On Cellular Data Pricing, Revenue & Consumptive Growth Dynamics, and Elephants in the Data Pipe.

Posted on August 3, 2023 by Dr. Kim

I am getting a bit sentimental as I haven’t written much about cellular data consumption for the last 10+ years. At the time, it did not take long for most folks in and out of our industry to realize that data traffic and, thereby, so many believed, the total cost of providing the cellular data would be growing far beyond the associated data revenues, e.g., remember the famous scissor chart back in the early two thousand tens. Many believed (then) that cellular data growth would be the undoing of the cellular industry. In 2011 many believed that the Industry only had a few more years before the total cost of providing cellular data would exceed the revenue rendering cellular data unprofitable. Ten years after, our industry remains alive and kicking (though they might not want to admit it too loudly).

Much of the past fear was due to not completely understanding the technology drivers, e.g., bits per second is a driver, and bytes that price plans were structured around not so much. The initial huge growth rates of data consumption that were observed did not make the unease smaller, i.e., often forgetting that a bit more can be represented as a huge growth rate when you start with almost nothing. Moreover, we also did have big scaling challenges with 3G data delivery. It became quickly clear that 3G was not what it had been hyped to be by the industry.

And … despite the historical evidence to the contrary, there are still to this day many industry insiders that believe that a Byte lost or gained is directly related to a loss or gain in revenue in a linear fashion. Our brains prefer straight lines and linear thinking, happily ignoring the unpleasantries of the non-linear world around us, often created by ourselves.

Figure 1 illustrates linear or straight-line thinking (left side), preferred by our human brains, contrasting the often non-linear reality (right side). It should be emphasized that horizontal and vertical lines, although linear, are not typically something that instinctively enters the cognitive process of assessing real-world trends.

Of course, if the non-linear price plans for cellular data were as depicted above in Figure 1, such insiders would be right even if anchored in linear thinking (i.e., even in the non-linear example to the right, an increase in consumption (GBs) leads to an increase in revenue). However, when it comes to cellular data price plans, the price vs. consumption is much more “beastly,” as shown below (in Figure 2);

Figure 2 illustrates the two most common price plan structures in Telcoland; (a, left side) the typical step function price logic that associates a range of data consumption with a price point, i.e., the price is a constant independent of the consumption over the data range. The price level is presented as price versus the maximum allowed consumption. This is by far the most common price plan logic in use. (b, right side) The “unlimited” price plan logic has one price level and allows for unlimited data consumption. T-Mobile US, Swisscom, and SK Telecom have all endorsed the unlimited with good examples of such pricing logic. The interesting fact is that most of those operators have several levels of unlimited tied to the consumptive behavior where above a given limit, the customer may be throttled (i.e., the speed will be reduced compared to before reaching the limit), or (and!) the unlimited plan is tied to either radio access technology (e.g., 4G, 4G+5G, 5G) or a given speed (e.g., 50 Mbps, 100 Mbps, 1Gbps, ..).

Most cellular data price plans follow a step function-like pricing logic as shown in Figure 2 (left side), where within each level, the price is constant up to the nominal data consumption value (i.e., purple dot) of the given plan, irrespective of the consumption. The most extreme version of this logic is the unlimited price plan, where the price level is independent of the volumetric data consumption. Although, “funny” enough, many operators have designed unlimited price plans that, in one way or another, depend on the customers’ consumption, e.g., after a certain level of unlimited consumption (e.g., 200 GB), cellular speed is throttled substantially (at least if the cell under which the customer demand resources are congested). So the “logic” is that if you wanted true unlimited, you still need to pay more than if you only require “unlimited”. Note that for the mathematically inclined, the step function is regarded as (piece-wise) linear … Although our linear brains might not appreciate that finesse very much. Maybe a heuristic that “The brain thinks in straight lines” would be more precisely restated as “The brain thinks in continuous non-constant monotonous straight lines”.

Any increase in consumption within a given pricing-consumption level will not result in any additional revenue. Most price plans allow for considerable growth without incurring additional associated revenues.

NETHERLANDS vs INDONESIA – BRIEFLY.

I like to keep informed and updated about markets I have worked in, with operators I have worked for, and with. I have worked across the globe in many very diverse markets and with operators in vastly different business cycles gives an interesting perspective on our industry. Throughout my career, I have been super interested in the difference between Telco operations and strategies in so-called mature markets versus what today may be much more of a misnomer than 10+ years ago, emerging markets.

The average cellular, without WiFi, consumption per customer in Indonesia was ca. 8 GB per month in 2022. That consumption would cost around 50 thousand Rp (ca. 3 euros) per month. For comparison, in The Netherlands, that consumption profile would cost a consumer around 16 euros per month. As of May 2023, the median cellular download speed was 106 Mbps (i.e., helped by countrywide 5G deployment, for 4G only, the speed would be around 60 to 80 Mbps) compared with 22 Mbps in Indonesia (i.e., where 5G has just been launched. Interestingly, although most likely coincidental, in Indonesia, a cellular data customer would pay ca. 5 times less than in the Netherlands for the same volumetric consumption. Note that for 2023, the average annual income in Indonesia is about one-quarter of that in the Netherlands. However, the Indonesian cellular consumer would also have one-fifth of the quality measured by downlink speed from the cellular base station to the consumer’s smartphone.

Let’s go deeper into how effective consumptive growth of cellular data is monetized… what may impact the consumptive growth, positively and negatively, and how it relates to the telco’s topline.

CELLULAR BUSINESS DYNAMICS.

Figure 3 Between 2016 and 2021, Western European Telcos lost almost 7% of their total cellular turnover (ca. 7+ billion euros over the markets I follow). This corresponds to a total revenue loss of ca. 1.4% per year over the period. To no surprise, the loss of cellular voice-based revenue has been truly horrendous, with an annual loss ca. 30%, although the Covid year (2021 and 2022, for that matter) was good to voice revenues (as we found ourselves confined to our homes and a call away from our colleagues). On the positive side, cellular data-based revenues have “positively” contributed to the revenue in Western Europe over the period (we don’t really know the counterfactual), with an annual growth of ca. 4%. Since 2016 cellular data revenues have exceeded that of cellular voice revenues and are 2022 expected to be around 70% of the total cellular revenue (for Western Europe). Cellular revenues have been and remain under pressure, even with a positive contribution from cellular data. The growth of cellular data volume (not including the contribution generated from WiFi usage) has continued to grow with a 38% annualized growth rate and is today (i.e., 2023) more than five times that of 2016. The annual growth rate of cellular data consumption per customer is somewhat lower ranging from the mid-twenties to the end-thirties percent. Needless to say that the corresponding cellular ARPU has not experienced anywhere near similar growth. In fact, cellular ARPU has generally been lowered over the period.

Some, in my opinion, obvious observations that are worth making on cellular data (I come to realize that although I find these obvious, I am often confronted with a lack of awareness or understanding of those);

Cellular data consumption grows much (much) faster than the corresponding data revenue (i.e., 38% vs 4% for Western Europe).

The unit growth of cellular data consumption does not lead to the same unit growth in the corresponding cellular data revenues.

Within most finite cellular data plans (thus the not unlimited ones), substantial data growth potential can be realized without resulting in a net increase of data-related revenues. This is, of course, trivial for unlimited plans.

The anticipated death of the cellular industry back in the twenty-tens was an exaggeration. The Industry’s death by signaling, voluptuous & unconstrained volumes of demanded data, and ever-decreasing euros per Bytes remains a fading memory and, of course, in PowerPoints of that time (I have provided some of my own from that period below). A good scare does wonders to stimulate innovation to avoid “Armageddon.” The telecom industry remains alive and well.

Figure 4 The latest data (up to 2022) from OECD on mobile data consumption dynamics. Source data can be found at OECD Data Explorer. The data illustrates the slowdown in cellular data growth from a customer perspective and in terms of total generated mobile data. Looking over the period, the 5-year cumulative growth rate between 2016 and 2021 is higher than 2017 to 2022 as well as the growth rate between 2022 and 2021 was, in general, even lower. This indicates a general slowdown in mobile data consumption as 4G consumption (in Western Europe) saturates and 5G consumption still picks up. Although this is not an account of the observed growth dynamics over the years, given the data for 2022 was just released, I felt it was worth including these for completeness. Unfortunately, I have not yet acquired the cellular revenue structure (e.g., voice and data) for 2022, it is work in progress.

WHAT DRIVES CONSUMPTIVE DATA GROWTH … POSITIVE & NEGATIVE.

What drives the consumer’s cellular data consumption? As I have done with my team for many years, a cellular operator with data analytics capabilities can easily check the list of positive and negative contributors driving cellular data consumption below.

Positive Growth Contributors:

Customer or adopter uptake. That is, new or old, customers that go from non-data to data customers (i.e., adopting cellular data).
Increased data consumption (i.e., usage per adopter) within the cellular data customer base that is driven by a lot of the enablers below;
Affordable pricing and suitable price plans.
More capable Radio Access Technology (RAT), e.g., HSDPA → HSPA+ → LTE → 5G, effectively higher spectral efficiency from advanced antenna systems. Typically will drive up the per-customer data consumption to the extent that pricing is not a barrier to usage.
More available cellular frequency spectrum is provisioned on the best RAT (regarding spectral efficiency).
Good enough cellular network consistent with customer demand.
Affordable and capable device ecosystem.
Faster mobile device CPU leads to higher consumption.
Faster & more capable mobile GPUs lead to higher consumption.
Device screen size. The larger the screen, the higher the consumption.
Access to popular content and social media.

Figure 5 illustrates the description of data growth as depending on the uptake of Adopters and the associated growth rate α(t) multiplied by the Usage per Adopter and the associated growth rate of usage μ(t). The growth of the Adopters can typically be approximated by an S-curve reaching its maximum as there are few more customers left to adopt a new service or product or RAT (i.e., α(t)→0%). As described in this section, the growth of usage per adopter, μ(t), will depend on many factors. Our intuition of μ is that it is positive for cellular data and historically has exceeded 30%. A negative μ would be an indication of consumptive churn. It should not be surprising that overall cellular data consumption growth can be very large as the Adopter growth rate is at its peak (i.e., around the S-curve inflection point), and Usage growth is high as well. It also should not be too surprising that after Adopter uptake has reached the inflection point, the overall growth will slow down and eventually be driven by the Usage per Adopter growth rate.

Figure 6 Using the OECD data (OECD Data Explorer) for the Western European mobile data per customer consumptive growth from 2011 to 2022, the above illustrates the annual growth rate of per-customer data mobile consumption. Mobile data consumption is a blend of usage across the various RATs enabling packet data usage. There is a clear increased annual growth after introducing LTE (4G) followed by a slowdown in annual growth, possibly due to reaching saturation in 4G adaptation, i.e., α_3G→4G(t) → 0% leaving μ_4G(t) driving the cellular data growth. There is a relatively weak increase in 2021, and although the timing coincides with 5G non-standalone (NSA) introduction (typically at 700 MHz or dynamics spectrum share (DSS) with 4G, e.g., Vodafone-Ziggo NL using their 1800 MHz for 4G and 5G) the increase in 2020 may be better attributed to Covid lockdown than a spurt in data consumption due to 5G NSA intro.

Anything that creates more capacity and quality (e.g., increased spectral efficiency, more spectrum, new, more capable RAT, better antennas, …) will, in general, result in an increased usage overall as well as on a per-customer basis (remember most price plans allow for substantial growth within the plans data-volume limit without incurring more cost for the customer). If one takes the above counterfactual, it should not be surprising that this would result in slower or negative consumption growth.

Negative growth contributors:

Cellular congestion causes increased packet loss, retransmissions, and deteriorating latency and speed performance. All in all, congestion may have a substantial negative impact on the customer’s service experience.
Throttling policies will always lower consumption and usage in general, as quality is intentionally lowered by the Telco.
Increased share of QUIC content on the network. The QUIC protocol is used by many streaming video providers (e.g., Youtube, Facebook, TikTok, …). The protocol improves performance (e.g., speed, latency, packet delivery, network changes, …) and security. Services using QUIC will “bully” other applications that use TCP/IP, encouraging TCP/IP to back off from using bandwidth. In this respect, QUIC is not a fair protocol.
Elephant flow dynamics (e.g., few traffic flows causing cell congestion and service degradation for the many). In general, elephant flows, particularly QUIC based, will cause an increase in TCP/IP data packet retransmissions and timing penalties. It is very much a situation where a few traffic flows cause significant service degradation for many customers.

One of the manifestations of cell congestion is packet loss and packet retransmission. Packet loss due to congestion ranges from 1% to 5%. or even several times higher at moments of peak traffic or if the user is in a poor cellular coverage area. The higher the packet loss, the worse the congestion, and the worse the customer experience. The underlying IP protocols will attempt to recover a lost packet by retransmission. The retransmission rate can easily exceed 10% to 15% in case of congestion. Generally, for a reliable and well-operated network, the packet loss should be well below 1% and even as low as 0.1%. Likewise, one would expect a packet retransmission rate of less than 2% (I believe the target should be less than 1%).

Thus, customers that happen to be under a given congested cell (e.g., caused by an elephant flow) would incur a substantially higher rate of retransmitted data packages (i.e., 10% to 15% or higher) as the TCP/IP protocol tries to make up for lost data packages. The customer may experience substantial service quality degradation and, as a final (unintended) “insult”, often be charged for those additional retransmitted data volumes.

From a cellular perspective, as the congestion has been relieved, the cellular operator may observe that the volume on the congested cell actually drops. The reason is that the packet loss and retransmission drops to a level far below the congested one (e.g., typically below 1%). As the quality improves for all customers demanding service from the previously overloaded (i.e., congested) cell, sustainable volume growth will commence in total and as well as will the average consumption on a customer basis. As will be shown below for normal cellular data consumption and most (if not all) price plans, a few percentage points drop in data volume will not have any meaningful effect on revenues. Either because the (temporary) drop happens within the boundaries of a given price plan level and thus has no effect on revenue, or because the overall gainful consumptive growth, as opposed to data volume attributed to poor quality, far exceeds the volume loss due to improved capacity and quality of a congested cell.

Well-balanced and available cellular sites will experience positive and sustainable data traffic growth.

Congested and over-loaded cellular sites will experience a negative and persistent reduction of data traffic.

Actively managing the few elephant flows and their negative impact on the many will increase customer satisfaction, reduce consumptive churn, and increase data growth, easily compensating for the congestion-induced increases due to packet retransmission. And unless an operator consistently is starved for radio access investments, or has poor radio access capacity management processes, most cell congestion can be attributed to the so-called elephant flows.

CELLULAR DATA CONSUMPTION IN REAL NETWORKS – ON A SECTOR LEVEL.

And irrespective of whatever drives positive and negative growth, it is worth remembering that daily traffic variations on a sector-by-sector basis and an overall cellular network level are entirely natural. An illustration of such natural sector variation over a (non-holiday) week is shown below in Figure 7 (c) for a sector in the top-20% of busiest sectors. In this example, the median variation over all sectors in the same week, as shown below, was around 10%. I often observe that even telco people (that should know better) find this natural variation quite worrisome as it appears counterintuitive to their linear growth expectations. Proper statistical measurement & analysis methodologies must be in place if inferences and solid analysis are required on a sector (or cell) basis over a relatively short time period (e.g., day, days, week, weeks,…).

Figure 7 illustrates the cellular data consumption daily variation over a (non-holiday) week. In the above, there are three examples (a) a sector from the bottom 20% in terms of carried volume, (b) a sector with a median data volume, and (c) a sector taken from the top 20% of carried data volume. Over the three different sectors (low, median, high) we observe very different variations over weekdays. From the top-20%, we have an almost 30% variation between the weekly minimum (Tuesday) and the weekly maximum (Thursday) to the bottom-20% with a variation in excess of 200% over the week. The charts above show another trend we observe in cellular networks regarding consumptive variations over time. Busy sectors tend to have a lower weekly variation than less busy sectors. I should point out that I have made no effort to select particular sectors. I could easily find some (of the less busy sectors) with even more wild variations than shown above.

The day-to-day variation is naturally occurring based on the dynamic behavior of the customers served by a given sector or cell (in a sector). I am frequently confronted with technology colleagues (whom I respect for their deep technical knowledge) that appear to expect (data) traffic on all levels monotonously increase with a daily growth rate that amounts to the annual CAGR observed by comparing the end-of-period volume level with the beginning of period volume level. Most have not bothered to look at actual network data and do not understand (or, to put it more nicely, simply ignore) the naturally statistical behavior of traffic that drives hourly, daily, weekly, and monthly variations. If you let statistical variations that you have no control over drive your planning & optimization decisions. In that case, you will likely fail to decide on the business-critical ones you can control.

An example of a high-traffic (top-20%) sector’s complete 365 day variations of data consumption is shown below in Figure 8. We observe that the average consumption (or traffic demand) increases nicely over the year with a bit of a slowdown (in this European example) during the summer vacation season (same around official holidays in general). Seasonal variations is naturally occurring and often will result in a lower-than-usual daily growth rate and a change in daily variations. In the sector traffic example below, Tuesdays and Saturdays are (typically) lower than the average, and Thursdays are higher than average. The annual growth is positive despite the consumptive lows over the year, which would typically freak out my previously mentioned industry colleagues. Of course, every site, sector, and cell will have a different yearly growth rate, most likely close to a normal distribution around the gross annual growth rate.

Figure 8 illustrates a top-20% sector’s data traffic growth dynamics (in GB) over a calendar year’s 365 days. Tuesdays and Saturdays are likely below the weekly average data consumption, and Thursdays are more likely to be above. Furthermore, the daily traffic growth is slowing around national holidays and in the summer vacation (i.e., July & August for this particular Western European country).

And to nail down the message. As shown in the example in Figure 9 below, every sector in your cellular network from one time period to the other will have a different positive and negative growth rate. The net effect over time (in terms of months more than days or weeks) is positive as long as customers adopt the supplied RAT (i.e., if customers are migrating from 4G to 5G, it may very well be that 4G consumed data will decline while the 5G consumed data will increase) and of course, as long as the provided quality is consistent with the expected and demanded quality, i.e., sectors with congestion, particular so-called elephant-flow induced congestion, will hurt the quality of the many that may reduce their consumptive behavior and eventually churn.

Figure 9 illustrates the variation in growth rates across 15+ thousand sectors in a cellular network comparing the demanded data volume between two consecutive Mondays per sector. Statistical analysis of the above data shows that the overall average value is ca. 0.49% and slightly skewed towards the positive growths rates (e.g., if you would compare a Monday with a Tuesday, the histogram would typically be skewed towards the negative side of the growth rates as Tuesday are a lower traffic day compared to Monday). Also, with the danger of pointing out the obvious, the daily or weekly growth rates expected from an annual growth rate of, for example, 30% are relatively minute, with ca. 0.07% and 0.49%, respectively.

The examples above (Figures 7, 8, and 9) are from a year in the past when Verstappen had yet to win his first F1 championship. That particular weekend also did not show F1 (or Sunday would have looked very different … i.e., much higher) or any other big sports event.

CELLULAR DATA PRICE PLAN LOGIC.

Figure 10 above is an example of the structure of a price plan. Possibly represented slightly differently from how your marketeer would do (and I am at peace with that). We observe the illustration of a price level of 8 data volume intervals on the upper left chart. This we can also write as (following the terminology of the lower right corner);

Thus, for the $p_1$ package allowing the customer to consume up to 3 GB is priced at 20 (irrespective of whether the customer would consume less). For package $p_5$ a consumer would pay 100 for a data consumption allowance up to 35 GB. Of course, we assume that the consumer choosing this package would generally consume more than 24 GB, which is the next cheaper package (i.e., $p_4$ ).

The price plan example above clearly shows that each price level offers customers room to grow before upgrading to the next level. For example, a customer consuming no more than 8 GB per month, fitting into $p_3$ , could increase consumption with 4 GB (+50%) before considering the next level price plan (i.e., $p_4$ ). This is just to illustrate that even if the customer’s consumption may grow substantially, one should not per se be expecting more revenue.

Even though it should be reasonably straightforward that substantial growth of a customer base data consumption cannot be expected to lead to an equivalent growth in revenue, many telco insiders instinctively believe this should be the case. I believe that the error may be due to many mentally linearizing the step-function price plans (see Figure 2 upper right side) and simply (but erroneously) believing that any increase (decrease) in consumption directly results in an increase (or decrease) in revenue.

DATA PRICING LOGIC & USAGE DISTRIBUTION.

If we want to understand how consumptive behavior impacts cellular operators’ toplines, we need to know how the actual consumption distributes across the pricing logic. As a high-level illustration, Figure 11 (below) shows the data price step-function logic from Figure 9 with an overall consumptive distribution superimposed (orange solid line). It should be appreciated that while this provides a fairly clear way of associating consumption with pricing, it is an oversimplification at best. It will nevertheless allow me to estimate crudely the number of customers that are likely to have chosen a particular price plan matching their demand (and affordability). In reality, we will have customers that have chosen a given price plan but either consume less than the limit of the next cheaper plan (thus, if consistently so, could save but go to that plan). We will also have customers that consume more than their allowed limit. Usually, this would result in the operator throttling the speed and sending a message to the customer that the consumption exceeds the limit of the chosen price plan. If a customer would consistently overshoots the limits (with a given margin) of the chosen plan, it is likely that eventually, the customer will upgrade to the next more expensive plan with a higher data allowance.

Figure 11 above illustrates on the left side a consumptive distribution (orange line) identified by its mean and standard deviation superimposed on our price plan step-function logic example. The right summarizes the consumptive distribution across the eight price plan levels. Note that there is a 9th level in case the 200 GB limit is breached (0.2% in this example). I am assuming that such customers pay twice the price for the 200 GB price plan (i.e., 320).

In the example of an operator with 100 million cellular customers, the consumptive distribution and the given price plan lead to a fiat of 7+ billion per month. However, with a consumptive growth rate of 30% to 40% annually per active cellular data user (on average), what kind of growth should we expect from the associated cellular data revenues?

Figure 12 In the above illustration, I have mapped the consumptive distribution to the price plan levels and then developed the begin-of-period consumptive distribution (i.e., the light green curve) month by month until month 12 has been reached (i.e., the yellow curve). I assume the average monthly consumptive cellular data growth is 2.5% or ca. 35% after 12 months. Furthermore, I assume that for the few customers falling outside the 200 GB limit that they will purchase another 200 GB plan. For completeness, the previous 12 months (previous year) need to be carried out to compare the total cumulated cellular data revenue between the current and previous periods.

Within the current period (shown in Figure 12 above), the monthly cellular data revenue CAGR comes out at 0.6% or a total growth of 7.4% of monthly revenue between the beginning period and the end period. Over the same period, the average data consumption (per user) grew by ca. 34.5%. In terms of the current year’s total data revenue to the previous year’s total data revenue, we get an annual growth rate of 8.3%. This illustrates that it should not be surprising that the revenue growth can be far smaller than the consumptive growth given price plans such as the above.

It should be pointed out that the above illustration of consumptive and revenue growth simplifies the growth dynamics. For example, the simulation ignores seasonal swings over a 12-month period. Also, it attributes 1-to-1 all consumption falling within the price range to that particular price level when there is always spillover on both upper and lower levels of a price range that will not incur higher or lower revenues. Moreover, while mapping the consumptive distribution to the price-plan giga-byte intervals makes the simulation faster (and setup certainly easier), it is also not a very accurate approach to the coarseness of the intervals.

A LEVEL DEEPER.

While working with just one consumptive distribution, as in Figure 11 and Figure 12 above, allows for simpler considerations, it does not fully reflect the reality that every price plan level will have its own consumptive distribution. So let us go that level deeper and see whether it makes a difference.

Figure 13 above, illustrates the consumptive distribution within a given price plan range, e.g., the “5 GB @ 30” price-plan level for customers with a consumption higher than 3 GB and less than or equal to 5 GB. It should come as no surprise that some customers may not reach even the 3 GB, even though they pay for (up to) 5 GB, and some may occasionally exceed the 5 GB limit. In the example above, 10% of customers have a consumption below 3 GB (and could have chosen the next cheaper plan of up to 3 GB), and 3% exceed the limits of the chosen plan (an event that may result in the usage speed being throttled). As the average usage within a given price plan level approaches the ceiling (e.g., 5 GB in the above illustration), in general, the standard deviation will reduce accordingly as customers will jump to the Next Expensive Plan to meet their consumptive needs (e.g., “12 GB @ 50” level in the illustration above).

Figure 14 generalizes Figure 11 to the full price plan and, as illustrated in Figure 12, let the consumption profiles develop in time over a 12-month period (Initial and +12 month shown in the above illustration). The difference between the initial and 12 months can be best appreciated with the four smaller figures that break up the price plan levels in 0 to 40 GB and 40 to 200 GB.

The result in terms of cellular data revenue growth is comparable to that of the higher-level approach of Figure 12 (ca. 8% annual revenue growth vs 34 % overall consumptive annual growth rate). The detailed approach of Figure 11 is, however, more complicated to get working and requires much more real data to work with (which obviously should be available to operators in this time and age). One should note that in the illustrated example price plan (used in the figures above) that at a 2.5% monthly consumptive growth rate (i.e., 34% annually), it would take a customer an average of 24 months (spread of 14 to 35 month depending on level) to traverse a price plan level from the beginning of the level (e.g., 5 GB) to the end of the level (12 GB). It should also be clear that as a customer enters the highest price plan levels (e.g., 100 GB and 200 GB), little additional can be expected to be earned on those customers over their consumptive lifetime.

The illustrated detailed approach shown above is, in particular, useful to test a given price plan’s profitability and growth potential, given the particularities of the customers’ consumptive growth dynamics.

The additional finesse that could be considered in the analysis could be an affordability approach because the growth within a given price level slows down as the average consumption approaches the limit of the given price level. This could be considered by slowing the mean growth rate and allowing for the variance to narrow as the density function approaches the limit. In my simpler approach, the consumptive distributions will continue to grow at a constant growth rate. In particular, one should consider more sophisticated approaches to modeling the variance that determines the spillover into less and more expensive levels. An operator should note that consumption that reduces or consistently falls into the less expensive level expresses consumptive churn. This should be monitored on a customer level as well as on a radio access cell level. Consumptive churn often reflects the supplied radio access quality is out of sync with the customer demand dynamics and expectations. On a radio access cell level, the diligent operator will observe a sharp increase in retransmitted data packages and increased latency on a flow (and active customer basis) hallmarks of a congested cell.

WRAPPING UP.

To this day, 20+ odd years after the first packet data cellular price plans were introduced, I still have meetings with industry colleagues where they state that they cannot implement quality-enhancing technologies for the fear that data consumption may reduce and by that their revenues. Funny enough, often the fear is that by improving the quality for typically many of their customers being penalized by a few customers’ usage patterns (e.g., the elephants in the data pipe), the data packet loss and TCP/IP retransmissions are reducing as the quality is improving and more customers are getting the service they have paid for. It is ignoring the commonly established fact of our industry that improving the customer experience leads to sustainable growth in consumption that consequently may also have a positive topline impact.

I am often in situations where I am surprised with how little understanding and feeling Telco employees have for their own price plans, consumptive behavior, and the impact these have on their company’s performance. This may be due to the fairly complex price plans telcos are inventing, and our brain’s propensity for linear thinking certainly doesn’t make it easier. It may also be because Telcos rarely spend any effort educating their employees about their price plans and products (after all, employees often get all the goodies for “free”, so why bother?). Do a simple test at your next town hall meeting and ask your CXOs about your company’s price plans and their effectiveness in monetizing consumption.

So what to look out for?

Many in our industry have an inflated idea (to a fault) about how effective consumptive growth is being monetized within their company’s price plans.

Most of today’s cellular data plans can accommodate substantial growth without leading to equivalent associated data revenue growth.

The apparent disconnect between the growth rate of cellular data consumption (CAGR ~30+%), in its totality as well on an average per-customer basis, and cellular data revenues growth rate (CAGR < 10%) is simply due to the industry’s price plan structures allowing for substantial growth without a proportion revenue growth.

ACKNOWLEDGEMENT.

I greatly acknowledge my wife, Eva Varadi, for her support, patience, and understanding during the creative process of writing this Blog.

Mobile Data-centric Price Plans – An illustration of the De-composed.

Posted on February 3, 2015 by Dr. Kim

How much money would it take for you to give up internet? …for the rest of your life? … and maybe much more important; How much do you want to pay for internet? The following cool video URL “Would you give up the Internet for 1 Million Dollars” hints towards both of those questions and an interesting paradox!

The perception of value is orders of magnitude higher than the willingness to pay, i.e.,

“I would NOT give up Internet for life for a Million+ US Dollars … oh … BUT… I don’t want to pay more than a couple of bucks for it either” (actually for a mature postpaid-rich market the chances are that over your expected life-time you will pay between 30 to 40 thousand US$ for mobile internet & voice & some messaging).

Price plans are fascinating! … Particular the recent data-centric price plans bundling in legacy services such as voice and SMS.

Needles to say that a consumer today often needs an advanced degree in science to really understand the price plans they are being presented. A high degree of trust is involved in choosing a given plan. The consumer usually takes what has been recommended by the shop expert (who most likely doesn’t have an advanced science degree either). This shop expert furthermore might (or might not) get a commission (i.e., a bonus) selling you a particular plan and thus in such a case hardly is the poster child of objectiveness.

How does the pricing experts come to the prices that they offer to the consumer? Are those plans internally consistent … or maybe not?

It becomes particular interesting to study data-centric price plans that try to re-balance Mobile Voice and SMS.

How is 4G (i.e., in Europe also called LTE) being charged versus “normal” data offerings in the market? Do the mobile consumer pay more for Quality? Or maybe less?

What is the real price of mobile data? … Clearly, it is not the price we pay for a data-centric price plan.

A Data-centric Tale of a Country called United & a Telecom Company called Anything Anywhere!

As an example of mobile data pricing and in particular of data-centric mobile pricing with Voice and SMS included, I looked at a Western European Market (let’s call it United) and a mobile operator called Anything Anywhere. Anything Anywhere (AA) is known for its comprehensive & leading-edge 4G network as well as several innovative product ideas around mobile broadband data.

In my chosen Western European country United, voice revenues have rapidly declined over the last 5 years. Between 2009 to 2014 mobile voice revenues lost more than 36% compared to an overall revenue loss of “only” 14%. This corresponds to a compounded annual growth rate of minus 6.3% over the period. For an in depth analysis of the incredible mobile voice revenue losses the mobile industry have incurred in recent years see my blog “The unbearable lightness of mobile voice”.

Did this market experience a massive uptake in prepaid customers? No! Not at all … The prepaid share of the customer base went from ca. 60% in 2009 to ca. 45% in 2014. So in other words the Postpaid base over the period had grown with 15% and in 2014 was around 55%. This should usually have been a cause for great joy and incredible boost in revenues. United is also a market that has largely managed not to capitalize economically on substantial market consolidation.

As it is with many other mobile markets, engaging & embracing the mobile broadband data journey has been followed by a sharp decline in the overall share of voice revenue from ca. 70% in 2009 to ca. 50% in 2014. An ugly trend when the total mobile revenue declines as well.

The Smartphone penetration in United as of Q1 2014 was ca. 71% with 32% iOS-based devices. Compare this to 2009 where the smartphone penetration was ca. 21% with iOS making out around 75+%.

Our Mobile Operator AA has the following price plan structure (note: all information is taken directly from AA’s web site and can be found back if you guess which company it applies to);

Data-centric price plans with unlimited Voice and SMS.
Differentiated speed plans, i.e., 4G (average speed advertised to 12 – 15 Mbps) vs. Double Speed 4G (average speed advertised to 24 – 30 Mbps).
Offer plans that apply Europe Union-wide.
Option to pay less for handsets upfront but more per month (i.e., particular attractive for expensive handsets such as iPhone or Samsung Galaxy top-range models).
Default offering is 24 month although a shorter period is possible as well.
Offer SIM-only data-centric with unlimited voice & SMS.
Offer Data-only SIM-only plans.
Further you will get access to extensive “WiFi Underground”. Are allowed tethering and VoIP including Voice-calling over WiFi.

So here is an example of AA’s data-centric pricing for various data allowances. In this illustration I have chosen to add an iPhone 6 Plus (why? well I do love that phone as it largely replaces my iPad outside my home!) with 128GB storage. This choice have no impact on the fixed and variable parts of the respective price plans. For SIM-Only plans in the data below, I have added the (Apple) retail price of the iPhone 6 Plus (light grey bars). This is to make the comparison somewhat more comparable. It should of course be clear that in the SIM-only plans, the consumer is not obliged to buy a new device.

Figure above: illustrates the total consumer cost or total price paid over the period (in local currency) of different data plans for our leading Western European Mobile Operator AA. The first 9 plans shown above includes a iPhone 6 Plus with 128GB memory. The last 5 are SIM only plans with the last 2 being Data-only SIM-only plans. The abbreviations are the following PPM: Pay per Month (but little upfront for terminal), PUF: Pay UpFront (for terminal) and less per month, SIMO: SIM-Only plan, SIMDO: SIM Data-Only plan, xxGB: The xx amount of Giga Bytes offered in Plan, 2x indicates double 4G speed of “normal” and 1x indicates “normal” speed, 1st UL indicates unlimited voice in plan, 2nd UL indicates unlimited SMS in plan, EU indicates that the plan also applies to countries in EU without extra charges. So PPM20GB2xULULEU defines a Pay per Month plan (i.e., the handset is pay over the contract period and thus leads to higher monthly charges) with 20 GB allowance at Double (4G) Speed with Unlimited Voice and Unlimited SMS valid across EU. In this plan you would pay 100 (in local currency) for a iPhone 6 Plus with 128 GB. Note the local Apple Shop retail price of an iPhone 6 Plus with 128 GB is around 789 in local currency (of which ca. 132 is VAT) for this particular country. Note: for the SIM-only plans (i.e., SIMO & SIMDO) I have added the Apple retail price of a iPhone 6 Plus 128GB. It furthermore should be pointed out that the fixed service fee and the data consumption price does not vary with choice of handset.

If I decide that I really want that iPhone 6 Plus and I do not want to pay the high price (even with discounts) that some price plans offers. AA offers me a 20GB 4G data-plan, pay 100 upfront for the iPhone 6 Plus (with 128 GB memory) and for the next 24 month 63.99 (i.e., as this feels much cheaper than paying 64) per month. After 24 month my total cost of the 20 GB would be 1,636. I could thus save 230 over the 24 month if I wanted to pay 470 (+370 compared to previous plan & – 319 compared to Apple retail price) for the iPhone. In this lower cost plan my monthly cost of the 20 GB would be 38.99 or 25 (40%!) less on a monthly basis.

The Analysis show that a “Pay-less-upfront-and-more-per-month” subscriber would end up after the 24 month having paid at least ca. 761 for the iPhone 6 Plus (with 128GB). We will see later, that the total price paid for the iPhone 6 Plus however is likely to be approximately 792 or slightly above today’s retail price (based on Apple’s pricing).

The Price of a Byte and all that Jazz

So how does the above data-price plans look like in terms of Price-per-Giga-Byte?

Although in most cases not be very clear to the consumer, the data-centric price plan is structured around the price of the primary data allowance (i.e., the variable part) and non-data related bundled services included in the plan (i.e., the fixed service part representing non-data items).

There will be a variable price reflecting the data-centric price-plans data allowance and a “Fixed” Service Fee that capture the price of bundled services such as voice and SMS. Based on total price of the data-centric price plan, it will often appear that the higher the allowance the cheaper does your unit-data “consumption” (or allowance) become. Indicating that volume discounts have been factored into the price-plan. In other words, the higher the data allowance the lower the price per GB allowance.

This is often flawed logic and simply an artefact of the bundled non-data related services being priced into the plan. However, to get to that level of understanding requires a bit of analysis that most of us certainly don’t do before a purchase.

Figure above: Illustrates the unit-price of a Giga Byte (GB) versus AA’s various data-centric price plans. Note the price plans can be decomposed into a variable data-usage attributable price (per GB) and a fixed service fee that accounts for non-data services blended into the price. The Data Consumption per GB is the variable data-usage dependable part of the Price Plan and the Total price per GB is the full price normalized to the plans data consumption allowance.

So with the above we have argued that the total data-centric price can be written as a fixed and a variable part;

${P_{Tot}} = {P_{Fixed}} + {P_{Data}}({U_{GB}}) = {P_{Fixed}} + {p_{GB}}U_{GB}^\beta$

As will be described in more detail below, the data-centric price ${P_{Tot}}$ is structured in what can be characterized as a “Fixed Service Fee” ${P_{Fixed}}$ and a variable “Data Consumption Price” ${P_{Data}}$ that depends on a given price-plan’s data allowance ${U_{GB}}$ (i.e., GB is Giga Byte). The “Data Consumption Price” ${P_{Data}}$ is variable in nature and while it might be a complex (i.e. in terms of complexity) function of data allowance ${U_{GB}}$ it typically be of the form ${p_{GB}}U_{GB}^\beta$ with the exponent $\beta$ (i.e., Beta) being 1 or close to 1. In other words the Data Consumptive price is a linear (or approximately so) function of the data allowance. In case $\beta$ is larger than 1, data pricing gets progressively more expensive with increasing allowance (i.e., penalizing high consumption or as I believe right-costing high consumption). For $\beta$ lower than 1, data gets progressively cheaper with increasing data allowances corresponding to volume discounts with the danger of mismatching the data pricing with the cost of delivering the data.

The “Fixed Service Fee” depends on all the non-data related goodies that are added to the data-centric price plan, such as (a) unlimited voice, (b) unlimited SMS, (c) Price plan applies Europe-wide (i.e., EU-Option), (d) handset subsidy recovery fee, (e) maybe a customer management fee, etc..

For most price data-centric plan, If the data-centric price divided by the allowance would be plotted against the allowance ${U_{GB}}$ in a Log-Log format would result in a fairly straight-line.

Figure above: illustration of the data-centric pricing on a per GB level plotted versus the GB allowance. Source: Dr. Kim K Larsen’s Mind Share contribution at Informa’s LTE World Summit May 2012; “Right pricing LTE and mobile broadband in general (a Technologist’ Observations”.

Nothing really surprising given the pricing math involved! It is instructive to see what actually happens when we take a data-centric price and divide by the corresponding data allowance;

$\frac{{{P_{Tot}}}}{{{U_{GB}}}} = \frac{{{P_{Fixed}} + {p_{GB}}U_{GB}^\beta }}{{{U_{GB}}}} = \limits^{\beta = 1} {p_{GB}} + {P_{Fixed}}U_{GB}^{ - 1}$

For very large data allowances ${U_{GB}}$ the price-centric per GB would asymptotically converge to ${p_{GB}}$ , i.e., the unit cost of a GB. As ${p_{GB}}$ is usually a lot smaller than ${P_{Fixed}}$ , we see that there is another limit, where the allowance ${U_{GB}}$ is relative low, where we would see the data-centric pricing per GB slope (in a Log-Log plot) become linear in the data allowance. Typically for allowances from 0.1 GB up towards 50 GB, non-linear slope of approximately -0.7±0.1 is observed and thus in between the linear and the constant pricing regime.

We can also observe that If the total price, of a data-centric price plan associated with a given data allowance (i.e., GB), is used to derive a price-per-GB, one would conclude that most mobile operators provide the consumer with volume discounts as they adapt higher data allowance plans. The GB gets progressively cheaper for higher usage plans. As most data-centric price plans are in the range where ${p_{GB}}$ is (a lot) smaller than ${P_{Fixed}}U_{GB}^{ - 1}$ , it will appear that the unit price of data declines as the data allowance increases. However in most cases it is likely an artefact of the Fixed Service Fee that reflects non-data related services which unless a data-only bundle can be a very substantial part of the data-centric price plan.

It is clear that data-allowance normalizing the totality of a data-centric price plan, particular when non-data services have been blended into the plan, will not reveal the real price of data. If used for assessing, for example, data profitability or other mobile data related financial KPIs this approach might be of very little use.

Figure above: illustrates the basic characteristics of a data-centric price plan normalized by the data allowance. The data for this example reflects the AA’s data-centric price plans 2x4G Speed with bundled unlimited Voice & SMS as well as applying EU-wide. We see that the Beta value corresponds to a Volume Discount (at values lower than 1) or a Volume Penalty (at values higher than 1).

Oh yeah! … The really “funny” part of most data-price plan analysis (including my own past ones!) are they are more likely to reflect the Fixed Service Part (independent of the Data allowance) of the Data-centric price plan than the actual unit price of mobile data.

What to expect from AA’s data-centric price plans?

so in a rational world of data-centric pricing (assuming such exist) what should we expect of Anything Anywhere’s price plans as advertised online;

The (embedded) price for unlimited voice would be the same irrespective of the data plan’s allowed data usage (i.e., unlimited Voice does not depend on data plan).
The (embedded) price for unlimited SMS would be the same irrespective of the data plan’s allowed data usage (i.e., unlimited SMS does not depend on data plan).
You would pay more for having your plan extended to apply across Europe Union compared to not having this option.
You would (actually you should) expect to pay more per Mega Byte for the Double Speed option as compared to the Single Speed Option.
If you decide to “finance” your handset purchase (i.e., pay less upfront option) within a data plan you should expect to pay more on a monthly basis.
Given a data plan has a whole range of associated handsets priced From Free (i.e., included in plan without extra upfront charge) to high-end high-priced Smartphones, such as iPhone 6 Plus 128 GB, you would not expect that handset related cost would have been priced into the data plan. Or if it is, it must be the lowest common denominator for the whole range of offered handsets at a given price plan.
Where the discussion becomes really interesting is how your data consumption should be priced; (1) You pay more per unit of data consumption as you consume more data on a monthly basis, (2) You pay the same per unit irrespective of your consumption or (3) You should have a volume discount making your units cheaper the more you consume.

of course the above is if and only if the price plans have been developed in reasonable self-consistent manner.

Figure above: Illustrates AA’s various data-centric price plans (taken from their web site). Note that PPM represents low upfront (terminal) cost for the consumer and higher monthly cost and PUF represent paying upfront for the handset and thus having lower monthly costs as a consequence. The Operator AA allows the consumer in the PPM Plan to choose for an iPhone 6 Plus 128GB (priced at 100 to 160) or an IPhone 6 Plus 64GB option (at a lower price of course).

First note that Price Plans (with more than 2 data points) tend to be linear with the Data Usage allowance.

The Fixed Service Fee – The Art of Re-Capture Lost legacy Value?

In the following I define the Fixed Service Fee as the part of the total data-centric price plan that is independent of a given plan’s data allowance. The logic is that this part would contain all non-data related cost such as Unlimited Voice, Unlimited SMS, EU-Option, etc..

From AA’s voice plan (for 250 Minutes @ 10 per Month & 750 Minutes @ 15 per Month) with unlimited SMS (& no data) it can be inferred that

Price of Unlimited SMS can be no higher than 7.5. This however is likely also include general customer maintenance cost.

Monthly customer maintenance cost (cost of billing, storage, customer care & systems support, etc.) might be deduced from the SIM-Only Data-Only package and would be

Price of Monthly Customer Maintenance could be in the order of 5, which would imply that the Unlimited SMS price would be 2.5. Note the market average Postpaid SMS ARPU in 2014 was ca., 8.40 (based on Pyramid Research data). The market average number of postpaid SMS per month was ca. 273 SMS.

From AA’s SIM-only plan we get that the fixed portion of providing service (i.e., customer maintenance, unlimited Voice & SMS usage) is 14 and thus

Price of Unlimited Voice should be approximately 6.5. Note the market average Postpaid Voice ARPU was ca. 12 (based on Pyramid Research data). The market average voice usage per month was ca. 337 minutes. Further from the available limited voice price plans it can be deduced that unlimited voice must be higher than 1,000 Minutes or more than 3 times the national postpaid average.

The fixed part of the data-centric pricing difference between the data-centric SIM-only plan and similar data-centric plan including a handset (i.e., all services are the same except for the addition of the handset) could be regarded as a minimum handset financing cost allowing the operator to recover some of the handset subsidy

Equipment subsidy recovery cost of 7 (i.e., over a 24 month period this amounts to 168 which is likely to recover the average handset subsidy). Note is the customer chooses to pay little upfront for the handset, the customer would have to pay 26 extra per month in he fixed service fee. Thus low upfront cost result in another 624 over the 24 month contract period. Interestingly is that with the initial 7 for handset subsidy recovery in the basic fixed service fee a customer would have paid 792 in handset recovery over 24 month period the contract applies to (a bit more than the iPhone 6 Plus 128GB retail price).

The price for allowing the data-centric price-plan to apply Europe Union Wide is

The EU-Option (i.e., plan applicable within EU) appears to be priced at ca. 5 (caution: 2x4G vis-a-vis 1x4G could have been priced into this delta as well).

For EU-option price it should be noted here that the two plans that are being compared differs not only in the EU-option. The plan without the EU option is a data plan with “normal” 4G speed, while the EU-option plan supports double 4G speeds. So in theory the additional EU-option charge of 5 could also include a surcharge for the additional speed.

Why an operator would add the double speed to the fixed Service Fee price part is “bit” strange. The 2x4G speed price-plan option clearly is a variable trigger for cost (and value to the customer’s data usage). Thus should be introduced in the the variable part (i.e., the Giga-Byte dependent part) of the data-centric price plan.

It is assumed that indeed the derived difference can be attributed to the EU-option, i.e., the double speed has not been include in the monthly Fixed Service Fee.

In summary we get AA’s data-centric price plan’s monthly Fixed Service Fee de-composition as follows;

Figure above: shows the composition of the monthly fixed service fee as part of AA’s data-centric plans. Of course in a SIM-only scenario the consumer would not have the Handset Recovery Fee inserted in the price plan.

So irrespective of the data allowance a (postpaid) customer would pay between 26 to 52 per month depending on whether handset financing is chosen (i.e., Low upfront payment on the expense of higher monthly cost).

Mobile data usage still has to happen!

The price of Mobile Data Allowance.

The variable data-price in the studied date-centric price plans are summarized in the table below as well as the figure;

Price-plan	4G Speed	Price per GB
Pay Less Upfront More per Month	Double	0.61±0.03
Pay Upfront & Less per Month	Double	0.67±0.05
SIM-Only	Single	1.47±0.08
SIM-Only Data Only	Single	2 (only 2 data points)

The first thing that obviously should make you Stop in Wonder is that Single 4G Speed Giga Byte is more than Twice the price of a Double 4G Speed Giga Byte … In need for speed … well that will give you a pretty good deal with AA’s price 2x4G plans.

Second thing to notice is that it would appear to be a really bad deal (with respect to the price-per-byte) to be a SIM-Only Data-Only customer.

The Data-Only pays 2 per GB. Almost 3 times more than if you would choose a subscription with a device, double speed, double unlimited and EU-wide applicable price plan.

Agreed! In absolute terms the SIM-only Data-only cost a lot less per month (9 less than the 20GB pay device upfront) and it is possible to run away after 12 months (versus the 24 month plans). One rationale for charging extra per Byte for a SIM-only Data-only plan could be that the SIM card might be used in Tablet or Data-card/Dongle products that typically does consume most if not all of a given plans allowance. For normal devices and high allowance plans on average the consumption can be quiet a lot lower than the actual allowance. Particular over a 24 month period.

You might argue that this is all about how the data-centric price plans have been de-composed in a fixed service fee (supposedly the non-data dependent component) and a data consumptive price. However, even when considering the full price of a given price plan is the Single-4G-Speed more expensive per Byte than Double-4G-Speed.

You may also argue that I am comparing apples and oranges (or even bananas pending taste) as the Double-4G-Speed plans include a devices and a price-plan that applies EU-wide versus the SIM-only plan that includes the customers own device and a price-plan that only works in United. All true of course … Why that should be more expensive to opt out of is a bit beyond me and why this should have an inflationary impact on the price-per-Byte … well a bit of a mystery as well.

At least there is no (statistical) difference in the variable price of a Giga Byte whether the customer chooses to pay of her device over the 24 month contract period or pay (most of) it upfront.

For AA it doesn’t seem to be of concern! …. As 88% would come back for more (according with their web site).

Obviously this whole analysis above make the big assumption that the data-centric price plans are somewhat rationally derived … this might not be the case!

and it assumes that rationally & transparently derived price plans are the best for the consumer …

and it assumes what is good for the consumer is also good for the company …

Is AA different in this respect to that of other Operators around the world …

No! AA is not different from any other incumbent operator coming from a mobile voice centric domain!

Acknowledgement

I greatly acknowledge my wife Eva Varadi for her support, patience and understanding during the creative process of creating this Blog.

Postscript – The way I like to look at (rational … what ever that means) data-centric pricing.

Firstly, it would appear that AA’s pricing philosophy follows the industry standard of pricing mobile services and in particular mobile data-centric services by the data volume allowance. Non-data services are added to the data-centric price plan and in all effect make up for the most part of the price-plan even at relative higher data allowances;

Figure above: illustrates the typical approach to price plan design in the Telecom’s industry. Note while not per se wrong it often overweight’s the volume element of pricing and often results in sub-optimizing the Quality and Product aspects . Source: Dr. Kim K Larsen’s Mind Share contribution at Informa’s LTE World Summit May 2012; “Right pricing LTE and mobile broadband in general (a Technologist’ Observations)”.

Unlimited Voice and SMS in AA’s standard data-centric plans clearly should mitigate possible loss or migration away from old fashion voice (i.e., circuit switched) and SMS. However both the estimated allowances for unlimited voice (6.5) and SMS (2.5) appear to be a lot lower than their classical standalone ARPUs for the postpaid category. This certainly could explain that this market (as many others in Western Europe) have lost massive amount of voice revenues over the last 5 years. In other words re-capturing or re-balancing legacy service revenues into data-centric plans still have some way to go in order to be truly effective (if at all possible which is highly questionable at this time and age).

Figure above: illustration of what to consider when pricing a product or developing a pricing plan. The figure is based on H.E Homa’s wonderful notes on “Pricing Fundamentals”. Source: Dr. Kim K Larsen’s Mind Share contribution at Informa’s LTE World Summit May 2012; “Right pricing LTE and mobile broadband in general (a Technologist’ Observations”. It should be noted that the above is very much driven from the point of view of value-based pricing. It is an inherent assumption Value-to-Customer (VtP) is also consistent with the consumer’s Willingness to Pay (WtP).

As a Technologist, I am particular interested in how the technology cost and benefits are being considered in data-centric price plans.

The big challenge for the pricing expert who focus too much on volume is that the same volume can result from vastly different network qualities and speed. The customers handset will drive the experience of quality and certainly consumption. By that differences in network load and thus technology cost. A customer with a iPhone 6 Plus is likely to load the mobile data network more (and thus incur higher cost) than a customer with a normal screen smartphone of 1 or 2 generations removed from iPhone 6 Plus. It is even conceivable that a user with iPhone 6 Plus will load the network more than a customer with a normal iPhone 6 (independent of the iOS). This is very very different for Voice and SMS volumetric considerations in legacy price plans, where handset had little (or no) impact on network load relative to the usage.

For data-centric price plans to be consistent with the technology cost incurred one should consider;

Higher “guarantied” Quality, typically speed or latency, should be priced higher per Byte than lower quality plans (or at the very least not lower).
Higher Volumetric Allowances should be priced per Byte higher than Lower Volumetric Allowance (or at the very least not lower).
Offering unlimited Voice & SMS in data-centric plans (as well as other bundled goodies) should be carefully re-balanced to re-capture some of lost legacy revenues.

That AA’s data-centric plans for double speed appears to be cheaper than their plans at a lower data delivery quality level is not consistent with costing. Of course, AA cannot really guaranty that the customer will get double 4G speed everywhere and as such it may not be fair to charge substantially more than for single speed. However, this is of course not what appear to happen here.

AA’s lowest data unit price (in per Giga Byte) is around 0.6 – 0.7 (or 0.06 – 0.07 Cent per Mega Byte). That price is very low and in all likelihood lower than their actual production cost of a GB or MB.

However, one may argue that as long as the Total Service Revenue gained by a data-centric price plan recover the production cost, as well as providing a healthy margin then whether the applied data unit-price is designed to recover the data production cost is maybe less of an issue.

In other words, data profitability may not matter as much as overall profitability. This said it remains in my opinion in-excusable for a mobile operator not to understand its main (data) cost drivers and ensure it is recovered in their overall pricing strategies.

Surely! You may say? … “Surely Mobile Operators know their cost structure and respective cost drivers and their price plans reflects this knowledge?”

It is my observation that most price plans (data-centric or not) are developed primarily in response to competition (which of course is an important pricing element as well) rather than firmly anchored in Cost, Value & Profit considerations. Do Operators really & deeply know their own cost structure and cost drivers? … Ahhh … In my opinion few really appear to do!

techneconomyblog

"It doesn't matter how beautiful your idea is, it doesn't matter how smart or important you are. If the idea doesn't agree with reality, it's wrong", Richard Feynman (paraphrased)

Tag Archives: mobile data pricing