Eight pricing and portfolio tips for telco operators

Telecoms.com periodically invites expert third-party contributors to submit analysis on a key topic affecting the telco industry. In this article Dr. Ekkehard Stadie and Dr. Kajetan Zwirglmaier of consulting firm Simon-Kucher explore how operators can counter the effects of declining prices and product development challenges.

Our Global Pricing Study revealed that 72 percent of all new products are a commercial flop. Or put another way: only one-third of telco operators state that their new products are a commercial success! At the same time, price pressure in the sector is high: 63 percent of operators have to compete on low prices. However, only 33 percent feel that the decline in prices is a natural trend in the industry. Telco operators can escape these trends by focusing on key areas of improvement. Here are our eight tips on what to do.

1. Optimise pricing strategies to meet targets

Telco operators have a huge number of targets for 2015, most of which focus on improving financial performance, increasing penetration of services/converged offers and stimulating usage. Well-established marketing and brand strategies are designed to support these goals. But what about pricing? Do they outperform their competitors by having a dedicated pricing strategy? Are they unique? Do they go beyond copying the competition? A pricing strategy provides clear guidelines for pricing measures and as pricing decisions usually receive considerable market attention – especially from customers and competitors – they are crucial for achieving targets. So establishing the link between operational pricing decisions and corporate goals is crucial for accomplishing and even exceeding corporate goals.

2. End price wars to achieve market development

According to our study, 64 percent of operators are currently engaged in a price war. At the same time, 76 percent of operators think that a competitor started it – mathematically impossible. Regardless of who actually started it, telecoms can seize the opportunity to end the price wars in 2015. To do so, it is essential to design a clear roadmap of when and how to act, and win the support of the C-suite. The key success factor is to act consistently throughout the entire go-to-market approach. If you ask yourself why you should end the war, simply calculate what you will lose if prices continue to deteriorate.

3. Implement segment-tailored value extraction

Many players in the telco market currently fear the risk of commoditisation. Portfolios are increasingly following the classical, purely volume-based (min/MB/SMS) trend. The transition from product marketing to segment-driven offers an escape route from the commoditisation dilemma. It also allows offers to be tailored to customer needs, increasing customer satisfaction and operator performance. To successfully design a segment-tailored approach, it is essential to first carefully select a method. Classical, purely demographic-based segmentations will not do. The first step is to put the customer needs at the heart of any segment building work. Second, develop a consistent go-to-market strategy that supports a segment-specific communication approach throughout the customer lifecycle. This will go a long way to improving customer satisfaction as well as profits.

4. Offer the best bundle

2014 was the year to prepare for convergence gaming. Vodafone, Deutsche Telekom and other players launched or prepared fixed mobile convergence (FMC)/multi-product offers. BT’s February announcement that it was buying EE, followed by the announcement of O₂ and Three’s merger in March, were the latest indications of how important FMC offers will be in the future. However, FMC offers are not yet the industry’s salvation. Currently the sole advantage they have is convenience, which is not a big enough pull for customers. The challenge for 2015 is to improve or launch FMC offers that provide sufficient benefits to be attractive to customers, but still generate incremental average revenue per user and do not squander future monetisation potential.

5. Fine-tune price models for sustainable development

The Global Pricing Study shows that 66 percent of companies are considering changing their price models. Why is this also an issue for telco companies? In many markets, current data volumes already exceed data consumption on average by more than 100 percent and voice services are already flat. Sure, streaming services and other drivers will increase data usage further. But by how much? And more importantly, will it grow stronger than included data volumes? Telco operators can gain a USP and improve sustainability of their business model by improving their price model and tying it closer to their customers’ needs. But two guiding principles should be kept in mind: Keep it simple for your customers and ensure that any performance improvements automatically monetise. Based on our experience doing so leads to a revenue boost of, on average, five percent.

6. Think of pricing capabilities as investing in future success

According to the Global Pricing Study, margin goals were not achieved mainly due to pricing issues, i.e. either the organisation’s pricing capabilities are insufficient or poor decisions in terms of pricing are made. Additionally, competition is getting fiercer as full market penetration has been nearly reached, not only concerning voice and SMS, but also data offers. To manage the corresponding challenges and opportunities, pricing capabilities have to improve. A multi-dimensional framework that enables your organisation to make superior pricing decisions that are in line with your corporate goals and don’t slow down company processes is essential. As a result the risk of accidentally entering price wars and/or missing opportunities to generate sustainable competitive advantages decreases significantly.

7. Implement smart hardware pricing

Hardware will continue to be one of the most important factors, if not the most important purchasing factor, for telco products, especially in the mobile business. But funding for hardware needs to be reduced and the only way to do this is to thoroughly understand customer needs and establish an integrated pricing approach for hardware and tariffs. Currently operators don’t even have hardware and tariff pricing located in the same departments or business areas. This leads to detached pricing decisions. Understanding customer needs helps appropriately allocate funding to the hardware combined with the best tariff, maximising customer willingness to pay. Furthermore, it makes it possible to use hardware pricing strategies that are tailored to the respective customer segments. Telecom operators who score well here will have a significant competitive advantage.

8. Learn from other industries

In total, 89 percent of telco operators think pressure in their market is intensifying. How can this be avoided in increasingly saturated markets where the big monetisation opportunity of 2014, the roll out of 4G, was missed, such as the UK? Learning from other industries and adopting strategies that have already proven successful in other markets will pay off. The variety of potential extra-industry benchmarks is great and ranges, from tailored incentive and bonus systems in the construction industry to freemium models of online businesses and partner cards from credit card providers. The challenge for telecom operators is to choose the best one for their company in order to gain a sustainable USP over their competitors.

It’s time to act. Telecoms can start exploiting the full potential of the great services they deliver by introducing a consistent pricing strategy and ending destructive price wars. By doing so they will regain their ability to proactively shape the market and utilise future trends. Applying a segment- specific, go-to-market approach and introducing sustainable price models are key pillars of success. Beyond this, converged offers and smart hardware pricing also play an important role. The first quarter of 2015 has just ended. Three more to go. Time enough for telecom managers to lead their company to the champions’ league of profitability and growth.

About the authors
Dr. Ekkehard Stadie is a Senior Partner at Simon-Kucher in Cologne and Dubai and heads the company’s global telecommunications practice. He holds a Ph.D. in Business-to-Business Marketing from the University of Muenster. Dr Stadie is the co-author of two books focusing on strategy in the telecommunications market and the author of numerous articles. He is a regular speaker at conferences around the world.

Dr. Kajetan Zwirglmaier is Director in Simon-Kucher’s global telecommunications practice. He holds a Ph.D. in economics from the Technische Universität München, is author of a book on seasonal price fluctuations and co-author of a book focusing on new technologies in pricing.