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Telco pricing: How to secure margin in times of data commoditization?

The rise of unlimited data plans significantly challenges the business model of the telco industry. Read here how you, as a telco, can secure revenue and margin in times of data commoditization.
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Tiering up price differences on the difference in data volume (volume tiering) has been common practice in mobile telco since the rise of flat-rate tariffs.

Price points for unlimited plans have dropped significantly, for example, in Germany, from around 200 € (first Telekom/Vodafone unlimited plans) to just under 30 € (latest O2 unlimited plans). When data volume is breaking off as a means to exploit the customers‘ price acceptance, the key challenge is to identify alternative ways to secure margin.

There are several typical responses to that challenge

#1 Convergent offers

Selling combined mobile and fixed-line contracts, for example, tie customers through contract conditions and constitute enforced loyalty. However, as soon as legal regulations ban such long-term contracts, these kinds of contracts will get under pressure.

#2 Value-added service

Another option is to monetize services rather than data, i.e., putting for example streaming or IoT at the center of the telco offering. However, many value-added services only appeal to very few customers, and we haven’t seen many providers successfully monetizing IoT as of yet. 

#3 Bandwidth tiering

A third potential solution for the telco industry is to tier unlimited plans along with bandwidth. For example, O2 Germany’s portfolio offers three unlimited data plans, differentiated by bandwidth (2 Mbit/s, 10 Mbit/s, LTE Max). Whilst this is a step into the right direction – as bandwidth certainly adds value to the customers – there is a certain risk of disappointing users: Few customers know what 2 or 10 Mbit/s means in terms of user experience, and we expect some to be disappointed when singing up for an unlimited plan and notice than it runs on less than 3G speed.

Whatever the response may be, for providers to secure their margin, we believe the following to be paramount.

How the telco industry can secure revenue and margin in the long run

#1 Identify decision points

When designing offers, it is not enough to make them appealing to customers, but there must be specific situations in which customers can opt for them. A very attractive convergent offer will not be successful when all who could be appealed by that offer cannot switch their provider, as they are bound to existing contracts. 

Therefore, identifying 1) customers who can actually decide and 2) touchpoints at which they can decide, can be more important for successful selling than having a product with the best possible value for money.

#2 Understand perceived value

Just because they are called value-added services, such services do not necessarily add actual value to the customer. Some services (like customer service) can be considered basics, so customers are not willing to pay for it. Others (like IoT) are too much of a niche, so they do not make the offer appealing to many (or, even worse, give customers the feeling of paying for something they don’t need).

Therefore, empirical data are needed to determine the relevance and value of tariff components, add relevant components to entry-level tariffs, and tier up the price difference between tariffs on components that add actual value to the customer.

#3 Shift focus from gross adds to ARPU and loyalty

In mature markets like telco, gross adds (acquiring more customers) come at high acquisition costs. The telco industry gives high discounts to new customers, who churn when another provider promises a better deal. 

We believe that a shift of paradigm is needed from gross adds to ARPU (generating more revenue of existing customers) and loyalty. In our projects, we regularly demonstrate that the application of behavioral selling and GRIPS is extremely successful:

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  • +28% responses to an optimized retention letter
  • +35% contract renewals through call center agents who are trained on GRIPS
  • +132% conversion of a second tariff through an optimized mailing landing page

Curious how to apply behavioral pricing and selling at your company? Get in touch!

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Vocatus AG Preisstrategie Behavioral Economics
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