MAXIMIZING ARPU FOR MOBILE OPERATORS Pricing strategies to

MAXIMIZING ARPU FORMOBILE OPERATORS

Pricing strategies to increaseARPU

27 April 2006

ValorisVAL-CIAL-CONFERENCES-2006-Pricing IIR Apr2006-060418-JMC

OBJECTIVES OF THIS SESSION

PRESENT 2 CONCRETE PRICING STRATEGIES,BASED ON ACTUAL CASE STUDIES, RESULTING

IN ARPU INCREASE

PRESENT 2 CONCRETE PRICING STRATEGIES,BASED ON ACTUAL CASE STUDIES, RESULTING

IN ARPU INCREASE


• Common wisdom says “that if we increase prices,we’ll increase ARPU” whereas “if we decreaseprices, the elasticity will not be enough to maintainARPU”, following the belief that:

1. The “classical” price / demand elasticity curve holds,showing a limited set of “states” for each customer

2. There is an “optimun point” that would maximizeexpenditure for each customer

3. At the current price levels, this “optimum point” is to theright of the curve, meaning that price levels would haveto be increased (!) to reach it

• Common wisdom says “that if we increase prices,we’ll increase ARPU” whereas “if we decreaseprices, the elasticity will not be enough to maintainARPU”, following the belief that:

1. The “classical” price / demand elasticity curve holds,showing a limited set of “states” for each customer

2. There is an “optimun point” that would maximizeexpenditure for each customer

3. At the current price levels, this “optimum point” is to theright of the curve, meaning that price levels would haveto be increased (!) to reach it

THE CLASSICAL PRICE / DEMAND CURVE

Currentsituation

Optimunpoint

Currentprice levels

Price perminute

Expenditure


• In practice, each customer behaves along his own“price / demand” elasticity curve:

- For certain customers, still price decreases mayresult in an increase of ARPU

- Customers require different price plans to reachtheir “optimun point”...

- ...but the existence of different price plans mightresult in a considerable ARPU DESTRUCTION ifnot correctly targeted:

� What would happen if each customer wasautomatically moved to his cheapest priceplan?

• In practice, each customer behaves along his own“price / demand” elasticity curve:

- For certain customers, still price decreases mayresult in an increase of ARPU

- Customers require different price plans to reachtheir “optimun point”...

- ...but the existence of different price plans mightresult in a considerable ARPU DESTRUCTION ifnot correctly targeted:

� What would happen if each customer wasautomatically moved to his cheapest priceplan?

DIFFERENT CUSTOMERS... DIFFERENT OPTIMUN POINTS... NEEDFOR A TARGETED APPROACH

• IF THE OBJECTIVE IS TO MAXIMIZE ARPU,“TARGETED APPROACH” IS THE KEYWORD

• DIRECT MARKETING TECHNIQUES (DATAMINING +TARGETED CAMPAIGNS) ARE THUS ESSENTIAL

• IF THE OBJECTIVE IS TO MAXIMIZE ARPU,“TARGETED APPROACH” IS THE KEYWORD

• DIRECT MARKETING TECHNIQUES (DATAMINING +TARGETED CAMPAIGNS) ARE THUS ESSENTIAL

Price perminute

Less pricesensitive

Very muchprice sensitive

A B C

ExpenditureIdeal plan from

customer AIdeal plan from

customer C

Current pricelevel (e.g. price

plan 1)


• Common wisdom says that “if we increase prices, we’llincrease ARPU” whereas if we decrease prices, theelasticity will not be enough to maintain ARPU, endorsingthe belief that:1. The “classical” price / demand elasticity curve holds,

showing a limited set of “states” for each customer2. There is an “optimun point” that would maximize

expenditure for each customer3. At the current price levels, this “optimun point” is to the

right of the curve, meaning that price levels would haveto be increased (!) to reach it

• Common wisdom says that “if we increase prices, we’llincrease ARPU” whereas if we decrease prices, theelasticity will not be enough to maintain ARPU, endorsingthe belief that:1. The “classical” price / demand elasticity curve holds,

showing a limited set of “states” for each customer2. There is an “optimun point” that would maximize

expenditure for each customer3. At the current price levels, this “optimun point” is to the

right of the curve, meaning that price levels would haveto be increased (!) to reach it

• In this situation, are there feasible alternativesto increase ARPU?

…not customer-friendly in thiscompetitive environment

• Increase pricesA

…there seems to be limitedroom for this for productsalready known (voice, SMS)

• Increase useB

…which seems to be incontradiction with the curve?

• Increase use bylowering prices

CPrice perminute

Expenditure

HOW TO INCREASE CUSTOMER ARPU WITHIN THE FRAMEWORKOF THE CLASSICAL PRICE / DEMAND CURVE?

AB

C

In the following slides we’ll see 2different approaches to realize

option C


• In practice, customers don’t have a 100% stableusage pattern, showing fluctuations over differentmonths …

• … and when they move to bundles they tend tochoose amounts exceeding their usage, notreaching the optimun price per minute in the shortterm …

• … and progressively evolving towards thisoptimum point for them

• In practice, customers don’t have a 100% stableusage pattern, showing fluctuations over differentmonths …

• … and when they move to bundles they tend tochoose amounts exceeding their usage, notreaching the optimun price per minute in the shortterm …

• … and progressively evolving towards thisoptimum point for them

CUSTOMERS REACTION TOWARDS PRICE BUNDLES

This shows a strategy whereby certain customerprofiles still show room for ARPU evolution in awin / win way:

• Operators increase ARPU• Customers enjoy a lower price per minute

This shows a strategy whereby certain customerprofiles still show room for ARPU evolution in awin / win way:

• Operators increase ARPU• Customers enjoy a lower price per minute

Price perminute

Expenditure

Current pricelevel (e.g. price

plan 1)

A

B

C

Current priceplan for thecustomer

Bundle tariff

A

BC


CUSTOMERS REACTION TOWARDS PRICE BUNDLES (Cont.)

• When customers move to bundles, they tend to choose amounts excluding their actual usage:- On average 15% - 20% higher than actual usage...- ...but 70% of customers choose bundles above their usage

< 25 < 50 < 75 < 100 < 125 < 150 < 175 < 200 < 225 < 250

<75% >125%

~50% ~25%

75% - 125%

~25%

Customers

Usage



Price perminute

ARPU

Bundle 1Bundle 2

Bundle 3

TotalARPU

0

20

40

60

80

100

120

Month 1 Month 2 Month 3

Customers progressively increase their usage and ARPU, making a more efficient use of their bundle.

Time

Bundle (curve)

Usage bellowthe pack

Usa

ge e

xcee

ding

the

pack

Evolution of customers in bundles


• In fact, different customer profilescan be identified according to theirreaction to bundles

• These profiles are characterized bya number of variables- ARPU- ARPU stability- Payment method- Age- …

• These profiles can be identifiedthrough experience and taken intoaccount when launching targetedmigration campaigns

• In fact, different customer profilescan be identified according to theirreaction to bundles

• These profiles are characterized bya number of variables- ARPU- ARPU stability- Payment method- Age- …

• These profiles can be identifiedthrough experience and taken intoaccount when launching targetedmigration campaigns


…

…

…

…

+40%

+20%

10%

-30%

0%

+30%

Avg ARPUimpact+20%

Profile B2

Profile B1

Profile A2

Profile A1

Profile A

Profile B


CUSTOMERS REACTION TOWARDS “ALL YOU CAN EAT”PRICING OPTIONS

“ALL YOU CAN EAT” OPTIONS“ALL YOU CAN EAT” OPTIONS ARPU IMPACT (ON PROMO VARIABLE)ARPU IMPACT (ON PROMO VARIABLE)

Price perminute

ARPU

1

2

1

Well targeted

Wrongly targeted

1 Before campaign

After campaign2


APARENT CONFLICT OF INTERESTAPARENT CONFLICT OF INTEREST CUSTOMERS INTEREST IN THE PROPOSITIONCUSTOMERS INTEREST IN THE PROPOSITION

Ideally we would like to avoid the apparent conflict ofinterest and segment customers in order to identifythose who both:

• Are interested in the propositions• Will increase ARPU and profitability

PROFITABLEFOR THE CUSTOMER

PROFITABLEFOR THE OPERATOR

YES NO

ANALYSISDoes a customer spend

more than €5/month on on-net calls during weekends?

“Call free on-net duringweekends for €5 / month”

• Ex-post analysis reveals customers groups withpotential for stimulation

• Some behaviours seem to be universal (similardynamics have been observed across several markets)

• Customersinterested in thecampaign in orderto stop limiting theirusage (“want totalk more”)

• Customersinterested in thecampaignexpecting toreduce their overallexpenditure (“wantto spend less”)

PROMO VARIABLEUSAGE EVOLUTION

BEFORE AFTER

SEGMENT “A”:STIMULATIONPOTENTIAL

SEGMENT “B”:ALREADYSERVED

15

100

+10%

x 6-7

100 110

CUSTOMERS REACTION TOWARDS “ALL YOU CAN EAT” PRICINGPROPOSITIONS (Cont.)HOW TO MAKE CUSTOMERS SATISFIED WHILE INCREASING THEIR ARPU?


ANALYSIS OF RESULTSANALYSIS OF RESULTSFULL-LAUNCH: SELECTION

OF IDEAL TARGET,IDEAL PROPOSITION

FULL-LAUNCH: SELECTIONOF IDEAL TARGET,

IDEAL PROPOSITION

EXPECTED PROFITABILITY

EXPECTED RESPONSE RATE

NPV: - 5NPV: - 5

NPV: - 50NPV: - 50

NPV: - 15NPV: - 15

Low voiceusage inweekends

High totalusage

Low totalusageHuge voice

usage inweekends

NPV: 30NPV: 30

NPV: 10NPV: 10

Accep. Rate: 300Accep. Rate: 300





Huge on-netSMS usageduringweekends

Low on-netSMS usageduringweekends

High ARPU

Low ARPU



Senior

Young

INTERESTED & PROFITABLE CLUSTERS

Accep. Rate:150

Accep. Rate:150

Accep. Rate:60

Accep. Rate:60

Accep. Rate:10

Accep. Rate:10

Accep. Rate:300

Accep. Rate:300

Accep. Rate:100

Accep. Rate:100Huge on-net

SMS usageduringweekends

Low on-netSMS usageduringweekends

High ARPU

Low ARPU

Accep. Rate:50

Accep. Rate:50

Accep. Rate:200

Accep. Rate:200

Senior

YoungAcceptance

rate: 50Acceptance

rate: 50

CUSTOMERSWITH POSITIVENPV Accep. Rate:

100Accep. Rate:

100

Accep. Rate:200

Accep. Rate:200

HighARPU

Young

NPV: 10

NPV: 15

NPV: 8

TESTTEST

Not

inte

rste

d

STI

M

INF

CR

IM Notinteresting

Acceptance rate:100

Avg. NPV: - 10

Acceptance rate:100

Avg. NPV: - 10

RESULTSRESULTS

AVG:-10

AVG:100

ARPU INCREASEARPU INCREASE

SATISFIEDCUSTOMERSSATISFIED

CUSTOMERS

CUSTOMERS REACTION TOWARDS “ALL YOU CAN EAT” PRICINGPROPOSITIONS (Cont.)3 STEPS PROCESS TOWARDS ARPU INCREASE + SATISFACTION


• Propositions with potential to increase ARPU

- Price plans: (time) bundles

- Pricing options: unlimited usage fees

• Direct marketing techniques

- Datamining to predict impact

- Targeted campaigns

SUMMARY

1

2

MAXIMIZING ARPU FOR MOBILE OPERATORS Pricing strategies to

Documents

Transcript of MAXIMIZING ARPU FOR MOBILE OPERATORS Pricing strategies to