Description
The objectives of this research is to find out the innovative price models adopted by CMSPs
and its impact on their bottom line. The ‘incoming free for life time’
3
pricing model for prepaid
mobile services, which was one of the driving forces behind the explosive growth of mobile
connections in 2006, is selected for detailed analysis. A case study of TRUMP, MTNL,
Mumbai during the last 12 month period of (January to December 2006) is discussed in detail
to further support this hypothesis.
1
“Innovations in Pricing of Prepaid services adopted by CMSPs (Cellular
Mobile Service Providers) and it’s impact on the Revenue Per Minute in
Raising their bottom line : A case study of TRUMP
1
MTNL, Mumbai during
the 12 month period of 2006.”
*B B Chaudhary, ** Dr. Vijay Wagh, * ** Dr. Pradip Manjrekar, **** Vani Kamath.
____________________________________________________________________________
ABSTRACT
In March 2008 the number of mobile connections in India crossed 261 million mark. It is now
having the second largest number of mobile connections in the world after China. The
teledensity
2
in India is governed by three factors viz. growing household income, innovative
price models adopted by CMSPs and telecom regulations. The mobile services market in India
is the fastest growing market in the world. There are more than five CMSPs in each circle; it is
becoming difficult for them to retain their market share. The mobile services provided by all of
them are having almost same features. The CMSPs are making all possible efforts to increase
their market share. Most of them have outsourced their non-core business activities. Some of
them have tied up with software firms to provide content and niche services. They are adopting
competitive strategy to differentiate their services from others. In order to penetrate the market
they are offering the lowest call tariffs in the world. The only way to earn profit is by the
economy of scales. MTNL has positioned Trump its Prepaid brand as the most affordable
mobile service in the market by providing Price Leadership in voice and data services. The
competitive strategy of CMSPs is to get the maximum number of customers by reducing
prices.
The objectives of this research is to find out the innovative price models adopted by CMSPs
and its impact on their bottom line. The ‘incoming free for life time’
3
pricing model for prepaid
mobile services, which was one of the driving forces behind the explosive growth of mobile
connections in 2006, is selected for detailed analysis. A case study of TRUMP, MTNL,
Mumbai during the last 12 month period of (January to December 2006) is discussed in detail
to further support this hypothesis.
* Deputy General Manager (Customer Service) Mobile Service MTNL, Mumbai. (E-mail :
[email protected]).
**Professor, N. L. Dalmai Institute of Management Studies and Research, Mira Road, Dist:
Thane, Maharashtra
***Professor & Head-Research and Extension Centre, Dr. D. Y. Patil Institute of Management
Studies, CBD Belapur, Navi Mumbai.
****Lecturer, Dr. D. Y. Patil Institute of Management Studies, CBD Belapur, Navi Mumbai.
2
INTRODUCTION
In spite of an impressive growth, India lags behind the countries like Brazil and China in tele
density. The need of the hour is Innovations in Pricing of mobile services, customer focused
policy initiatives and inflow of funds to catch up with the leading achievers. The TABLE-1
below gives comparison of tele density in some countries as on December 2005.
Country Population
(Million)
GDP
(per capita)
US$2004
Telephones
(thousands)
Tele density
USA 298.21 36273 360347 122.71
UK 59.67 26369 94791 158.51
Australia 20.16 25436 29880 148.25
Brazil 186.41 3338 107987 59.78
Mexico 107.03 6328 66974 62.58
Sri Lanka 20.74 1031 4606 22.20
Korea 48.29 14136 62087 128.56
Japan 128.08 31324 153525 119.86
Indonesia 222.87 1156 59682 26.79
China 1315.84 1268 743861 56.53
Pakistan 153.96 614 18049 11.72
India* 1115.59 634 142092 23.81
World 6728.08 5944 3309379 49.45
TABLE-1: STATUS OF TELE DENSITY IN SOME COUNTRIES AS ON DEC, 2005.
* As on DECEMBER 2007, Source: International Telecommunication Union
Objectives of this Research
The objectives of this research are as follows:
(1) to analyse the innovative price models adopted by CMSPs and
(2) it’s impact on the Revenue Per Minute in raising the bottom line of the CMSPs.
3
Hypothesis of this Research
The hypothesis of this research is:
H0: the “Innovations in pricing of the Prepaid mobile services adopted by CMSPs is having an
impact on the Revenue Per minute in raising their bottom line ”.
H1: the “Innovations in pricing of the Prepaid mobile services adopted by CMSPs is not
having an impact on the Revenue Per Minute in raising their bottom line ”.
The Innovations in pricing model ‘incoming free for life time’ for prepaid mobile services,
which was one of the driving forces behind the explosive growth of mobile connections in
2006 is selected for detailed analysis. The impact of the other innovations in pricing was not
found to be of any significance.
Challenges in Growth of Mobile Services in India
The mobile services in India were launched in August 1995, after the announcement of
National Telecom Policy 1994 (NTP). The growth was slow in initial years because of the
exorbitant prices of mobile handsets and unaffordable tariff. The announcement of New
Telecom Policy (NTP) in 1999, heralded several innovations by CMSPs which sparked growth
of mobile connections in India. The number of mobile connections added in 2002-03 was 6.26
million, in 2003-04 was 20.7 million, in 2004-05 was 18.48 million, in 2005-06 was 40.93
million and in 2006-07 was 71.98 million. The figures in brackets in TABLE- 2 below gives
the new fixed and mobile connections added during the years.
Item Growth during the Tenth five year plan (2002-07)
In millions 2002-03 2003-04 2004-05 2005-06 2006-07
Fixed Lines 41.62
(3.40)
42.84
(1.22)
46.19
(3.35)
48.98
(2.79)
40.77
(-8.21)
Mobile 13.00
(6.26)
33.70
(20.70)
52.18
(18.48)
93.11
(40.93)
165.09
(71.98)
Total 54.62
(9.66)
76.54
(21.92
98.37
(21.82)
142.09
(43.72)
205.86
(63.77)
Tele density 5.11 7.02 8.95 12.74 18.22
TABLE- 2: GROWTH OF FIXED LINES AND CELLULAR MOBILE TELEPHONES IN
INDIA. SOURCE ERU, DoT
4
The Six Important Agencies Influencing the Prices of Mobile Services
The six important Agencies who influence the prices in mobile service are:
i) The Government, which formulates the policies.
ii) Telecom Regulatory Authority of India (TRAI) which regulates telecom business.
iii) The CMSPs, who operate the services in their licensed areas.
iv) Telecom Dispute Settlement and Appellate Tribunal (TDSAT) which settles dispute
between CMSPs and TRAI.
v) The OEM vendors who supply telecom equipments and mobile handsets.
vi) The Value Added service
4
(VAS) or content providers and
vii) The distributors to retailers in the market.
India is divided into four service areas namely Metro, Circle-A, B, and C. The license is
awarded to CMSPs circle wise, the Circle is almost co- terminus with the geographical
boundary of the states. The details of the circles are given below in TABLE-3:
Sr.
No
Service
Area
States and Metros
1 Circle A Maharashtra, Gujarat, Karnataka, Tamil Nadu and
Andhra Pradesh.
2 Circle B Kerala, Punjab, Haryana, Madhya Pradesh, Uttar Pradesh
(E & N), Rajasthan, West Bengal, Andaman and Nicobar
3 Circle C Himachal Pradesh, Bihar, Assam, North East and Jammu
and Kashmir.
4 Metros Mumbai, Kolkata, Chennai and Delhi
TABLE-3: THE DETAILS OF CIRCLE AND STATES.
5
Innovations as Business Strategy Only Way ahead for CMSPs.
Innovation is a process by which an idea or invention is commercially exploited. Innovation
implies creating something new that is beneficial. The CMSPs are facing challenges imposed
by unprecedented growth. They have chosen innovation as one of their business strategies to
sustain competitive advantage and increase the number of customers. They are inventing price
models to make mobile services more affordable. A system’s approach to innovation is
adopted by CMSPs, which is helping them in reducing the cost of mobile services. It is felt that
Innovation is needed by them to maintain competitive advantage.
Innovation Models adopted by CMSPs.
Innovation is the most desirable capability that any organization can posses and nurture.
Innovation is based upon the relationship between environment and the organizations. The
social deterministic school of thought argues that innovation is a result of the combination of
social factors and external influences. The argument is that when environment is conducive
innovations will happen. The individualistic school of thought argues that innovators who are
born with such talents can only do innovations. In organizations, innovation can be ‘technology
push’
5
or ‘market pull’
6
or both. In telecom industry innovations are happening both in
technology and marketing. In ‘technology push’ model manufacturer makes the products
efficiently and marketing department offers them to customers. Whereas the ‘customer driven
model’
7
emphasizes the role of marketing as an initiator of new ideas resulting from close
interactions with customers. This model is widely used by CMSPs for marketing mobile
services. The service delivery processes dealing with customer business process adopts
interactive model also, this is latest approach to creative behavior in organizations. The
telecom regulation and customer demands which are outside, the organization are facilitating
innovations in the mobile service market.
OVERVIEW OF MOBILE SERVICES MARKETING MIX
8
The mobile service market in India is crowded. There are more than five CMSPs in each circle
9
and metro .They are facing intense competition and working hard to gain and maintain their
market share. Along with the increase in supply of mobile services, there is an improvement in
quality, which has resulted in mobile service being treated as commodity like Fast Moving
Consumer Good (FMCG). The tariff of Prepaid service is normally more as compared to Post
paid services. The Indian mobile service market is very price sensitive. The CSMPs are
inventing price models to attract all segments of customers. The CMSPs are offering activation
and deposit waiver and free handsets to postpaid customers and free validity and talk time to
prepaid customers. The CMSPs have a well-woven network for retailing the mobile services
through - Company branded shops, Distributors, Dealers, Retailers and Direct Sales Agents
(DSA). The mobile services are retailed along with FMCGs in the market. The CMSPs have
appointed distributors and retailers.
6
It is the retailers who are common for all dealers who are calling the shots and driving prices.
Now ,the prices of mobile services can be compared at the click of mouse. The customers are
well educated today and take conscious decisions. They are vocal about the deficiencies and
are asking for more freebees. The facility to activate the new mobile connections and
provisioning is available with distributors. The runner
10
collects Customer Agreement Forms
11
(CAF) and submits it to distributor for activation of mobile connections. The second sales
channel are Company branded shops, which are owned by CMSPs. These are manned by
employees of the company. The CMSPs have made provision in the budget for promoting the
mobile services. They have not left any media unexploited to advertise and market their
products. They also sponsor cultural shows on occasions of local festivals. They have tied up
with leading Bollywood stars and models to promote their products. They have also appointed
a number of DSAs who cater to personalized needs of customer and maintain Public Relations.
The after sales services to mobile customers are provided by the call centers. The facility to
make bill payments is extended by providing drop boxes in public places. The call centre is
well equipped to address the grievances of customers. The CMSPs pay special attention to the
customer business process so as to provide excellent services to the customers. They are well
equipped with latest Information Technology tools to take care of customer needs. The CMSPs
pay a lot of attention to the business processes employed for delivery of mobile services. They
have employed advanced Billing and customer care systems (BCCS) to cater to the needs of
customers. They use the best available architects to build customized shops. The design of all
the shops, distributor’s offices are standard to communicate the brand image. The employees
attending the customers are well dressed and trained to provide customized after sales
services. These shops are well equipped to demonstrate Value Added Services (VAS) also.
Here the customers can have the real feel of service before buying it. The CSMPs are spending
huge sums to build and maintain website which support very user-friendly ‘self care’ modules.
METHODOLOGY
Legacy system of pricing telecom services
In India two systems for pricing telecom services were used the flat rate and the measured rate.
Under the former, subscriber has to pay a fixed monthly rental irrespective of the number of
calls made. In the latter, the subscriber is charged a lower rental plus a usage charge per call.
The Measured system of pricing still continues. The tariff of the calls was decided depending
upon the time of origination of the call, day, distance, duration, more the number of calls made
by the user higher the tariff. The rental was decided on the basis of the capacity of telephone
exchange from where the customer is served. The rental for the rural connections was low as
compared to the urban areas.
7
Different methods of Pricing
The prices are not an end in themselves, but a means to achieve an end. In India the end is to
increase tele density and achieve universal telecom services at reasonable prices. This is
driving CMSPs to innovate the price models. The pricing mechanism should encourage
efficiency, provide financial viability, promote investment and support new services. It should
curb the possibility of anti-competitive behavior in market. It shall ensure stability and
predictability of prices in order to promote business confidence.
The Prices are based either on costs or demand. The cost-based price includes a rate of return
(or mark-up) together with costs, i.e., they focus on economic costs, which include a normal
commercial return. In telecom, there are two basic types of demand, one for accessing the
network and other for usage, these two elements is priced separately, and the impact of price
on these two types of demand need be considered separately while deriving the price models.
(A) Cost Based Pricing: The cost is equal to the sum of all fixed costs and variable costs;
fixed costs are costs which do not vary with changes in traffic and variable costs are costs
which change with the change in traffic. Three costs are considered while using the cost-based
pricing they are short-run marginal costs, long-run incremental costs and fully-allocated costs.
The Short-run marginal costs are those costs which arise due to an increase in the output level
these costs are increment to total costs when an additional unit of output is produced. The long
run incremental costs cover not just the normal variable costs but also the potential fixed costs.
Long run incremental costs are based on forward-looking costs, and would thus incorporate the
effects of economies of scale and technical change. The concern that a price based on marginal
or long run incremental costs would not cover total costs has led to a consideration of fully-
allocated costs. The Fully-allocated costs methodology covers all cost components, i.e. in
addition to a consideration of the cost components covered by the long-run incremental costs;
this methodology requires a full allocation of common or joint costs to the individual services.
The Mark-Up on Costs is done in three different ways. First way focuses on demand price and
aims at minimizing the loss in efficiency that would arise if the price deviates from marginal
costs. Second way is to use some uniform mark-up or thumb-rule for mark-up, such as a
reasonable commercial return and third way is a two-part pricing which involves levying an
access or rental charge while pricing the use of the service at its marginal cost, or pricing
different levels or units of the services at different rates. Subsidies in telecom are provided for
various reasons. The Ramsey rule states that the mark-up of price over marginal cost should be
in an inverse proportion to the elasticity of demand for the product. For example, elasticity of
demand of residential subscribers is likely to be more than that of business subscribers, because
the demand of the former is likely to be affected much more by a change in telecom prices.
Under the Ramsey rule, this would imply that a lower mark-up should be charged to residential
subscribers and a higher mark-up to the business customers. The elasticity of telecom demand
is affected by changes in the regulation also. The Ramsey rule can only be used as a rough
guide for mark-up, while keeping in mind the above-mentioned social implications of this
mark-up.
8
(B) Demand-Based Prices: The demand-based prices are determined independently of
costs. A demand-based price reflects willingness of the user to pay for a service, which in turn
is an indication of benefit value that the customer derives from the product. Based on these
principles, this demand based price focuses not on efficiency in terms of cost, but on efficiency
in terms of the value given by a customer.
The Price cap method is used for restructuring the telecom tariff in the markets where the level
of competition is high and number of operators are more. Price floor and ceiling are also used
to check abuse of market power. Unfair competition is a major concern in the telecom sector,
which normally has dominant incumbent CSMPs in the market. Normally the long run
incremental cost is used as floor price.
DISSCUSSION AND FINDINGS
(1) Innovations in Pricing.
The innovations in pricing of mobile services are driven by CMSPs. They are offering the
services in innovative price models, which are very attractive. These innovations have
contributed in the reduction of the cost of ownership and made mobile services more accessible
for the low-income group customers.
The following innovative models for pricing new plans are adopted as compared to plain
vanilla tariff models used in the legacy system.
i) ‘Incoming free for lifetime’ plans. In this plan the free incoming calls are allowed to the
customers, if they recharge for a small amount every six months.
ii) One India tariff plan (1 Rupee/min anywhere in India). This plan is for the customers
making heavy subscriber Trunk Dialing (STD) calls.
iii) One India Roaming Plan. (1 Rupee/min while roaming in India). This plan is for customers
using the national roaming services frequently.
iv) The Pre paid customer can Barter talk minutes for extension of account validity.
v) The availability and affordability of the Micro refill coupons in various denominations (e.g.
small refill of Rs 10 and validity extension at the rate of Rs3/- per day.).
vi) Bundling of Mobile handset with tariff plans, where the mobile handsets are offered free of
charge.
vii) Attractive Value Added Services which are compatible with less sophisticated handsets
e.g. voice based SMS in place of the text based SMS and services on voice platforms for
access to services on voice in place of the SMS.
9
(2) The ‘Incoming free for Lifetime’ price model: The ‘Incoming free for Lifetime’
price model is a departure from the traditional price model, in this rental component is charged
only once in the life of the customer. This was an innovative price model invented by CMSPs
to attract new customers. 'Incoming free for lifetime' price model was first announced by
Airtel in December 2005. This was launched after ‘Non-Stop Mobile'
12
scheme launched by
Tata Teleservices turned out to be a big hit which allowed customers to receive free incoming
calls for two years without recharging. The ‘Incoming free for life time was offered to
customers on one time payment of Rs 999/-, with the condition that customer shall recharge his
account once in every 6 months. In this pricing model the Revenue per Minute (RPM) for out
going call charges were kept much higher than the other price model to compensate for the
monthly rental component charges. The analysis of the Impact of ‘Incoming free for life time’
price model is done on three vital parameters viz. Revenue per minute (RPM), number of new
customers added
13
and Minutes of usage
14
(MOU).
The number of Customers who opted for 'Incoming free for lifetime' price model through out
India as on 30th June 2006 after 6 months of launch of this scheme is given in TABLE-4 below
.
Number of
Customers (in
million.)
Life time
plan
New
customers.
Migrated
customers.
Customers who
recharged per
Month
Circle A 6.60 54% 46% 66%
Circle B 4.86 51% 49% 88%
Circle C 1.36 41% 59% 94%
Metro 3.28 51% 54% 62%
All India 16.10 51% 49% 72%
TABLE- 4: MOBILE CUSTOMERS IN ’INCOMING FREE FOR LIFE TIME ’ as on 30
th
June 06.
Source: TRAI Study Paper: No.3/2006 New Delhi 19/12/2006. (All figures in million)
It can be seen from the above that 16.10 Million customers opted for this model. This scheme
was a major contributor to the growth of mobile connections in 2006. The ‘Incoming free for
life time’ attracted 51% new customers and the rest migrated from the existing plans. The
conversion of customers from the Postpaid to Prepaid was also noticed. It is also seen that on
an all India average 72% of the “Incoming free for life time” customers recharged every
month.
10
The break up of minutes of usage per customer per month in ‘incoming free for Lifetime’
price model shows that they made 57 minutes of outgoing calls and received 214 minutes of
incoming calls per month. The ratio of Incoming minutes to the outgoing minutes is 79:21,
against the generally observed incoming and outgoing minutes of usage pattern of 60:40 in
other prepaid price models.
Minutes of
Usage
Incoming
Minutes
Outgoing Minutes Total Minutes
Circle A 80% 20% 266
Circle B 77% 23% 271
Circle C 78% 22% 317
Metro 80% 20% 269
All India 79% 21% 271
TABLE -5: AVERAGE MINUTES OF USAGE PER CUSTOMERS PER MONTH IN
‘INCOMING FREE FOR LIFE TIME ’ price model for the period Jan. 06 to June 06
Source:TRAI Study Paper: No.3/2006 New Delhi 19/12/2006.
The comparative chart of the ARPU of the ‘Incoming free for life time ‘price model is
tabulated below.
Circle ARPU
(Life )
ARPU
(other)
RPM
(Life )
RPM
(other)
A
223
- 0.84 -
B 219 - 0.81 -
C 237 - 0.76 -
Metro 205 - 0.76 -
All India 218 261 0.80 0.77
TABLE -6: The REVENUE COMPOSITION FOR ‘INCOMING FREE FOR LIFE TIME ’
price plan as 30th June 06.
Source:TRAI Study Paper: No.3/2006 New Delhi 19/12/2006.
11
The average all India ARPU of the ‘incoming free for lifetime’ price model is Rs.218 per
month. The revenue Composition of this model shows that a large portion of revenue is
contributed by outgoing calls and other services. This implies that this price model is not
different from other pricing models. The revenue per minute ‘Incoming free for Lifetime price
model is Re.0.80, which is higher as compared with RPM of Re.0.77 of other price models.
(3) A Case Study of Trump Prepaid brand of Mahanagar Telephone
Nigam Limited (MTNL) Mumbai, To further validate the research hypothesis the sale
figures of MTNL Mumbai were taken for a period of 12 months.
Year
2006
Sale of
Life time
Refill
New
customer
% of Life
time
Customers
out of new
customers
ARPU
(in Rs. per month)
January 87,641 57,613 47,326 374
February 39,088 42,821 25,016 185
March 26,489 62,453 12,970 353
April 18,081 35,444 9,943 181
May 15,653 37,187 9,548 166
June 16,936 35,422 8,637 143
August 20,177 35,182 12,913 215
September 16,978 5,457 3,225 216
October 17,479 29,835 10,836 179
November 18,309 29,764 8,971 207
December 16954 27,611 9,155 210
Total 3,13,471 1,61,494 56,304 2663/12
TABLE-8: The number of the new customers added in ‘incoming free life time’ price model
during the last 12 months for the period of 2006 for Trump Prepaid services of MTNL
Mumbai.
12
The average revenue per minute of ‘Incoming free for life time’ price model during the last 12
months period was found to be Re 0.79. The average ARPU Rs 222/- of Trump MTNL was
found to Rs 222/- which conforms the all India trend.
Impact on the Bottom line (inclusive of all taxes) =
{Sales of the Refill Coupons + New Customers added X ARPU}.
{3.13 lacs X Rs 1008 + 1.61 lacs X Rs.222} = Rs. 34 crores approximately.
This study was also done on three vital parameters viz. revenue per minute, new customers’
added and average revenue per user. It was found that the ‘incoming free for life time’ pricing
model increased the number of new customers for which MTNL was looking for desperately.
The average revenue per minute for incoming free model is Re. 0.79 which is more as
compared to the Re 0.77 RPM of other prepaid schemes. In this case study the ARPU is Rs
222/- which is more than the average ARPU of the prepaid customers in other schemes. Hence
on the basis of the matrices it can be concluded that this pricing model has increased the
bottom line of the companies significantly by adding new customers with higher RPM and the
research hypothesis is TRUE.
CONCLUSIONS
The CMSPs have chosen Innovation as one of their business strategies to sustain competitive
edge. They are working on innovations in the mobile services products and processes. The
‘Incoming free for life time’ Pricing Models for prepaid services adopted by them is having
an impact in raising their bottom line significantly by attracting new customers, higher revenue
per minute per customer and the Average revenue per user.
Hence the research hypothesis the “Innovations in pricing of the Prepaid mobile services
adopted by CMSPs is having an impact on the Revenue Per minute in raising their bottom
line” is proved and accepted.
ACKNOWLEDEMENTS
1. Shri J Gopal, Executive Director, MTNL, Mumbai.
Librarian, Dr.D.Y. Patil Institute of Management Studies, CBD Belapur, Navi Mumbai
13
REFERENCES.
[
2
] TRUMP is the prepaid brand launched by Mahanagar Telephone Nigam Limited.
[
2
] The number of the telephone connections per 100 persons.
[
3
] Incoming Lifetime free is a pricing model offered by the CMSPs in India.
[
4
] VAS-Value added service providers such as Ring Back Tone, etc.
[
5
], Dr C S G Krishna & Dr R Lalitha Innovation Management, Himalaya Publishing house Mumbai, 2007.
[
6
] Dr C S G Krishna & Dr R Lalitha, Innovation Management,Himalaya Publishing House, Mumbai,
2007.
[
7
] Dr C S G Krishnamacharyulu & Dr R Lalitha, Innovation Management, Himalaya Publishing House
Mumbai , 2007.
[
8
] C Bhattacharjee, Service Sector Management: An Indian Prospective, Jaico Publishing House Mumbai,
2007.
[
9
]India is divided in to small geographical areas for granting licenses.
[
10
] A person who is employed by the retailer of the CMSPs who collects the CAF from the customer and
arranges for the activation of the mobile connection.
[
11
] Customer Agreement form this is used by the CMSPs to register the request of the customer for new
mobile connection.
[
12
] ARPU(average revenue per user) is a parameter used to calculate performance of mobile services .
[
13
] New customers ,this is very significant for the CMSPs as the revenue depends on the number of the
customers.
[
14
] MOU (Minutes of usage) is the average number of total usage of the customers divided by the total
number of the customers.
[16].Study paper 3/2006 TRAI dated 19/12/2006.
[17].Report of the working group on the telecom sector for the Eleventh Five Year Plan(2002-07) dated Oct
06, 2002.
[18].http://www.trai.gov.in.
doc_200708953.pdf
The objectives of this research is to find out the innovative price models adopted by CMSPs
and its impact on their bottom line. The ‘incoming free for life time’
3
pricing model for prepaid
mobile services, which was one of the driving forces behind the explosive growth of mobile
connections in 2006, is selected for detailed analysis. A case study of TRUMP, MTNL,
Mumbai during the last 12 month period of (January to December 2006) is discussed in detail
to further support this hypothesis.
1
“Innovations in Pricing of Prepaid services adopted by CMSPs (Cellular
Mobile Service Providers) and it’s impact on the Revenue Per Minute in
Raising their bottom line : A case study of TRUMP
1
MTNL, Mumbai during
the 12 month period of 2006.”
*B B Chaudhary, ** Dr. Vijay Wagh, * ** Dr. Pradip Manjrekar, **** Vani Kamath.
____________________________________________________________________________
ABSTRACT
In March 2008 the number of mobile connections in India crossed 261 million mark. It is now
having the second largest number of mobile connections in the world after China. The
teledensity
2
in India is governed by three factors viz. growing household income, innovative
price models adopted by CMSPs and telecom regulations. The mobile services market in India
is the fastest growing market in the world. There are more than five CMSPs in each circle; it is
becoming difficult for them to retain their market share. The mobile services provided by all of
them are having almost same features. The CMSPs are making all possible efforts to increase
their market share. Most of them have outsourced their non-core business activities. Some of
them have tied up with software firms to provide content and niche services. They are adopting
competitive strategy to differentiate their services from others. In order to penetrate the market
they are offering the lowest call tariffs in the world. The only way to earn profit is by the
economy of scales. MTNL has positioned Trump its Prepaid brand as the most affordable
mobile service in the market by providing Price Leadership in voice and data services. The
competitive strategy of CMSPs is to get the maximum number of customers by reducing
prices.
The objectives of this research is to find out the innovative price models adopted by CMSPs
and its impact on their bottom line. The ‘incoming free for life time’
3
pricing model for prepaid
mobile services, which was one of the driving forces behind the explosive growth of mobile
connections in 2006, is selected for detailed analysis. A case study of TRUMP, MTNL,
Mumbai during the last 12 month period of (January to December 2006) is discussed in detail
to further support this hypothesis.
* Deputy General Manager (Customer Service) Mobile Service MTNL, Mumbai. (E-mail :
[email protected]).
**Professor, N. L. Dalmai Institute of Management Studies and Research, Mira Road, Dist:
Thane, Maharashtra
***Professor & Head-Research and Extension Centre, Dr. D. Y. Patil Institute of Management
Studies, CBD Belapur, Navi Mumbai.
****Lecturer, Dr. D. Y. Patil Institute of Management Studies, CBD Belapur, Navi Mumbai.
2
INTRODUCTION
In spite of an impressive growth, India lags behind the countries like Brazil and China in tele
density. The need of the hour is Innovations in Pricing of mobile services, customer focused
policy initiatives and inflow of funds to catch up with the leading achievers. The TABLE-1
below gives comparison of tele density in some countries as on December 2005.
Country Population
(Million)
GDP
(per capita)
US$2004
Telephones
(thousands)
Tele density
USA 298.21 36273 360347 122.71
UK 59.67 26369 94791 158.51
Australia 20.16 25436 29880 148.25
Brazil 186.41 3338 107987 59.78
Mexico 107.03 6328 66974 62.58
Sri Lanka 20.74 1031 4606 22.20
Korea 48.29 14136 62087 128.56
Japan 128.08 31324 153525 119.86
Indonesia 222.87 1156 59682 26.79
China 1315.84 1268 743861 56.53
Pakistan 153.96 614 18049 11.72
India* 1115.59 634 142092 23.81
World 6728.08 5944 3309379 49.45
TABLE-1: STATUS OF TELE DENSITY IN SOME COUNTRIES AS ON DEC, 2005.
* As on DECEMBER 2007, Source: International Telecommunication Union
Objectives of this Research
The objectives of this research are as follows:
(1) to analyse the innovative price models adopted by CMSPs and
(2) it’s impact on the Revenue Per Minute in raising the bottom line of the CMSPs.
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Hypothesis of this Research
The hypothesis of this research is:
H0: the “Innovations in pricing of the Prepaid mobile services adopted by CMSPs is having an
impact on the Revenue Per minute in raising their bottom line ”.
H1: the “Innovations in pricing of the Prepaid mobile services adopted by CMSPs is not
having an impact on the Revenue Per Minute in raising their bottom line ”.
The Innovations in pricing model ‘incoming free for life time’ for prepaid mobile services,
which was one of the driving forces behind the explosive growth of mobile connections in
2006 is selected for detailed analysis. The impact of the other innovations in pricing was not
found to be of any significance.
Challenges in Growth of Mobile Services in India
The mobile services in India were launched in August 1995, after the announcement of
National Telecom Policy 1994 (NTP). The growth was slow in initial years because of the
exorbitant prices of mobile handsets and unaffordable tariff. The announcement of New
Telecom Policy (NTP) in 1999, heralded several innovations by CMSPs which sparked growth
of mobile connections in India. The number of mobile connections added in 2002-03 was 6.26
million, in 2003-04 was 20.7 million, in 2004-05 was 18.48 million, in 2005-06 was 40.93
million and in 2006-07 was 71.98 million. The figures in brackets in TABLE- 2 below gives
the new fixed and mobile connections added during the years.
Item Growth during the Tenth five year plan (2002-07)
In millions 2002-03 2003-04 2004-05 2005-06 2006-07
Fixed Lines 41.62
(3.40)
42.84
(1.22)
46.19
(3.35)
48.98
(2.79)
40.77
(-8.21)
Mobile 13.00
(6.26)
33.70
(20.70)
52.18
(18.48)
93.11
(40.93)
165.09
(71.98)
Total 54.62
(9.66)
76.54
(21.92
98.37
(21.82)
142.09
(43.72)
205.86
(63.77)
Tele density 5.11 7.02 8.95 12.74 18.22
TABLE- 2: GROWTH OF FIXED LINES AND CELLULAR MOBILE TELEPHONES IN
INDIA. SOURCE ERU, DoT
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The Six Important Agencies Influencing the Prices of Mobile Services
The six important Agencies who influence the prices in mobile service are:
i) The Government, which formulates the policies.
ii) Telecom Regulatory Authority of India (TRAI) which regulates telecom business.
iii) The CMSPs, who operate the services in their licensed areas.
iv) Telecom Dispute Settlement and Appellate Tribunal (TDSAT) which settles dispute
between CMSPs and TRAI.
v) The OEM vendors who supply telecom equipments and mobile handsets.
vi) The Value Added service
4
(VAS) or content providers and
vii) The distributors to retailers in the market.
India is divided into four service areas namely Metro, Circle-A, B, and C. The license is
awarded to CMSPs circle wise, the Circle is almost co- terminus with the geographical
boundary of the states. The details of the circles are given below in TABLE-3:
Sr.
No
Service
Area
States and Metros
1 Circle A Maharashtra, Gujarat, Karnataka, Tamil Nadu and
Andhra Pradesh.
2 Circle B Kerala, Punjab, Haryana, Madhya Pradesh, Uttar Pradesh
(E & N), Rajasthan, West Bengal, Andaman and Nicobar
3 Circle C Himachal Pradesh, Bihar, Assam, North East and Jammu
and Kashmir.
4 Metros Mumbai, Kolkata, Chennai and Delhi
TABLE-3: THE DETAILS OF CIRCLE AND STATES.
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Innovations as Business Strategy Only Way ahead for CMSPs.
Innovation is a process by which an idea or invention is commercially exploited. Innovation
implies creating something new that is beneficial. The CMSPs are facing challenges imposed
by unprecedented growth. They have chosen innovation as one of their business strategies to
sustain competitive advantage and increase the number of customers. They are inventing price
models to make mobile services more affordable. A system’s approach to innovation is
adopted by CMSPs, which is helping them in reducing the cost of mobile services. It is felt that
Innovation is needed by them to maintain competitive advantage.
Innovation Models adopted by CMSPs.
Innovation is the most desirable capability that any organization can posses and nurture.
Innovation is based upon the relationship between environment and the organizations. The
social deterministic school of thought argues that innovation is a result of the combination of
social factors and external influences. The argument is that when environment is conducive
innovations will happen. The individualistic school of thought argues that innovators who are
born with such talents can only do innovations. In organizations, innovation can be ‘technology
push’
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or ‘market pull’
6
or both. In telecom industry innovations are happening both in
technology and marketing. In ‘technology push’ model manufacturer makes the products
efficiently and marketing department offers them to customers. Whereas the ‘customer driven
model’
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emphasizes the role of marketing as an initiator of new ideas resulting from close
interactions with customers. This model is widely used by CMSPs for marketing mobile
services. The service delivery processes dealing with customer business process adopts
interactive model also, this is latest approach to creative behavior in organizations. The
telecom regulation and customer demands which are outside, the organization are facilitating
innovations in the mobile service market.
OVERVIEW OF MOBILE SERVICES MARKETING MIX
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The mobile service market in India is crowded. There are more than five CMSPs in each circle
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and metro .They are facing intense competition and working hard to gain and maintain their
market share. Along with the increase in supply of mobile services, there is an improvement in
quality, which has resulted in mobile service being treated as commodity like Fast Moving
Consumer Good (FMCG). The tariff of Prepaid service is normally more as compared to Post
paid services. The Indian mobile service market is very price sensitive. The CSMPs are
inventing price models to attract all segments of customers. The CMSPs are offering activation
and deposit waiver and free handsets to postpaid customers and free validity and talk time to
prepaid customers. The CMSPs have a well-woven network for retailing the mobile services
through - Company branded shops, Distributors, Dealers, Retailers and Direct Sales Agents
(DSA). The mobile services are retailed along with FMCGs in the market. The CMSPs have
appointed distributors and retailers.
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It is the retailers who are common for all dealers who are calling the shots and driving prices.
Now ,the prices of mobile services can be compared at the click of mouse. The customers are
well educated today and take conscious decisions. They are vocal about the deficiencies and
are asking for more freebees. The facility to activate the new mobile connections and
provisioning is available with distributors. The runner
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collects Customer Agreement Forms
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(CAF) and submits it to distributor for activation of mobile connections. The second sales
channel are Company branded shops, which are owned by CMSPs. These are manned by
employees of the company. The CMSPs have made provision in the budget for promoting the
mobile services. They have not left any media unexploited to advertise and market their
products. They also sponsor cultural shows on occasions of local festivals. They have tied up
with leading Bollywood stars and models to promote their products. They have also appointed
a number of DSAs who cater to personalized needs of customer and maintain Public Relations.
The after sales services to mobile customers are provided by the call centers. The facility to
make bill payments is extended by providing drop boxes in public places. The call centre is
well equipped to address the grievances of customers. The CMSPs pay special attention to the
customer business process so as to provide excellent services to the customers. They are well
equipped with latest Information Technology tools to take care of customer needs. The CMSPs
pay a lot of attention to the business processes employed for delivery of mobile services. They
have employed advanced Billing and customer care systems (BCCS) to cater to the needs of
customers. They use the best available architects to build customized shops. The design of all
the shops, distributor’s offices are standard to communicate the brand image. The employees
attending the customers are well dressed and trained to provide customized after sales
services. These shops are well equipped to demonstrate Value Added Services (VAS) also.
Here the customers can have the real feel of service before buying it. The CSMPs are spending
huge sums to build and maintain website which support very user-friendly ‘self care’ modules.
METHODOLOGY
Legacy system of pricing telecom services
In India two systems for pricing telecom services were used the flat rate and the measured rate.
Under the former, subscriber has to pay a fixed monthly rental irrespective of the number of
calls made. In the latter, the subscriber is charged a lower rental plus a usage charge per call.
The Measured system of pricing still continues. The tariff of the calls was decided depending
upon the time of origination of the call, day, distance, duration, more the number of calls made
by the user higher the tariff. The rental was decided on the basis of the capacity of telephone
exchange from where the customer is served. The rental for the rural connections was low as
compared to the urban areas.
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Different methods of Pricing
The prices are not an end in themselves, but a means to achieve an end. In India the end is to
increase tele density and achieve universal telecom services at reasonable prices. This is
driving CMSPs to innovate the price models. The pricing mechanism should encourage
efficiency, provide financial viability, promote investment and support new services. It should
curb the possibility of anti-competitive behavior in market. It shall ensure stability and
predictability of prices in order to promote business confidence.
The Prices are based either on costs or demand. The cost-based price includes a rate of return
(or mark-up) together with costs, i.e., they focus on economic costs, which include a normal
commercial return. In telecom, there are two basic types of demand, one for accessing the
network and other for usage, these two elements is priced separately, and the impact of price
on these two types of demand need be considered separately while deriving the price models.
(A) Cost Based Pricing: The cost is equal to the sum of all fixed costs and variable costs;
fixed costs are costs which do not vary with changes in traffic and variable costs are costs
which change with the change in traffic. Three costs are considered while using the cost-based
pricing they are short-run marginal costs, long-run incremental costs and fully-allocated costs.
The Short-run marginal costs are those costs which arise due to an increase in the output level
these costs are increment to total costs when an additional unit of output is produced. The long
run incremental costs cover not just the normal variable costs but also the potential fixed costs.
Long run incremental costs are based on forward-looking costs, and would thus incorporate the
effects of economies of scale and technical change. The concern that a price based on marginal
or long run incremental costs would not cover total costs has led to a consideration of fully-
allocated costs. The Fully-allocated costs methodology covers all cost components, i.e. in
addition to a consideration of the cost components covered by the long-run incremental costs;
this methodology requires a full allocation of common or joint costs to the individual services.
The Mark-Up on Costs is done in three different ways. First way focuses on demand price and
aims at minimizing the loss in efficiency that would arise if the price deviates from marginal
costs. Second way is to use some uniform mark-up or thumb-rule for mark-up, such as a
reasonable commercial return and third way is a two-part pricing which involves levying an
access or rental charge while pricing the use of the service at its marginal cost, or pricing
different levels or units of the services at different rates. Subsidies in telecom are provided for
various reasons. The Ramsey rule states that the mark-up of price over marginal cost should be
in an inverse proportion to the elasticity of demand for the product. For example, elasticity of
demand of residential subscribers is likely to be more than that of business subscribers, because
the demand of the former is likely to be affected much more by a change in telecom prices.
Under the Ramsey rule, this would imply that a lower mark-up should be charged to residential
subscribers and a higher mark-up to the business customers. The elasticity of telecom demand
is affected by changes in the regulation also. The Ramsey rule can only be used as a rough
guide for mark-up, while keeping in mind the above-mentioned social implications of this
mark-up.
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(B) Demand-Based Prices: The demand-based prices are determined independently of
costs. A demand-based price reflects willingness of the user to pay for a service, which in turn
is an indication of benefit value that the customer derives from the product. Based on these
principles, this demand based price focuses not on efficiency in terms of cost, but on efficiency
in terms of the value given by a customer.
The Price cap method is used for restructuring the telecom tariff in the markets where the level
of competition is high and number of operators are more. Price floor and ceiling are also used
to check abuse of market power. Unfair competition is a major concern in the telecom sector,
which normally has dominant incumbent CSMPs in the market. Normally the long run
incremental cost is used as floor price.
DISSCUSSION AND FINDINGS
(1) Innovations in Pricing.
The innovations in pricing of mobile services are driven by CMSPs. They are offering the
services in innovative price models, which are very attractive. These innovations have
contributed in the reduction of the cost of ownership and made mobile services more accessible
for the low-income group customers.
The following innovative models for pricing new plans are adopted as compared to plain
vanilla tariff models used in the legacy system.
i) ‘Incoming free for lifetime’ plans. In this plan the free incoming calls are allowed to the
customers, if they recharge for a small amount every six months.
ii) One India tariff plan (1 Rupee/min anywhere in India). This plan is for the customers
making heavy subscriber Trunk Dialing (STD) calls.
iii) One India Roaming Plan. (1 Rupee/min while roaming in India). This plan is for customers
using the national roaming services frequently.
iv) The Pre paid customer can Barter talk minutes for extension of account validity.
v) The availability and affordability of the Micro refill coupons in various denominations (e.g.
small refill of Rs 10 and validity extension at the rate of Rs3/- per day.).
vi) Bundling of Mobile handset with tariff plans, where the mobile handsets are offered free of
charge.
vii) Attractive Value Added Services which are compatible with less sophisticated handsets
e.g. voice based SMS in place of the text based SMS and services on voice platforms for
access to services on voice in place of the SMS.
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(2) The ‘Incoming free for Lifetime’ price model: The ‘Incoming free for Lifetime’
price model is a departure from the traditional price model, in this rental component is charged
only once in the life of the customer. This was an innovative price model invented by CMSPs
to attract new customers. 'Incoming free for lifetime' price model was first announced by
Airtel in December 2005. This was launched after ‘Non-Stop Mobile'
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scheme launched by
Tata Teleservices turned out to be a big hit which allowed customers to receive free incoming
calls for two years without recharging. The ‘Incoming free for life time was offered to
customers on one time payment of Rs 999/-, with the condition that customer shall recharge his
account once in every 6 months. In this pricing model the Revenue per Minute (RPM) for out
going call charges were kept much higher than the other price model to compensate for the
monthly rental component charges. The analysis of the Impact of ‘Incoming free for life time’
price model is done on three vital parameters viz. Revenue per minute (RPM), number of new
customers added
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and Minutes of usage
14
(MOU).
The number of Customers who opted for 'Incoming free for lifetime' price model through out
India as on 30th June 2006 after 6 months of launch of this scheme is given in TABLE-4 below
.
Number of
Customers (in
million.)
Life time
plan
New
customers.
Migrated
customers.
Customers who
recharged per
Month
Circle A 6.60 54% 46% 66%
Circle B 4.86 51% 49% 88%
Circle C 1.36 41% 59% 94%
Metro 3.28 51% 54% 62%
All India 16.10 51% 49% 72%
TABLE- 4: MOBILE CUSTOMERS IN ’INCOMING FREE FOR LIFE TIME ’ as on 30
th
June 06.
Source: TRAI Study Paper: No.3/2006 New Delhi 19/12/2006. (All figures in million)
It can be seen from the above that 16.10 Million customers opted for this model. This scheme
was a major contributor to the growth of mobile connections in 2006. The ‘Incoming free for
life time’ attracted 51% new customers and the rest migrated from the existing plans. The
conversion of customers from the Postpaid to Prepaid was also noticed. It is also seen that on
an all India average 72% of the “Incoming free for life time” customers recharged every
month.
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The break up of minutes of usage per customer per month in ‘incoming free for Lifetime’
price model shows that they made 57 minutes of outgoing calls and received 214 minutes of
incoming calls per month. The ratio of Incoming minutes to the outgoing minutes is 79:21,
against the generally observed incoming and outgoing minutes of usage pattern of 60:40 in
other prepaid price models.
Minutes of
Usage
Incoming
Minutes
Outgoing Minutes Total Minutes
Circle A 80% 20% 266
Circle B 77% 23% 271
Circle C 78% 22% 317
Metro 80% 20% 269
All India 79% 21% 271
TABLE -5: AVERAGE MINUTES OF USAGE PER CUSTOMERS PER MONTH IN
‘INCOMING FREE FOR LIFE TIME ’ price model for the period Jan. 06 to June 06
Source:TRAI Study Paper: No.3/2006 New Delhi 19/12/2006.
The comparative chart of the ARPU of the ‘Incoming free for life time ‘price model is
tabulated below.
Circle ARPU
(Life )
ARPU
(other)
RPM
(Life )
RPM
(other)
A
223
- 0.84 -
B 219 - 0.81 -
C 237 - 0.76 -
Metro 205 - 0.76 -
All India 218 261 0.80 0.77
TABLE -6: The REVENUE COMPOSITION FOR ‘INCOMING FREE FOR LIFE TIME ’
price plan as 30th June 06.
Source:TRAI Study Paper: No.3/2006 New Delhi 19/12/2006.
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The average all India ARPU of the ‘incoming free for lifetime’ price model is Rs.218 per
month. The revenue Composition of this model shows that a large portion of revenue is
contributed by outgoing calls and other services. This implies that this price model is not
different from other pricing models. The revenue per minute ‘Incoming free for Lifetime price
model is Re.0.80, which is higher as compared with RPM of Re.0.77 of other price models.
(3) A Case Study of Trump Prepaid brand of Mahanagar Telephone
Nigam Limited (MTNL) Mumbai, To further validate the research hypothesis the sale
figures of MTNL Mumbai were taken for a period of 12 months.
Year
2006
Sale of
Life time
Refill
New
customer
% of Life
time
Customers
out of new
customers
ARPU
(in Rs. per month)
January 87,641 57,613 47,326 374
February 39,088 42,821 25,016 185
March 26,489 62,453 12,970 353
April 18,081 35,444 9,943 181
May 15,653 37,187 9,548 166
June 16,936 35,422 8,637 143
August 20,177 35,182 12,913 215
September 16,978 5,457 3,225 216
October 17,479 29,835 10,836 179
November 18,309 29,764 8,971 207
December 16954 27,611 9,155 210
Total 3,13,471 1,61,494 56,304 2663/12
TABLE-8: The number of the new customers added in ‘incoming free life time’ price model
during the last 12 months for the period of 2006 for Trump Prepaid services of MTNL
Mumbai.
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The average revenue per minute of ‘Incoming free for life time’ price model during the last 12
months period was found to be Re 0.79. The average ARPU Rs 222/- of Trump MTNL was
found to Rs 222/- which conforms the all India trend.
Impact on the Bottom line (inclusive of all taxes) =
{Sales of the Refill Coupons + New Customers added X ARPU}.
{3.13 lacs X Rs 1008 + 1.61 lacs X Rs.222} = Rs. 34 crores approximately.
This study was also done on three vital parameters viz. revenue per minute, new customers’
added and average revenue per user. It was found that the ‘incoming free for life time’ pricing
model increased the number of new customers for which MTNL was looking for desperately.
The average revenue per minute for incoming free model is Re. 0.79 which is more as
compared to the Re 0.77 RPM of other prepaid schemes. In this case study the ARPU is Rs
222/- which is more than the average ARPU of the prepaid customers in other schemes. Hence
on the basis of the matrices it can be concluded that this pricing model has increased the
bottom line of the companies significantly by adding new customers with higher RPM and the
research hypothesis is TRUE.
CONCLUSIONS
The CMSPs have chosen Innovation as one of their business strategies to sustain competitive
edge. They are working on innovations in the mobile services products and processes. The
‘Incoming free for life time’ Pricing Models for prepaid services adopted by them is having
an impact in raising their bottom line significantly by attracting new customers, higher revenue
per minute per customer and the Average revenue per user.
Hence the research hypothesis the “Innovations in pricing of the Prepaid mobile services
adopted by CMSPs is having an impact on the Revenue Per minute in raising their bottom
line” is proved and accepted.
ACKNOWLEDEMENTS
1. Shri J Gopal, Executive Director, MTNL, Mumbai.
Librarian, Dr.D.Y. Patil Institute of Management Studies, CBD Belapur, Navi Mumbai
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REFERENCES.
[
2
] TRUMP is the prepaid brand launched by Mahanagar Telephone Nigam Limited.
[
2
] The number of the telephone connections per 100 persons.
[
3
] Incoming Lifetime free is a pricing model offered by the CMSPs in India.
[
4
] VAS-Value added service providers such as Ring Back Tone, etc.
[
5
], Dr C S G Krishna & Dr R Lalitha Innovation Management, Himalaya Publishing house Mumbai, 2007.
[
6
] Dr C S G Krishna & Dr R Lalitha, Innovation Management,Himalaya Publishing House, Mumbai,
2007.
[
7
] Dr C S G Krishnamacharyulu & Dr R Lalitha, Innovation Management, Himalaya Publishing House
Mumbai , 2007.
[
8
] C Bhattacharjee, Service Sector Management: An Indian Prospective, Jaico Publishing House Mumbai,
2007.
[
9
]India is divided in to small geographical areas for granting licenses.
[
10
] A person who is employed by the retailer of the CMSPs who collects the CAF from the customer and
arranges for the activation of the mobile connection.
[
11
] Customer Agreement form this is used by the CMSPs to register the request of the customer for new
mobile connection.
[
12
] ARPU(average revenue per user) is a parameter used to calculate performance of mobile services .
[
13
] New customers ,this is very significant for the CMSPs as the revenue depends on the number of the
customers.
[
14
] MOU (Minutes of usage) is the average number of total usage of the customers divided by the total
number of the customers.
[16].Study paper 3/2006 TRAI dated 19/12/2006.
[17].Report of the working group on the telecom sector for the Eleventh Five Year Plan(2002-07) dated Oct
06, 2002.
[18].http://www.trai.gov.in.
doc_200708953.pdf