Telecoms.com periodically invites expert third-party contributors to submit analysis on a key topic affecting the telco industry. In this piece Dr. Ekkehard Stadie and Martin Deutschenbaur, of Simon-Kucher & Partners, look at current telco pricing models and why they need to change.

Revenue and profit sources of mobile and fixed-line network providers are under much more pressure than originally thought. Users are radically changing their behaviour, over-the-top (OTT) offers are highly competitive, and, most of all, non-future proof toxic price models are in place.

The most recent wake-up call came in the form of Facebook’s takeover of WhatsApp and its announcement shortly thereafter that it will start offering voice telephony. Classic telecommunication providers need to carefully scrutinize how services are priced. Simply pricing units of megabytes, minutes and text messages is no longer sufficient to maintain profitability and growth.

The following six challenges have to be tackled with effective pricing solutions:

1.) Mobile data usage with lower growth potential than expected

Data volumes in fixed-line networks have grown much more than in mobile networks. “Commercial” WiFi offers will cannibalise mobile data usage. It’s standard nowadays for restaurants, hotels, airports, companies and public transport to offer their customers and visitors free WiFi. There is no urgent need to use mobile data offers in these places. The clear winner in volume growth is the fixed-line network.

2.) Data roaming revenues under pressure through WiFi

This highly profitable business line is not only feeling pressure from regulation, it’s also affected by the WiFi substitution. Many customers would rather commute from one WiFi hotspot to the next instead of going through the effort of booking an extra data roaming option.

3.) Voice roaming revenue under pressure through OTT solutions

Voice roaming calls, still considered expensive, are partially being replaced by better and free solutions. FaceTime and Skype are more multi-media-oriented, and to some extent, qualitatively better. Also in the B2B area teleconference calls and longer conversations with far-away locations are more attractively served by OTT providers. In its Skype service, Microsoft already offers multi-media features like group video calls, screen sharing and calls to specific countries can be added on. While this offer can still be considered as a consumer/prosumer solution, Microsoft offers the corresponding multi-media functionalities also through Lync in a business environment.

4.) Text messages not yet re-positioned

The text message is an outdated technology. We are already seeing mass migration to offers such as WhatsApp. Yet text messages are the most reliable means of delivery, have the highest degree of privacy and have the most direct character of all messaging forms in business communication. But text messages are at the end of the life cycle. The end can only be slowed down.

5.) National voice usage revenue can only get protected by differentiated service pricing

National voice usage is decreasing for many reasons. For one, OTT messaging is replacing traditional calls. Also, calls are being substituted by multi-media OTT calls. In the “Postpaid” area a revenue safeguard is reached via unlimited voice offers.

6.) Home data usage is rising, but hardly being charged. In the current price model access can even be substituted

As with public WiFi hotspots, unlimited data usage is the dominant business model also for residential internet access. In an IP-based environment, it makes little sense for all apartments of an apartment building to separately pay £20 to £30 per month for a fixed-line internet connection. Instead of e.g. eight individual connections one connection with a higher bandwidth and a WiFi router for £50 per month would be enough for the whole building.

New pricing approaches: The time to act is now!

It is time for a completely new approach to strategic pricing. Voice, text messages and roaming are going through a downturn. Data volume is migrating at a high level into fixed-line networks with unlimited usage models that do not monetise any usage increase. Innovative price models can help to detox current pricing structures. The optimal pricing solution however depends on multiple factors like market environment and positioning of the provider. Telecoms companies have to evaluate different routes as there is no one size fits all solution. Price model changes are needed and beneficial for telecoms companies but they are the “decathlon” of pricing, a lot of experience and practice is required. It is like flying, the rougher it gets the more experienced the pilot has to be.

Dr. Ekkehard Stadie is a Senior Partner at Simon-Kucher & Partners, where he heads the global Telecommunications & IT competence center.

Martin Deutschenbaur is a Director at Simon-Kucher & Partners, London, where he heads the Telecommunications, Online Business and Technology Services competence center  

Simon-Kucher & Partners, Strategy & Marketing Consultants:

Simon-Kucher & Partners is a global consulting firm focusing on smart profit growth. It specialises in strategy, marketing, sales and pricing. It helps its clients to achieve revenue growth using fact-based and practical strategies. In a survey of leading managers in Germany, manager magazin named it the leading consultancy for marketing and sales (August 2011). The firm has 700 employees across 27 offices worldwide.