The day of indifference - Flash Promos in telecom
Do you remember math?
Susi wants to make a fruit salad with an equal amount of oranges, bananas, and apples. Apples are sold in boxes of 22, oranges are sold in boxes of 33, and bananas are sold in pairs. This trivialized example is the basic challenge for all Mobile Virtual Network Operators (MVNOs).
The big network operators like Verizon, Sprint, T-Mobile and AT&T don’t give MVNOs a straight up price, but rather a complicated bundle price based on their profit expectations. These different wholesale bundle prices must be repackaged by each MVNO to be attractive to subscribers. Our tests show that pass through pricing from any given wholesale plan to the consumer results in non-competitive and unattractive plans, which gains a close zero subscription rate.
Now, we revisit our fruit salad problem. Does little Susi really want to make a fruit salad to feed 264 people or make a fruit salad to feed 22 people with 11 oranges leftover? She knows that if she feeds exactly 264 people, she doesn’t waste a dime, but she also knows that her business must grow and will hardly ever have the right number of people. MVNO’s must master Susi’s problem, on steroids. The amount of variables drastically increases when taking consumption patterns into consideration, and with this the complexity of the statistics and math behind the problem dramatically increases. But, at the end, it boils down to little Susi’s problem.
If retailers have extra inventory, they have sales; it’s somewhat the same in telecom. If telecoms must balance their usage, they should have flash sales and regular sales to fine tune and optimize their inventory and billing. However, sales in telecom are more difficult. First off, we call them promotions, not sales. But seriously, we all remember cooking a sauce and trying to fix it. From the get go, the sauce is too spicy, so you add water. Now the sauce is too runny, so you add flour. Now the sauce is tasteless and we have to add more spice again. The same is true about fixing the consumption averages in telecom by optimizing pricing because MVNOs must adjust to changing consumption patterns. The smaller the MVNO, the less they can rely on averages. This is why MVNOs should use a promotional strategy not only to gain more clients, but to optimize their customer consumption mix. Flash promotions will be necessary for all MVNOs in the future to optimize wholesale billing plans with a limited subscriber base.
Where does this leave the customer, the individual subscriber? We see pricing plans and decide, which one is the best for our specific needs during our current situation in life? Or, don’t we? Most likely, we are guided by the fear of overages. Who really knows how much data is used, and for what? When we craft our living budget, we prefer our phone bill to be a fixed cost rather than a variable cost. We tend to over buy just to have that peace of mind. Indeed, between 70-80% of people are over buying. On the other hand, 10% are under buying and another 10% get it right.
We see an ongoing price war between all the major MNOs and are left asking if we should stay prepaid and wait for the best postpaid deal or lock yourself into a good-looking postpaid deal right now. Perhaps we decide to stay prepaid as the prepaid deals are becoming better for low usage. It all depends on us; we must shop and make the best decision about what is right for our current situation. But, we all notice with cheaper and cheaper pricing from the major MNOs, we will soon reach a level of indifference. Some research even suggests that a less than 25% deviation in price is ineffective in persuading people to change brands or substitute a product and service.
A Prediction for the Future
The MNOs pressure their wholesale clients by underpricing them, leading to more and more MVNOs running promotions for the wrong reason. Those telecoms will soon have to run promotions to balance their averages. Soon, we will reach the point of indifference, the point where even a 25% change in pricing will not cause a change in behavior because the price is below the threshold of indifference. What happens if the MNO’s pricing reaches the point of indifference, where the consumer doesn’t care about a buck, more or less. The MNOs are already preparing for the Day of Indifference by merging and acquiring content companies and excluding their wholesale partners from this development.
Interesting links for further reading:
The 1st set of links are articles published on RingPlus Social concerning mergers and acquisitions of MNOs. The 2nd set of links give insight into how the new FCC is paving the way, helping MNOs prepare for the Day after Indifference. The 3rd link shows that everywhere MVNOs are challenged, they find new technologies and innovation. Here’s a single example of how the MVNO world begins to prepare for upcoming challenges.