Financial implications of rate plan optimization in the post-paid mobile market

https://doi.org/10.1016/j.tele.2010.11.007Get rights and content

Abstract

In the competitive mobile telecommunications market, rate plans with new pricing structure are introduced regularly. Prior literature reveals that subscribers often overpay for their service because of inappropriate rate plan selection. Having subscribers on financially-optimal rate plans is found to be beneficial from both churn reduction and tenure maximization perspectives. However, the revenue implications of deploying such a customer relationship management strategy have not been thoroughly researched. This paper examines the revenue implications by analysing 1249 post-paid mobile subscribers in Canada over a 44-month period. This research also provides insights into some potential moderators that may influence the strengths of the linkage between rate plan suitability and revenue contribution.

Introduction

Faced with the high cost of acquisition and rising churn rate in a rapidly maturing market, mobile operators are exploring new ways to better retain their valued subscribers (Ahn et al., 2006, Kim and Yoon, 2004, Neslin et al., 2004, Seo et al., 2008, Turel and Serenko, 2006). Prior research points out that up to half of the mobile operator’s revenue is extracted from subscribers through underages and overages as a result of their inappropriate rate plan selection (Brewin, 2002). The result is often an extraordinarily high bill for the mobile subscriber, and government agencies around the world have started to push mobile operators to address this growing “bill shock” issue (Malik, 2010). The idea of helping mobile service subscribers to save money by switching them to the most financially-optimal rate plans has emerged as one of the feasible customer retention strategies in the mobile telecommunications sector (Joo et al., 2002, Wong, 2010a).

Conceptually speaking, the deployment of such a strategy means that mobile operators have to sacrifice short-term revenue in exchange of long-term customer loyalty. To what extent is revenue contributed by optimal rate plan subscribers different from those with non-optimal plans? Should rate plan optimization be carried out as a customer relationship management initiative and applied to all subscribers? This paper aims to give mobile operators some insights into the revenue implications of rate plan optimization, and presents them with a framework that can be used to evaluate such a strategy based on their business objectives.

Section snippets

Rate plan optimization as a customer retention strategy

Anderson and Mittal (2000) suggest that companies that focus solely on customer acquisition and ignore customer retention may not achieve positive bottom-line results financially. Researchers like Reichheld and Sasser (1990) consider customer satisfaction programs as important tools that can increase a company’s profit by preventing customers from churning. According to Jain and Singh (2002), companies should direct their marketing efforts to their most profitable customers who are typically

Definition of optimal rate plans

Although new Advanced Wireless Services (AWS) operators are making use of unlimited plans to enter the Canadian mobile market (Mobilicity, 2010, Public Mobile, 2010 and Wind Mobile, 2010), metered rate plans are still popular among the national mobile incumbents such as Bell, Rogers, and TELUS. It has also been reported that major mobile operators have started to move away from unlimited rate plan type and started to promote metered plans once again as their networks start to face traffic

Descriptive statistics

To put our findings into context, it is important to first understand the severeness of inappropriate rate plan selection among mobile subscribers. In their research of the Korean mobile industry, Joo et al. (2002) conclude that about 40% of the subscribers are using wrong rate plans. A slightly higher figure is observed in this research; 577 out of 1249 (46.2%) mobile subscribers being examined are found to overpay for their mobile service due to inappropriate rate plan selection (see Table 1

Discussion and conclusion

Batt and Katz (1998) have previously argued that some subscribers may have relaxed attitudes towards telecom spending; so switching to the optimal rate plan may not be a priority for them, considering the time, cost, and effort required for such a rate plan comparison exercise. Having said that, prior literature has suggested that mobile operator can play an active role in achieving higher retention rates by encouraging subscribers to pay less through the selection of suitable rate plans,

Managerial implications

Implementing rate plan optimization, as one can imagine, is not an easy task. It involves getting a solid understanding of the subscribers’ historical voice-calling pattern, billing records, and their future mobile usage requirements. The challenge is that a mobile operator may need to invest in customer relationship management and back-end billing systems to capture, analyze, and present customer information. Even if the right information is available, mobile operator also needs to consider

Limitations and future research

Several limitations deserve mention. One of the key limitations is the use of revenue in the financial analysis. The lack of cost information, such as acquisition costs and network operating costs, prevents this study from calculating the profitability levels, which may be required to paint a better financial picture for the mobile operator.

Furthermore, the financial benefits of having loyal customers are not reflected in the calculation. Future research can consider a more advanced model to

Ken Kwong-Kay Wong is Assistant Professor of Marketing at Universitas 21 Global. He is also a recipient of the Faculty Excellence Award 2008 and 2009 where he was honoured in all three award categories including Outstanding Professor, Most Innovative Professor, and Excellence in Online Education. Dr. Wong has also taught marketing courses at the University of Toronto since 2003. He holds a DBA from the University of Newcastle, Australia and an MBA from Nyenrode Business Universiteit. His

References (40)

  • K. Brown

    Holding onto customers

    Wireless Week

    (2004)
  • K. Clay et al.

    Ex post vs ex ante pricing: optional calling plans and tapered tariff

    Journal of Regulatory Economics

    (1992)
  • CRTC, 2008. Communications Monitoring Report 2008. Policy Monitoring. Accessed April 3, 2009. Available online at...
  • CWTA, 2006. Wireless Facts and Figures. Industry Facts. Accessed May 6, 2006. Available online at...
  • Dalfen, C., 2005. Report to the Governor in Council: Status of Competition in Canadian Telecommunications Markets 2005....
  • T. Gerpott et al.

    Customer retention, loyalty and satisfaction in the German mobile cellular telecommunications market

    Telecommunications Policy

    (2001)
  • Gordon, J., 2010. Reader Forum: Cell awareness an effective alternative to costly mobile backhaul. RCRWireless....
  • D. Jain et al.

    Customer lifetime value research in marketing: a review and future directions

    Journal of Interactive Marketing

    (2002)
  • Y.H. Joo et al.

    Encouraging customers to pay less for mobile telecommunication services

    Journal of Database Marketing

    (2002)
  • Kowalke, M., 2007. Stop Guessing, Start Saving: Mobile Rate Plan Optimization. TMCnet - Call Accounting Channel....

    • Cited by (3)

    • Choosing a wrong mobile communication price plan: An empirical analysis of predictors of the degree of tariff misfit among flat rate subscribers in Germany

      2017, Telematics and Informatics
      Citation Excerpt :

      Hence, in the long run and perhaps even in the medium term, it is likely to be more profitable for MNO to take measures which aim at limiting the number of their subscribers whose degree of misfit between their rate plan and their service consumption behaviors is high. Prior research on wrong tariff choices of (mobile) communication customers has strongly focused on quantifying the financial losses which accrue to consumers due to being in suboptimal rate plans (Ascarza et al., 2016; Ater and Landsmann, 2016; Bar-Gill and Stone, 2012; Faqolli and Tole, 2013; Genakos et al., 2016; Grubb, 2009; Grubb and Osborne, 2015; Grzybowski and Liang, 2015; Joo et al., 2002; Köhler et al., 2014; Leider and Şahin, 2014; Miao and Jayakar, 2014; Miravete, 2003; Miravete and Palacios-Huerta, 2014; Narayanan et al., 2007; Telegraph, 2015; Wong, 2010b, 2012; Wu et al., 2015). A second stream of research has explored objective reasons (e.g., rate plan complexity or switching costs) and subjective causes (e.g., flat rate or flexibility preferences) of financially suboptimal (mobile) communication rate plan choices of consumers (e.g., Friesen and Earl, 2015; Gerpott, 2007, 2009; Goettler and Clay, 2011; Hämmäinen et al., 2009; Harada et al., 2015; Haucap and Heimeshoff, 2011; Heidenreich and Talke, 2012; Iyengar et al., 2007; Krämer and Wiewiorra, 2012; Lambrecht et al., 2007; Lambrecht and Skiera, 2006; Mitomo et al., 2009; Train et al., 1987; Uhrich et al., 2013; Wolk and Skiera, 2010).

    • 3G post adoption users experience with telecommunications services: A partial least squares (PLS) path modelling approach

      2016, Nankai Business Review International

    • Bounded rationality and consumer choice: an evaluation of consumer choice of mobile bundles

      2014, Chinese Journal of Communication

    Ken Kwong-Kay Wong is Assistant Professor of Marketing at Universitas 21 Global. He is also a recipient of the Faculty Excellence Award 2008 and 2009 where he was honoured in all three award categories including Outstanding Professor, Most Innovative Professor, and Excellence in Online Education. Dr. Wong has also taught marketing courses at the University of Toronto since 2003. He holds a DBA from the University of Newcastle, Australia and an MBA from Nyenrode Business Universiteit. His research interests include CRM and Online Education

    View full text
    Copyright © 2010 Elsevier Ltd. All rights reserved.