Turning data usage into profits by taking price differentiation one step further
I recently returned from the Mobile Pricing Conference in London (organized by Informa) where, apart from the lunchtime World Cup discussion, the entire first day buzzed with: “Houston, we have a problem with data explosion and associated data pricing. What can service providers do about it?”
Houston’s challenge: Service providers are seeing a dramatic impact on their financial bottom line; the cost to support the growing demand for data is disproportionate to the revenues generated from its traffic and usage. Take Vodafone Europe, for example, whose data traffic grew from 48% in 2008 to 77% in Q1 2010 while data revenue grew from 24% to only 28%. If this continues, service providers will struggle to turn data into a profitable business, not to mention the immediate implications on the user experience.
Houston’s solution: There are several - from acquiring more spectrum to deploying faster networks and upgrading backhauls to offloading, congestion management, network optimization, policy management and tiered pricing, for example. The latter, according to a survey conducted by Chetan Sharma Consulting (2010), is viewed as the leading revenue-generating solution for mobile data consumption and is way ahead of any of the other solutions noted above.
Not surprisingly, six months after stating that “…3% of smartphone users are consuming 40% of the [ir] network capacity…” AT&T announced its decision to eliminate the $30 unlimited-data plan for new users and replace it with new plans costing $15/month for 200 megabytes of data traffic or $25/month for 2 gigabytes.
Shortly afterwards, Orange, O2UK, and Verizon made similar announcements. By changing their pricing models, operators can truly impact consumer behavior which can lead to a reduction in usage, freeing up much-needed bandwidth. According to Chetan Sharma, “…had AT&T instituted a 1 GB/month limit … on smartphones in 2009, its smartphone traffic would have likely been reduced by at least 30% and the overall traffic by over 17%.”
Moreover, monetization of data (the core of tiered pricing) is a new way of looking at things – it’s really about building a new relationship with customers and meeting their expectations. It’s about making a clear statement about how resources should be used and allocated (e.g. not allowing a small number of users to spoil the experience for others) and at the same time understanding that some usages and services have priority over others (e.g. providing top quality 24/7 service for medical emergency services). And just as important, it is also about sowing the seeds for the future by monetizing new and upgraded 4G networks.
In the past, and unlike in other industries, technological upgrade was not justified through premium pricing and we as consumers saw this as organic evolution. We are willing to pay a premium price for a train that reaches its destination in half the time so why shouldn’t we pay for a faster data network?
So how can service providers monetize the value consumers get from data consumption? Some of the new pricing models include:
Tiered pricing and upgrade on demand which are data plans based on (or include any combination of) capacity (200 megabytes vs. 2 gigabytes), speed (512KBps vs. 1MBps), time (day, month, week, peak/off-peak), priority or type of customer (private, business, VIP, government), type of application (P2P, streaming, video) and device type (smartphone, broadband modem, e-book reader), etc.
Take AT&T, for example. If a user is paying $15 per month for 200 MB and she reaches the allocated cap, AT&T can then decide what to do next in addition to charging an overage fee. It can downgrade the speed to 2.5G which would preclude certain usages (video streaming, P2P, or shutting down data consumption all together until the next billing cycle). If the customer does not want to be subjected to the different penalties for overages, she can move to a more comprehensive plan.
Tiered pricing should not be viewed lightly or as something that is simple to implement. Laying down new rules about data usage requires service providers to inform their customers how much data they are actually using (after all, who really knows how much bandwidth is used by checking Facebook from your mobile).
Service providers can take tiered pricing one step further and allow customers to upgrade their accounts in real time. Customers can receive alerts that they are reaching their set data cap. Instead of exceeding their consumption and paying the overage, they can request to move to a higher tier for the specific billing cycle or to upgrade their entire data plan to one that better fits their consumption habits. An engaging service provider will also help customers better analyze their data consumption (based on past usage patterns and relevant needs) and assess which plan suits them best.
Another interesting model is cost sharing where (communication) service providers share their costs with other service and content providers who want to guarantee their customers quality of service and sufficient bandwidth to meet their needs. In these cases, it will not always be the customers who pay for the guaranteed experience. Imagine that Cisco wants to provide its Gold customers with superior quality when using Cisco’s WebEx video service. Cisco may reach an agreement with the service provider to provide its customers with the best possible quality of service for WebEx. In this case, Cisco pays the service provider while the customer pays Cisco for their WebEx services.
We are looking at other use cases and discussing them with our customers. Data as the oxygen that allows us to enjoy and take part in the always on lifestyle is a wonderful thing, but even as a commodity (at least in developed markets) its value should be better perceived. Monetization is one way to uphold data and protect its value.