Gone are the days when wireless carriers could generate subscriber
growth simply by offering standard buckets of minutes at competitive
prices; adding customers today requires a targeted approach toward the
specific needs of customer segments. Carriers’
recent launches of unlimited plans that focus on high-end users is just
one step in the increasingly vital direction of targeted pricing.
A new report from Diamond Management & Technology Consultants, Inc.
(NASDAQ: DTPI) finds that wireless carriers in mature markets typically
are not marketing targeted pricing plans to specific customer segments
as effectively as they should. Diamond’s
paper, entitled “Targeted Pricing,”
explains that targeting can be performed on the basis of wireless
subscribers’ usage patterns or demographics,
but notes that pricing is just one element of a targeted value
proposition.
“Carriers looking to add new customers at
their competitors’ expense have little choice
but to develop differentiated offers—which
are often based on price,” said Hamilton
Sekino, a Partner in Diamond’s Telecom
practice and author of the paper. “The rise
of family plans has locked a larger portion of subscribers into group
contracts, which increases the barriers for many subscribers to change
carriers.”
Discounts on new phones for existing subscribers and other incentives
have added to carriers’ difficulty in
converting competitors’ subscribers, known as “customer
churn.” According to Diamond’s
report, these factors have largely contributed to a drop in monthly
churn rates from 2.5 percent in 2000 to 1.7 percent today—and
only 1.3 percent for postpaid plan subscribers.
To obtain a complete copy of the report, send an email to wirelesspricing@diamondconsultants.com.
“Companies run the risk of losing money if
they do not undertake adequate preparation when launching new pricing
plans,” said Sekino. “Wireless
carriers cannot afford to approach pricing plans blindly, and must
validate their targeted plans.”
For instance, carriers need to weigh the value of mass-market
advertising campaigns against the value of marketing specific pricing
plans through media outlets that cater to particular demographic
segments. While some companies have developed innovative pricing
structures, most wireless carriers adopt the mass-market approach for
pricing plan introductions—often not the most
cost-effective approach.
Making the Case for Targeted Segments
Diamond’s paper provides high-level analysis
of six targeted pricing plan examples, each of which holds a unique
value proposition that justifies the offer. Each example cites current
competitive benchmarks from major carriers and the estimated potential
market size for each offer, and the report also includes each sample plan’s
calculated value across several dimensions. The targeted customer
segments for the sample plans are:
Nationwide Heavy Usage – The
core segments are businesspeople and traveling professionals who demand
an abundance of peak calling time and currently subscribe to wireless
plans starting at 1,500 minutes. The plan offers simplicity and
predictability to its subscribers, who pay $100 per month and do not
need to worry about budgeting their minutes, or risking the possibility
of incurring additional fees for overages.
Local Medium-Heavy Usage – The
plan is targeted at small-business workers, including blue-collar
workers (such as plumbers, electricians, and taxi drivers), social
workers, real estate agents, and other locally- or regionally-based
traveling salespeople. A secondary segment includes in-state college
students and young adults. This plan offers simplicity and
predictability at a relatively low price point, and it carries a greater
perceived value than plans offered by competitors.
Very Low Usage – The targeted
customers are elderly individuals who have basic mobile service needs;
subscribers do not want to pay for an expensive postpaid plan. At the
same time, they may eschew prepaid service because of its top-up
requirements, varying expiration dates, and limited customer care. Such
a plan offers a combination of affordability and simplicity, with the
price aimed at people with very limited mobile phone needs. The postpaid
model makes it more predictable and easy to use than prepaid
alternatives.
Heavy Messaging – The target
segment for this plan is teenagers, especially those who are graduating
from prepaid or family plans. The offer should be attractive to a
segment that has perhaps the largest appetite for text messages. Teens
also tend to focus calls to a circle of friends and family members, and
have less of a need for peak minutes due to school and after-school
activities. This plan offers value and affordability while providing
teens with exactly what they want most—free
messaging, free nights and weekends, free calls to favorite numbers—and
does not charge them for lots of anytime minutes they don’t
need. In addition, a cap on anytime minutes eliminates the risk of high
overage fees and provides parents with peace of mind.
Heavy International Long Distance (ILD) –
Broadly, the audience includes all wireless users with habitual
international calling needs. More specifically, this offer focuses on
foreign-born U.S. citizens and visa holders who regularly place
international calls. The plan combines affordability with convenience,
as users can make ILD calls at rates competitive to most calling cards —an
offer missing from today’s marketplace. For
added value, users can reach their contacts quickly and effortlessly
with one-touch calling.
Fixed Substitution – The target
audience for this final example is restricted to broadband households
that wish to replace their fixed-line phone service. Moreover, families
are less willing or able to “cut the cord,”
so carriers should focus this service on young singles and couples, who
may be more receptive. The plan offers value with added convenience, as
consumers can reduce their overall telecom expenditures and eliminate a
need to juggle multiple phone numbers.
To properly validate a targeted pricing plan, wireless carriers should
address five key questions:
Does the pricing plan speak to the targeted segment’s
needs, price sensitivity, and usage behaviors that currently are not
addressed by existing plans?
Aside from pricing, are there other compelling elements in the value
proposition to the target segments?
Do the pricing plans drive retention and loyalty in the target
segments?
Are the target segments big enough to warrant the expense of
mobilizing marketing, channel, and back-office resources?
Is the value created by incremental new customers large enough to more
than offset the re-pricing in the customer base and baseline of new
customers?
“Targeted, ‘high
value’ pricing plans can capture customers
from competing carriers or keep customers from switching to other
service providers, but not without potentially hazardous consequences,”
said Sekino. “Wireless companies can risk
cannibalizing their own customer base or initiating a pricing war.
“Targeted pricing plans are a vital piece of
the puzzle to continue generating growth in a saturated market. However,
carriers need to carefully apply customer segmentation and analytics to
understand the value creation or destruction of these pricing plans”
About Diamond
Diamond (NASDAQ: DTPI) is a management and technology consulting firm.
Recognizing that information and technology shape market dynamics,
Diamond’s small teams of experts work across
functional and organizational boundaries to develop new strategies,
improve operations, and deliver results. Since the greatest value in a
strategy, and its highest risk, resides in its implementation, Diamond
also provides proven execution capabilities. We deliver three critical
elements to every project: fact-based objectivity, spirited
collaboration, and sustainable results. To learn more visit www.diamondconsultants.com.
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