Tuesday, November 17, 2015

There are Times When Even Lower Prices Do Not Drive Higher Consumption and Revenue

It might seem obvious that lower prices stimulate more demand for Internet access, mobile services and other products. In many cases--but not all--that is the case.

That could have important implications for service provider behavior and regulatory activity.

If lower prices do not lead to higher demand, then all lower prices do is diminish ability to sustain availability of the services. Some might call that a death spiral. That disconnect between consumption and price happens especially when markets reach saturation.

You might think, for example, about pricing for dial-up Internet access. No matter how low prices go, those price declines are unlikely to lead to higher consumption.

Also, in a growing number of instances, there is no direct price mechanism, since there is no direct incremental cost to use many communications-related apps and services. So end user behavior is not directly affected by price mechanisms.

That does not mean there are no underlying buyers and sellers. Though there might be no incremental direct cost to the end user (though “cost” in terms of exposure to advertising is “paid”). In such cases, the “customer” in such cases is a third party, not the end user.

As such, the causal relationships between price and consumed volume are shifted.

But even where there is a direct customer cost, it is not always true that lower prices drive higher usage, or higher levels of buying.

The tricky issue is that once markets reach saturation, they can become inelastic and resistant to price changes. In such markets, raising price does not lead to less demand, while lowering prices does not lead to more demand. 

Neither mobile voice nor carrier text messaging have reached a point where prices and consumption are not related. But they are trending in that direction.

One reason for the inelastic effects is that even lower prices might not stimulate incremental demand for a product that is technologically obsolete or for which newer and preferred substitutes exist.

That might be the case for dial-up access, compared to high speed access, in many markets. In the United States, by 2013, just three percent of Internet access customers used dial-up services.  

Consider that messaging, often available without any incremental direct cost,  represents vastly more traffic volume than carrier text messaging, which does have some direct cost element.

Those are examples of changing consumer preferences for talking, texting or messaging. In many ways, voice demand is declining, with replacement products (messaging) taking the place of former voice demand.

Most studies show marked preferences for texting and messaging, and a fall in usage of voice services. In many cases, such behaviors happen even when the user cannot determine the actual direct cost for using messaging, carrier text messaging or voice usage.

That is the case when a flat recurring fee allows unlimited numbers of text or voice messages, for example. It is not clear that an even lower fixed price actually stimulates more usage.

Also, when it is possible to make some calls for prices at zero or close to zero, prices already arguably have ceased to be relevant determinants of behavior.

By 2012, U.S. mobile phone users in every age category already were sending and receiving many more text messages than calls.

In a similar way, It is not clear that demand for fixed network voice lines can actually be stimulated if prices drop. Some might note the impact of bundling policies that make purchase of Internet access, linear TV and home phone service a package featuring lower prices.

The problem is that many consumers will buy the bundle because they save money overall, and not because they “want” the home phone service much, if at all.

The point is that determining the direct impact of lower prices on demand for fixed network phone service is difficult to determine, since the purchase often is tied to purchase of other products (Internet access and entertainment TV) that consumers seem to want.

Generally speaking, demand for communications services is elastic in markets that are not saturated. That might not be the case when everybody who wants to buy a product already has done so.

In a saturated or declining market, not even lower prices will drive usage that translates into higher revenue.

No comments:

Ultra-Low Latency Use Cases is Where Most New 5G Apps Will Develop

Though capacity matters, the big use case upside for 5G is expected to come in the area of ultra-low latency applications or perhaps ultra-r...