Sunday, January 3, 2021

Tariff and Price Complexity is a Strategy

There is a reason why consumer internet access or mobile service prices are intentionally complex: complexity makes it difficult to compare, across providers. Complexity often is facilitated by unbundling service into components. 


Unbundled services--by definition--make price comparisons more difficult. But unbundling allows many different value combinations and feature bundles to be created, deemphasizing like-to-like value comparisons.  


That is not to deny consumer welfare gains in the form of cost savings from bundle prices. But service providers arguably do not sell bundles primarily because it benefits consumers. Rather, bundles benefit the suppliers as well.  


In other words, the complexity of consumer communications service billing is intentional, and designed to optimize revenue for service providers. Complexity does so by limiting the ease of comparison shopping by price. 


Consider multi-product bundles, which literally obscure what consumers actually are paying, from the consumers themselves. By definition, a three-product bundle, sold for one price, not only offers a discount over separate retail prices, but also obscures what each component actually costs. 


Sure, one can try and approximate the savings by comparing the total cost of the bundle price against the separate, a la carte prices of the constituent bundle components, and then apply a flat-rate discount against each separate service. 


That probably is not how the service providers see matters. Instead, the bundles are likely designed to optimize overall revenue, with key benefits coming from reduced churn or account longevity. 


If it produces higher overall revenue and higher profit margins, one service might be heavily merchandised to protect higher take rates for another service that produces more revenue or higher profit margin


To be sure, component value is changing. Internet access is more important; linear video is less important. Most consumers prefer to use their mobile phones for voice, rather than landline voice service. Streaming is the growing choice for video service, reducing the value and revenue from linear video subscriptions. 


Still, unbundling value also creates many different ways to rebundle value that obscure price comparisons and create value incentives for purchase of more-expensive plans. Mobile internet plans differ on the amount and use of tethering, for example. The cheapest plans might not allow tethering, or restrict its usage. 


“Unlimited data usage” plans tend to be the most expensive offered by a mobile operator, for example. Some service providers require purchase of an unlimited plan to use 5G. 


The point is that complexity and unbundling also create optimized revenue scenarios for service providers that obscure price comparisons. 


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