Wednesday, October 31, 2012

Value Based Pricing is Creeping into the Communications Business

“Value based pricing” has been discussed in the communications industry for some time, the theory being that it makes more sense to charge customers for communications-based services on the perceived “value” of the applications or access. 

The principle is similar to use of toll lanes on highways at rush hour. Some consumers are willing to pay extra to use the toll lanes. Most do not prefer to do so. To be sure, current regulatory rules that require all Internet access to be supplied in "best effort" fashion are impediments that prohibit service providers from creating such differentiated products. 

Still, when networks are congested, for example, many consumers will be willing to pay for priority access. That is an example of value based pricing. 

But value based pricing has been used for quite a long time in the communications business, in some ways. 

You might argue that the value of text messaging is not, in fact, directly related to its cost of supply, but on the usefulness of the app.

The shift to some modified version of “consumption-based” pricing for high-speed access, in place of an undifferentiated “unlimited” usage plan, is another example.

In the coming years, more "communication services" might be sold as part of some other product. Using mobile networks to deliver content to tablets provides one example, where the product a customer buys is a book, for example, and the network price is simply embedded into the overall cost of the delivered content. 

The same is true of video entertainment services. Customers want the video, not the network that delivers the video. The amount of network resources used to deliver HBO is not different from delivering an ad-supported news channel. But the price of those products is quite different.
In a similar way, mobile banking, payments or wallet services “use the network,” but the value proposition for end users is the applications. Likewise, text messaging is valuable to customers, but it is the ability to send and receive messages that is bought, not the use of the network.

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