Strategic pricing can be the answer to secure CSPs’ future profitability

Petter Järtby is head of business unit BSS at Ericsson. In this exclusive interview, he tells VanillaPlus that many communication service providers (CSPs) have embraced innovations in both products and customer service, and are now adopting business-model innovations to help them deal with evolving ecosystems.

But by themselves, these approaches are still not delivering the kind of revenue increases CSPs want and need. Arguably that can only come from an area of innovation that, historically, is not on many CSPs’ radar: pricing.

Järtby proposes the concept of experience-based pricing (EBP). This enables CSPs to charge for the value of the overall experience delivered than solely for network connectivity. This concept requires a high degree of customer intimacy combined with analytically-derived insights into the customers’ experience and preferences

VanillaPlus: Can you explain a little more about the concept of experience-based pricing and why CSPs should be interested in it?

Petter Järtby: Put simply, experienced-based pricing is about charging based on the perceived value of the customer’s experience within a given context, rather than based on solely the network access.

peter-j-imageExperience-based pricing may be the only feasible solution to the challenging business outlook facing many CSPs today. Specifically, Ericsson predicts that network traffic will grow ten-fold by 2019 whereas the GSMA predicts CSP revenues to grow by only 20% over the same period. We also see that newly deployed LTE networks are loaded shortly after they are completed because user demands are constantly increasing.

This business outlook results in an unacceptable ROI for CSPs and their shareholders, impacting their ability to invest in their infrastructure and properly serve their customers. They need solutions, and EBP can be part of that solution. As a long term partner to CSPs, Ericsson wants to help them explore potential solutions to address this situation, hence why we are discussing the concept of EBP.

CSPs have looked into many different areas to address this situation. They’ve cut costs, they’ve targeted new business models to grow revenues, and they’ve looked at product and service innovation. Everything except pricing innovation has been considered and that’s odd because research from McKinsey and company indicates that pricing is the strongest lever to impact profitability. This research found that when you increase average price by as little as 1% you impact the bottom line by 11% on average.

Many CSPs are offering unlimited access to a finite resource and as a result we are starting to see pricing wars emerge – which is the start of a downward spiral to low profitability. What’s more, customers are only served well if the service provider is profitable enough to fund research and development and ensure the services they offer are of high quality and attractive to users.

VP: What is needed to enable CSPs to charge based on the value of an experience? Is there a danger of charging at too high a rate and causing people to not use services?

PJ: EBP is about taking into account much more than just network connectivity – such as utilising complex value propositions to understand what the customer is prepared to pay based on the value of the service to them in a specific context.

For example, it’s unlikely that a consumer will pay a premium simply to watch a YouTube video on their phone at home. But imagine that customer was at the World Cup Final, and willing to pay much more than the standard rate to send a video to friends – to share the experience with them. Pricing of that experience could then be based upon supply and demand at that moment.

Where there’s a difference in delivered experience there is a difference in value. The experience is different at the grocery store than it is at the World Cup Final. The context therefore matters because in the latter scenario, you’re at a ‘once in a lifetime’ event but from a CSP perspective there is constrained capacity at that event because everyone in the stadium wants to send videos during the same time period. The CSP must consider how to serve those customer demands profitably to optimise their return on investment. Strategic pricing can be the answer to secure CSPs’ future profitability

It’s better to provide customers with the option to have a reliably consistent experience at a greater cost than it is to provide a dissatisfying and unpredictable experience – such as throttling – at the standard rate. By employing yield management concepts such as EBP, you are establishing equilibrium in the supply and demand of connectivity and capacity. Users who are not willing to pay the higher price during capacity constrained conditions opt out and give that opportunity to those who value a higher quality experience at that moment. This is very similar to yield management techniques that have been used for decades in the airline and hotel industries.

To get started an operator would first need to develop a pricing strategy based on the following primary inputs:

  • Micro-segmentation – the process by which you analyse your customer base and uncover smaller and smaller segments with different priorities; theoretically, getting to a ‘segment of one’
  • Insightful Information – the analytical insights that are exclusively traversing CSPs’ networks and systems and can be used to develop personally relevant offers at an acceptable profit
  • Mathematical models – that incorporate the micro-segmentation, insider information and market and competitive information to determine the optimal price point for individual services and various combinations that result in a ‘win-win’ situation for the CSP and the customer.

VP: How will CSPs use the data they collect about their customers to extract insights to enable them to make relevant propositions to customers and partners? Is EBP about more than charging the consumer according to experience?

PJ: While EBP does propose that CSPs charge for the experience, it also provides a way to uncover additional value for the customer. Scenarios exist in which there is a service a consumer might value but doesn’t know what it will cost them so they don’t use it for fear of bill-shock. Take international roaming for example. Currently, greater than 70% of international travellers turn off mobile broadband when they roam due to the uncertainly of the charges, even though many of them indicate that international access would be valuable to them. CSPs could determine their average cost for providing international roaming for a day and then offer it as a service to their customers at a flat price, giving customers what they need at a price that is acceptable to them and at a profit that is appropriate for the CSP. This can be extended to OTT partners that might wish to pay CSPs for delivering their services or for the insights into how customers are using the OTT service. If a CSP is employing microsegmentation, it knows which OTT services and apps are being used and can make that information available to its partners. The CSP has more information than the OTT partner does and can buy in bulk from the OTT partner and deliver a service at a specific cost. There is the potential for CSPs to resell and profit from this as well.

VP: Why have CSPs been slow to adopt EBP or other yield management techniques? What are the barriers to adoption?

PJ: If a CSP wants to deploy EBP, they certainly need the technological capabilities I’ve mentioned, but organisational readiness is also a significant challenge. Historically, CSPs have not used pricing as a differentiator and haven’t developed and systematically evolved their pricing strategies as have other industries such as airlines, hospitality and now online retail. CSPs would have to treat pricing strategy development and execution with the care as they currently do product development and execution.

An interesting point is that many CSPs have invested in robust technical capabilities but still have not used them to their full potential. One reason for this situation is that the organisational readiness for pricing strategy development is not in place. Of course, market and competitive considerations must also be carefully weighed and included in the pricing strategy development.

VP: What do you see as the prospects for EBP as it becomes more widely understood and deployed?

PJ: CSPs have to be convinced EBP is a viable pricing strategy. Based on the economic theories of supply and demand, EBP uses sophisticated yield management techniques that have been used successfully in other industries for decades. The telecoms industry is experiencing some of the same market conditions that these industries experienced before they began to use yield management techniques. We believe concepts like EBP will enable CSPs to gracefully transition to the dynamic, real-time, ever-increasing demands that mark the Networked Society; just as similar pricing concepts helped airlines and online retailers successfully transition.

As the market shifts away from traditional, singleconnection contracts, we’re seeing watershed offerings such as the emergence of shared data plans and ‘nocontract’ post-paid plans that create more of a ‘free market,’ bringing CSPs closer to dynamic pricing and EBP. As mentioned earlier, many have already deployed integrated charging and analytics, but they simply don’t use them to their full potential. The irony is that of all the consumer facing industries, telecoms has the richest source of data about customers. It’s time CSPs made profitable use of it for the benefit of themselves and their customers.

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