Industry Blog

Reality Check: Evolution of operator tiered pricing and service-based pricing models

Time to read: 3 minutes

As mobile data consumption continues to skyrocket, service providers must constantly evolve in new and innovative ways to enable subscribers to engage with mobile data without fear of unexpected expense. Attracting users who want to pay for a particular service without having a long-term obligation will be a useful complement to contracted, tiered pricing plans.

Some providers offer tiered pricing plans (based on volume of bytes consumed), which have been generally met with success in terms of sustained profits while others offer service- and value-based plans which enable the provider to more frequently engage with their user community and represent the value of a particular service. The combined value of these two approaches is significant as it allows a service provider to provide a range of services for existing users and to attract new users; sustaining and evolving their business in a competitive environment.

Commercial pressures on 24-month tiered contracts

Tiered pricing plans that are established (and arguably undifferentiated) in the market have a business problem over time, as data consumption increases rapidly their profitability (and thus sustainability) can be radically affected. The typical contract term is 24 months and over this period, the Web and user habits can change dramatically. Users frequently don’t engage with their service provider unless there is a billing or connectivity issue; as such when the profile of access changes there is no natural path for the service provider to engage the user and provide options.

There is also little room for opportunities to differentiate (and so upsell) services since new devices and plans typically must wait until the end of a two-year contract. This suits some users but over time the market pressure will result in plans from multiple service providers being very similar and market value being commoditized.

It is also beneficial for service providers that they refrain from locking in new users to such long-term obligations (often based on recouping device subsidies) so that prices and services offered can more rapidly adjust and adapt to shifting consumer and market dynamics.

Using value-based pricing to complement tiered pricing can help service providers become more flexible and offset the competition. Many consumers pay for expensive data plans – often for data they never use – because of a lack of understanding of what they consume (like the “gym membership” model) or because they’re afraid of overage costs. In this scenario, value-based plans such as video-as-a-service or roaming packages would be attractive upsell promotions. Instead of limiting the consumer to another incomprehensible “bucket” of data added on to their contract, service providers can offer a by-the-hour video plan or an unlimited roaming data package for the month, making competition less attractive because users know exactly what they’re paying for and what they’re getting.

By definition, service- and value-based models do not involve long contracts. In the case of a video package bolt-on, subscribers may opt to change or cancel their video data plans when they choose without worrying about contract-adjustment or early termination penalties. Service-based pricing improves profit margins for service providers because the pricing allows subscribers more flexibility and choices which leads to increased purchasing.

Tiered-pricing models based on megabytes/gigabytes need continual data consumption analytics to predict not only the capacity required for the mobile network but to also gauge optimal price points, application trends and data thresholds in the market. In value-based pricing, this continues to be true but the difference is that the feedback loop into creating new services and price points can be a lot faster; different value-based opportunities can be created and launched in weeks and not months.

Service-based plans allow subscribers to purchase just enough data that they need for the type of applications they use, whether it’s video by-the-hour, tethering for a week or unlimited texting for a month. Because providers categorize service-based plans by the type of applications, they have a better idea about what kind of data subscribers are consuming and hence the appropriate price point. This can be used to attract new users, upsell to current users, and to differentiate offers quickly to targeted subscriber segments in a more meaningful way. With subscribers opting to purchase applications they’re familiar with rather than “500 MBs of data,” service providers are able to generate new revenue through application-oriented sells.

Proactively evolving revenue opportunities by providing users what they need

Value-based plans allow subscribers and providers to take advantage of new, innovative forms of mobile data consumption and pricing. These types of plans allow service providers to offer a mix of data packages to match user needs and accurately charge for the data used on their networks.

From the users’ perspective, value-based plans empower them to understand services that are being offered and directly relate it to value. They know what they’re purchasing, for what price, and how they will ultimately use the mobile data network. This allows for service providers to sustain their business by having a more precise price point control, better user interaction, and the ability to differentiate through a variety of meaningful offerings. Service- and value-based pricing are extensions of tiered pricing that provide evolution opportunity rather than more of the same, which in turn enables service providers to extend their service and value options that attract new consumers in a competitive marketplace.

This blog was published by RCR Wireless on January 15th Click Here