Data Pricing : Fresh Insights from the Airline Industry

Presentation2
According to Warren Buffet “The single most important decision in evaluating a business is pricing power..If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” If this is true then it would make Telcos in the 4G world a lousy business since Telco Execs in Africa ( especially ) have a prayer session on how to cut prices by + 25 % every 3 months and crow about it in the Media like pontificating politicians seeking votes during a presedential election.

The Boston Consulting Group Report (The Internet Economy in the G-20: The $4.2 Trillion Opportunity, ) surveyed about 1,000 people in each of several G-20 nations on what “lifestyle habit” they would give up instead of the Internet for a year, including sex, alcohol, showers and cars. Most of the results for items like coffee, chocolate and fast food were steady with averages of 70-80 percent. Japan topped the list of citizens who would make the sacrifice, with 56 percent who would abstain from sex. Brazilians were the least likely to give up sex for the web access – only 12 percent surveyed would give it up. American and South Africans were most attached to their vehicles – only 10 percent each were willing to give up their cars for the Internet.

Another interesting finding was the perceived value of the Internet versus its actual cost. For instance, Americans value the Internet at $3,000. According to BCG, it’s value is actually $472 – an incredible markup in price based on perception.

So in light of the above : is there any hope for Telco execs who are intent on destroying the profitability of the Industry by engaging in vicious price battles that threatens the sustainability of the Industry ???? Thats where Yield Management can provide some insights on how best to price data. Robert Crandall, former Chairman and CEO of American Airlines, gave Yield Management its name and has called it “the single most important technical development in transportation management since we entered deregulation.” Ditto for Telco De Regulation

Yield management is the process of understanding, anticipating and influencing consumer behavior in order to maximize yield or profits from a fixed, perishable resource such as airline seats or hotel room reservations or advertising inventory or Internet bandwidth . Its core concept is to provide the right service to the right customer at the right time for the right price.This process can result in price discrimination, where a firm charges customers consuming otherwise identical goods or services a different price for doing so.

Believe it or not the telco and airline industries have much in common in terms of perishable inventory , large sunk low marginal costs and varying predictable demand volume. Yield management principles would indicate that, as the costs of using network capacity are minimal, it makes sense to use as much of it as possible when it is available and maximize revenue from it when it is in shorter supply. Unused bandwidth is lost forever.

It is surprising if not shocking that Operators are utilizing on average only 35 to 40 percent of their network capacity. It takes some creativity to turn this huge dormant asset into profits.There are several scenarios in which yield management can be used to increase revenues.

• Improving Market Segmentation and Pricing : Market segmentation enables enterprises to cater products and services, including pricing, targeted at the buyers in each segment. The basic idea, which makes segmentation an effective tool to increase an enterprise’s bottom line, is to charge more for products targeted at customer segments with a higher willingness to pay.

• Monetizing Unused Bandwidth : Telcos stand to increase profits through the creative monetization of their unused network bandwidth. Similar to the empty airline seat, network bandwidth is a perishable resource with a very low marginal cost, so filling the underutilized bandwidth with revenue-producing network traffic will have a direct, positive impact on the bottom line.

•Dynamic Pricing : Market segmentation and associated segment pricing aims to maximize profits by fixing prices at levels that are optimal for targeted segments. Dynamic pricing encompasses adjusting the prices to changing market conditions and/or the status of the Telco’s resources.

• Increasing Profits at Peak Utilization : Although dynamic price adjustments can be used as an effective mechanism to off-load the network during peak usage, periods of peak utilization by definition are synonymous with periods of peak market demand and, as such, should be assessed for opportunities to increase revenues.

• Reservations : The mobile network’s bandwidth management functions enable Telcos to reserve bandwidth for specific customers in advance of their actual bandwidth usage. When a customer’s reservation is in effect, the network ensures that the customer receives the requested bandwidth even if there are other customers competing for the same bandwidth.

• Pricing flexibility : Real-time charging functionality provides Telcos with pricing flexibility at least on par with, if not better than that used by the airline industry. Telcos can charge based on the attributes of provided services, customer characteristics, context, network state, historical usage, etc.

Besides increasing revenue Yield management can also reduce the need to increase capacity, resulting in savings in investment for providers, which can be passed on to consumers as lower costs. The value of yield management for mobile broadband is an opportunity for service providers to manage the quality of a user’s experience while achieving increased revenues in the context of the exponential CAPEX costs associated with servicing the global demand for mobile broadband services.

Sadiq Malik ( Telco Strategist )

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