and introduced its own dynamic tariff, Yeboforless, in May 2008. More recently, Orange Botswana launched its new prepaid dynamic tariff (Sesolo Zone) in July 2009 and Safaricom Kenya announced the launch of its new prepaid dynamic tariff (Supa Onega) in September 2009. Orange Group has indicated that it is looking to trial a dynamic tariff offering in most of its African subsidiaries.
There are lots of analyst views (including Mohit’s) which say that it has the potential to increase ARPUs, MOU and hence the profitability for operators. They have always taken these plans as positive for the company. There are real examples which show that for a brief period of time, these plans do increase ARPU. One of them is Vodacom – ARPUs increased two consecutive quarters after the launch of dynamic pricing plans. I personally don’t believe that ARPUs increased because of this plan and there was something else which led to increase in ARPUs. The reason is ARPUs declined for the next 2 quarters after the first 2 quarters of increase and then increased once again after the decline. So ARPUs dont really follow a pattern apart from suggesting that ARPUs in Quarter 3 and Quarter 4 are normally higher than other quarters. Some of the other reasons why I believe this kind of plan is rather negative for the company are stated below. I know I am going against the collective intelligence of various operators but I have my reasons for the same.
These discounts are based on the premise that these discounts would lead to uniform level of usage through out the day well distributed between high and low loads. However, in emerging economies where price elasticity seemingly is high, the introduction of dynamic pricing will lead to considerable change in the user behaviour leading to non uniform usage behaviour through out the day eroding price per minute. This risk could be minimized by having a real variable pricing plan where there are no preconfigured prices for any time and location. In fact pricing would really change based on the network load and not on time and location (I know network load is directly proportional to time and location of the user but still it matters when the prices are configured in the system)
These discounts are aimed at cannibalizing operators own existing customer base by offering a blanket plan to the whole customer base. I think if operators need to offer this plan, then this should be offered to properly segmented customers based on their usage behaviour. Blanket plan would lead to lesser revenues from even that customer segment which is willing to pay full rates for the call during that time at that location. But by offering this plan to everybody operators can loose out on massive revenues. So plans should be launched after carefully studying the customer usage behaviour
If operators want to uniformly distribute the network through out the day, then instead of cannibalizing their existing revenues, they should focus on other mechanisms/business models by which they can sweat their infrastructure by other means instead of loosing out on revenue from their customers who would change their behaviour. One of the most common businesses which comes into mind is M2M where ARPUs are really low and operators can charge least possible rates for these transactions promoting M2M transactions and usage. M2M can be automated in such a way that they take place only those times during the day when network usage is least. This would help operators not only capture very low ARPU business but also refrain from making less from those call where they could have made more. Dynamic pricing can seriously cannibalize operators own market.
Could this lead to bad customer experience – With ever changing prices, customers could get really get confused about the cost of the making a call. If they made the call in one area and then moved to another, what price would they be charged. How many times in a day this pricing is changed. What are the T&Cs in these. These are the valid questions which operators will have to address otherwise customers could have a real bad experience dealing with this complex plan.
Finally, not to say that these plans invariably loose money but they have the potential to backfire and can lead to even lower ARPUs for the operators. What operators need is development of new business models to make effective use of their networks rather than dynamic pricing to cannibalize their own market
Amit Agarwal looks after market insight and strategy for Convergys IM. In this role Amit reviews market trends, threats and strategies and makes recommendations for R&D or product investments. He also looks after the Investment and Innovation Management and guide the innovation process in the organization. Amit regularly generates though leadership helping the company create vision for the future.
Amit hás more than 7 years experience in the IT, telco and management consultancy market as an experienced consultant developing marketing strategies and plans for global corporations. Prior to Convergys, Amit was an Associate with Cognizant Technology Solutions where he focused on telco industry.
Amit is a graduate of Bangalore Institute of Technology, India and has an MBA in Finance and Strategy from Imperial College, London.