Cost Certainty Has High Value for Consumers

Enticing consumers to upgrade to a next-generation network (fixed or mobile) might not be difficult for early adopters, who care less about cost than “being first” to get the new technology. Most consumers need other justifications, though. 

Some perceived problem needs to be addressed; some new value has to be added; new capabilities or use cases have to be made clear, before mainstream consumers will feel they must upgrade. 

Sometimes network performance does the trick; sometimes not. Where it is available, 5G can claim to offer faster internet access speeds. Depending on which spectrum options are available, the incremental change might be almost non-existent, slight or highly differentiated. 

Based on past experience, mobile customers know a bit of trial and error is possible or required. 

Right now, U.S. mobile operators often take a different tack. Rather than hanging the purchase decision entirely on 5G network performance or availability, they shift the value proposition to cost certainty. 

In other words, 5G is offered as a feature bundled with unlimited usage plans. But the key value is “cost certainty.” Customers know what the recurring cost will be, and need not worry about additional usage or overage charges. 

Even when an unlimited usage plan costs more, there is enough additional value in such plans to drive adoption, so valued is cost certainty. 

Predictability also is valued in terms of product consistency, others will note. That seems less the case for unlimited mobile data usage plans. What really matters is cost certainty. 

Consumers tend to prefer predictable cost services because it allows them to budget for the  recurring payments. People do not like surprises, where it comes to recurring purchase costs. 

There is considerable evidence of consumer preferences for subscription over per-use pricing. 

During the 1970s, the U.S. Bell system telephone companies started offering customers a choice between the the traditional flat rate option, which might cost $7.50 per month, and allow unlimited local calling, and of a measured rate option, which might cost $5.00 per month, allow for 50 calls at no extra charge, and then cost $0.05 per call. 

In the numerous trials that were carried out, the flat rate option was usually selected by over half of the customers who were making fewer local calls than the 50 covered by the measured rate basic charge, even though they clearly would have benefited from per-use pricing. 

These results are documented in Cosgrove and Linhart (1979), Garfinkel and Linhart (1979) and Garfinkel and Linhart (1980). 

The same sort of issue arose in the 1980s and 1990s around videocassette and DVD movie rental fees. People were charged a late fee when cassettes were returned “late.” Some argue that early Netflix, which mailed DVDs out to consumers, succeeded in part because there was no danger of late fee charges . 

In fact, the Netflix subscription model was designed to eliminate late fees.  

Similar results were seen when long-distance calling plans were similarly varied in the 1980s.Consumers could pay by use or buy flat-rate calling plans. Many customers  paid for plans that provided more calling than they actually used, as documented by Mitchell and Vogelsang (1991).

In the internet era, consumers often buy usage plans that offer more usage than they expect, simply so customers are assured of the recurring cost.

There are three main reasons that probably lead consumers to prefer flat-rate pricing, and they were recognized a long time ago in research by Cosgrave and Linhart (1979), Garfinkel and Linhart (1979) and Garfinkel and Linhart (1980).

Fixed price plans provide protection against sudden large bills. Customers also typically overestimate how much they use a service, leading them to buy plans that they actually do not need.

There is a convenience issue as well. In a per-use situation, consumers seem to worry about whether each call is worth the money it costs. That limits usage, as a study by Garfinkel Garfinkel and Linhart (1980) found.

 A flat-rate plan allows them not to worry about the cost of each call.

The point is that the reasons consumers prefer flat rate service plans are clear. They value such plans enough to pay more than they might under usage-based plans. But the cost certainty has value. 

In the case of 5G unlimited usage plans, that behavior will be clearly seen. The value might often be less the “unlimited usage” than the “certainty of cost.”