mr_64_kshitij_pricing strategy review in telecom sector

8/7/2019 MR_64_Kshitij_Pricing strategy review in telecom sector

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PRICING STRATEGY REVIEW in TELECOM SECTOR

A marketing Research Survey

Submitted by

Kshitij Sharma


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INTRODUCTION ......................................................................... 3

Abstract ......................................................................................... 3

Objectives ...................................................................................... 3

Methodology ................................................................................. 4

Executive Summary ....................................................................... 4

Steps involved in developing a Pricing Strategy ........................... 5

Marketing Strategy and the Marketing Mix ................................................................................. 6

Estimate the Demand Curve ......................................................................................................... 6

Calculate Costs ................................................................................................................................ 6

Environmental Factors ..................................................................................................................... 7

Pricing Objectives ............................................................................................................................ 8

Pricing Methods ............................................................................................................................. 10

Price Discounts ............................................................................................................................... 11

FINDINGS .................................................................................. 12

CONCLUSIONS ......................................................................... 23

Questionnaire ............................................................................... 24

Pricing Strategy for telecom industry .......................................................................................... 24

References ................................................................................... 28


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INTRODUCTION

Abstract

The marketing mix is probably the most famous marketing term. Its elements are the

basic, tactical components of a marketing plan. Also known as the Four P's, the

marketing mix elements are price, place,product, and promotion. Pricing i.e. price

discrimination is still the most neglected among Edmond Jerome McCarthys

famous 4 ps by far. Pricing strategy forms an integral part of the marketing mix, in

fact calling it the most important part of it is no big deal as it is the major activity that

results in revenue generation fo the company.

Objectives

The MR project seeks to fulfill the following objectives:

1. Understand the basic concepts of pricing strategy as an efective weapon in the

arsenal of producer.

2. To study the various kind of pricing strategies being implemented in the marketfor telecom industry.
http://www.marketingteacher.com/Lessons/lesson_place.htmhttp://www.marketingteacher.com/Lessons/lesson_place.htmhttp://www.marketingteacher.com/Lessons/lesson_place.htm


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3. To research the basic consumer perception and reaction to such pricingstrategies.

Methodology

To gain a perspective on the pricing strategies that are followed various firms all over

the world, a basic theoretical knowledge of the pricing strategies will be discussed

with subsequent delving into the intricacies of consumer behavior in a heavily

competitive market like telecom industry.

Primary data has to be collected based on an objective questionnaire to gauge

the consumer reaction over the various options available to him/her in the market.

Primary target of the survey are respondents in the age group 15 and more, who own a

cell phone, are active users who are aware of the market opportunities and who are

aware of the different options available in the market.

Executive Summary

A recent research by Simon, Kucher & Partners, a German consultancy, has even

demonstrated that a price increase of a mere two (!) per cent would translate into

double-digit profit growth for many companies, even those caught up on saturated

markets or facing a price war.


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Steps involved in developing a Pricing Strategy

1. Development of marketing strategy

- perform marketing analysis

-segmentation

- targeting

-positioning.

2. Marketing mix decisions

-define the product

- distribution

-promotional tactics.

3. Estimate the demand curve - understand how quantity demanded varies with

price.

4. Calculate cost - include fixed and variable costs associated with the product.

5. Understand environmental factors - evaluate likely competitor actions, understand

legal constraints, etc.

6. Set pricing objectives - for example, profit maximization, revenue maximization,

or price stabilization (status quo).

7. Determine pricing - using information collected in the above steps, select a

pricing method, develop the pricing structure, and define discounts.

These steps are interrelated and are not necessarily performed in the above order.

Nonetheless, the above list serves to present a starting framework.


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Marketing Strategy and the Marketing Mix

Before the product is developed, the marketing strategy is formulated, including target

market selection and product positioning. There usually is a tradeoff between product

quality and price, so price is an important variable in positioning. Because of inherent

tradeoffs between marketing mix elements, pricing will depend on other product,

distribution, and promotion decisions.

Estimate the Demand Curve

Because there exists a relation between price and quantity demanded, it becomes quite

necessary to comprehend the impact of price on sales of a good by projecting the

demand curve for the product.

For products available in the market, experiments can be performed at prices above

and below the current price in order to determine the price elasticity of demand.

Inelastic demand indicates that price increases might be feasible.

Calculate Costs

If the firm has decided to launch the product, there likely is at least a basic

understanding of the costs involved, otherwise, there might be no profit to be made.

The unit cost of the product sets the lower limit of what the firm might charge, and

determines the profit margin at higher prices.

The total unit cost of a producing a product is composed of the variable cost ofproducing each additional unit and fixed costs that are incurred regardless of the

quantity produced. The pricing policy should consider both types of costs.

The cost that has to be incurred includes marketing strength, access to low cost

materials and effective production. The experience of your enterprise and the

complexity of introduction problems such as lack of adherence to industry standards,


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unavailability of materials, poor quality control, regulatory problems and the inability

to explain the benefits of the offering to the prospect are some of the major problems.

The effectiveness of the enterprise infrastructure in terms of organization, recruiting

capabilities, employee benefit programs, customer support facilities and logistical

capabilities as well as distribution effectiveness as measured by history of relations,

the extent of channel utilization, financial stability, reputation, access to prospects and

familiarity with offering. Technological efforts likely to be successful as measured by

the strength of the development organization.

Environmental FactorsPricing must take into account the competitive and legal environment in which the

company operates. From a competitive standpoint, the firm must consider the

implications of its pricing on the pricing decisions of competitors. For example,

setting the price too low may risk a price war that may not be in the best interest of

either side. Setting the price too high may attract a large number of competitors who

want to share in the profits.

From a legal standpoint, a firm is not free to price its products at any level it chooses.

For example, there may be price controls that prohibit pricing a product too high.

Government actions (current or under consideration) can support or detract strategy.

Subsidies, safety, efficacy and operational regulations, licensing requirements,

materials access restrictions and price controls need to be considered.

Pricing it too low may be considered predatory pricing or "dumping" in the case of

international trade. Offering a different price for different consumers may violate laws

against price discrimination. Finally, collusion with competitors to fix prices at an

agreed level is illegal in many countries.

Anticipated demographic changes may support or negatively impact the growth

potential of industry and market. This includes factors such as education, age, income

and geographic location. Moreover technological changes that are occurring may or


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may not favor the actions of enterprise. Cultural changes such as fashion trends and

life style trends may or may not support your offering's penetration of the market

Pricing Objectives

The firm's pricing objectives must be identified in order to determine the optimal

pricing. Common objectives include the following:

1. Current profit maximization - seeks to maximize current profit, taking intoaccount revenue and costs. Current profit maximization may not be the best

objective if it results in lower long-term profits.

2. Current revenue maximization - seeks to maximize current revenue with noregard to profit margins. The underlying objective often is to maximize long-term

profits by increasing market share and lowering costs.

3. Maximize quantity - seeks to maximize the number of units sold or the number ofcustomers served in order to decrease long-term costs as predicted by the

experience curve.

4. Maximize profit margin - attempts to maximize the unit profit margin,recognizing that quantities will be low.

5. Quality leadership - use price to signal high quality in an attempt to position theproduct as the quality leader.

6. Partial cost recovery - an organization that has other revenue sources may seekonly partial cost recovery.

7. Survival - in situations such as market decline and overcapacity, the goal may beto select a price that will cover costs and permit the firm to remain in the market.

In this case, survival may take a priority over profits, so this objective is

considered temporary.

8. Status quo - the firm may seek price stabilization in order to avoid price wars andmaintain a moderate but stable level of profit.


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For new products, the pricing objective often is either to maximize profit margin or to

maximize quantity (market share). To meet these objectives, skim pricing and

penetration pricing strategies often are employed.

Skim pricing attempts to "skim the cream" off the top of the market by setting a high

price and selling to those customers who are less price sensitive. Skimming is a

strategy used to pursue the objective of profit margin maximization.

Skimming is most appropriate when:

Demand is expected to be relatively inelastic; that is, the customers are nothighly price sensitive.

Large cost savings are not expected at high volumes, or it is difficult to predictthe cost savings that would be achieved at high volume.

The company does not have the resources to finance the large capitalexpenditures necessary for high volume production with initially low profit

margins.

Penetration pricing pursues the objective of quantity maximization by means of a low

price. It is most appropriate when:

Demand is expected to be highly elastic; that is, customers are pricesensitive and the quantity demanded will increase significantly as price

declines.

Large decreases in cost are expected as cumulative volume increases. The product is of the nature of something that can gain mass appeal fairly

quickly.

There is a threat of impending competition.As the product lifecycle progresses, there likely will be changes in the demand curveand costs. As such, the pricing policy should be reevaluated over time. The pricing


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objective depends on many factors including production cost, existence of economies

of scale, barriers to entry, product differentiation, rate of product diffusion, the firm's

resources, and the product's anticipated price elasticity of demand.

Pricing Methods

To set the specific price level that achieves their pricing objectives, managers may

make use of several pricing methods. These methods include:

Cost-plus pricing - set the price at the production cost plus a certain profitmargin.

Target return pricing - set the price to achieve a target return-on-investment.

Value-based pricing - base the price on the effective value to the customerrelative to alternative products.

Psychological pricing - base the price on factors such as signals ofproduct quality, popular price points, and what the consumer perceives to

be fair.

In addition to setting the price level, managers have the opportunity to design

innovative pricing models that better meet the needs of both the firm and its

customers. For example, software traditionally was purchased as a product in which

customers made a one-time payment and then owned a perpetual license to the

software. Many software suppliers have changed their pricing to a subscription model

in which the customer subscribes for a set period of time, such as one year.

Afterwards, the subscription must be renewed or the software no longer will function.

This model offers stability to both the supplier and the customer since it reduces the

large swings in software investment cycles.


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Price Discounts

The normally quoted price to end users is known as the list price. This price usually is

discounted for distribution channel members and some end users. There are several

types of discounts, as outlined below.

Quantity discount - offered to customers who purchase in large quantities. Cumulative quantity discount - a discount that increases as the cumulative

quantity increases. Cumulative discounts may be offered to resellers who

purchase large quantities over time but who do not wish to place large

individual orders.

Seasonal discount - based on the time that the purchase is made anddesigned to reduce seasonal variation in sales. For example, the travel

industry offers much lower off-season rates. Such discounts do not have to

be based on time of the year; they also can be based on day of the week or

time of the day, such as pricing offered by long distance and wireless service

providers.

Cash discount - extended to customers who pay their bill before a specifieddate.

Trade discount - a functional discount offered to channel members forperforming their roles. For example, a trade discount may be offered to a

small retailer who may not purchase in quantity but nonetheless performs

the important retail function.

Promotional discount - a short-term discounted price offered to stimulatesales.


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FINDINGS

1. The population that responded to the survey consisted mainly of the age groupfrom 15-25. The primary reason that this group came to be the biggest

contributor is that people belonging to this age group are the ones who actively

engage in deciding their choices. Mainly constituting of students going to

schools and colleges these are the ones who are most aware of the currently

available plans, different pricing schemes from different operators and are most

susceptible to changing operators if and when they get a better choice based on

their criterion like call rates, network connectivity and several other reasons.

There were a few respondents in other categories also, with people belonging to

age group 25-35 being the next active survey takers. Respondents belonging to

age group 45 and above were not interested in doing the survey as they are the

2%

87%

9%

2%0%

Age Distribution

Under 15

15-25

25-35

35-45

45+


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ones who are quite set in their routine; they had taken their connection based on

advice and were unaware of better schemes available from other operators. They

seemed to be quite happy with their operators and were not interested in

changing their service providers once MNP (Mobile Number Portability) sets

foot in India.

2.Majority of the respondents were males who were interested in knowing more

about the currently prevailing plans and showed more knowledge of the

schemes than their female counterparts. The demography shown here can be

considered a fair representative of the general population in the age group 15-

25. Female population, in survey, was less knowledgeable about the different

operator plans currently available in the market but was major spenders

compared to their male counterparts. The average billing estimate for female

population was more than Rs. 500 per month while the average bill/recharge for

male population lied in the range Rs. 200-500. This showed overall indifference

of female populace towards the advertising campaigns from various operators

63%

37%

Gender divide

Male

Female


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and therefore special steps can be taken to ake them active consumers as in they

decide in the process of choosing an operator according to their needs.

3.Majority of the populace who responded were students and not the salaried

category though general sense dictates that it should be the other way round. A

reason that can be given about the above phenomenon is that salaried consumer

working in a firm is provided with a connection by the company itself and

therefore has no say in buying the connection. Students on the other hand,

mainly staying away from homes for studying purpose, take a better informed

decision after consulting with their peers. They are more engaged in the process

of choosing the best plan for themselves to minimize costs.

41

15

0

Occupation

Student

Self-Employed

Salaried

Other


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4.On account of handsets in usage Nokia emerged as the market leader in India, a

trend seen world over. Nokia handsets have an image of being sturdy, less prone

to breakage, value-for-money proposition. Nokia has made its position as the

world's leading mobile-phone brand by the simple understanding that when

basic technology questions are solved, communication leaves the aspect of

voice quality for the aspect of design relations. The trend in mobile phone

business is usability, or better how familiar is it to use the next phone, and this

fact gives Nokia an almost unbeatable advantage, cause as it has more than half

of all cellular users trained on its way of managing a phone the choice for the

next model is very much more in Nokia's reach.

A possible strategy here can be a tie-up with vendors like nokia and selling

handsets at cheaper rates with multiple options can help boost sales for

operators. This is being implemented but very slowly as consumers are not very

comfortable with the idea of buying a handset from the vendor itself. A model

of penetration pricing can be applied here to increase sales in initial stages and

later on, once the model is sustainable, the rates can be increased again.

0

10 2030

Nokia

Sony Ericsson

Blackberry

HTC

Motorola

Samsung

LG

Spice

Micromax

Others

27

4

1

2

1

4

3

1

2

2

Cellphone Brand

Cellphone Brand


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5.Bharti Airtel emerged as the major player in the market wide ranging popularity

from students as well as working population. Airtel has more than 65 million

customers (July 2008). It is the largest cellular provider in India, and also

supplies broadband and telephone services - as well as many other

telecommunications services to both domestic and corporate customers. It has

found acceptance from corporate sector using the blackberry services right up to

the lowly skilled labor class which has to move a lot depending on the work. It

shows that the brand image of airtel is more of reliability operator which

provides excellent service. This is in spite of the fact that call rates for airtel is

at a premium compared to other emerging operators like idea and reliance.

Vodafone is the next big operator which has a good market share. It lags behind

airtel because it is perceived to have less no. of plans and schemes which

alienate people. An effective strategy here for Vodafone would be better market

penetration tactics which will build its image as Vodafone already has

competitive services available to counter airtel.

Bharti Airtel is embarking on another joint venture with Vodafone Essar and

Idea Cellular to create a new independent tower company called Indus Towers.

0 5 10 15 20 25

Airtel

Vodafone

Idea

MTNL

Reliance

Tata DoCoMo

Others

21

11

8

1

4

1

1

Service Provider

Service Provider


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This new business will control more than 60% of India's network towers. IPTV

is another potential new service that could underpin the company's long-term

strategy.

6.The majority of the connections used in India were prepaid sim cards which are

opposite to the trend in US and European markets. This model actually makes

less money for the company compared to the postpaid model. The insight that

can be gained from this is that India is still a rowing market which is yet to

mature fully; therefore companies are foregoing higher profit margins in lieu of

boosting sales at the moment. This approach can be called as value pricing and

is used where external factors such as increased competition force companies to

provide 'value' products and services to retain sales.

43

3

Type of Connection

Prepaid

Postpaid


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Moreover the calls were made almost equitably to local areas and long distance

calls.

7. Brand associations:Airtel: it is perceived to be reliable player which has good connectivity and an

India roll-out. People value it for its consistency in providing network services.

It scores high on internet usage and easy recharge facility too. But it fares

poorly on flexibility in plan change and call cost are considered to be on higher

side.

Vodafone: it also scores high on the connectivity option but also has a goodpublic image of providing VAS. It scores low on call rates(it means high call

rates), on internet usage and plan flexibility.

Idea: it scores high on call rates and is one of the leading providers for the local

calls. But on fronts other than call rates and VAS, it fares really poor on

connectivity with high call drop rate, internet usage charges are high. The online

recharge facility is poor and plans available are not user friendly.

Type of Call

Local

STD


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Other players like MTNL, reliance and TATA DoCoMo prform well on cost

issues and internet usage options but suffer problems similar to IDEA on all the

other fronts.

8.Monthly usage pattern revealed certain interesting trends. There is tendency to

get medium size recharges done by most of the consumers that vary from Rs. 50

500 with Rs, 500-1000 being the next most popular category. It shows that the

respondents were users with good income or family support and were able to

spend more.

0

2

4

6

8

10

12

14

16

Multiple

Times a

Week

Weekly Fortnightly Monthly

4

15

11

13

Frequency of Recharge

Frequency of Recharge


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Moreover the trend showed that most respondents were in favor of weekly or

monthly recharges. On basis of this the pricing strategy can be improvised to

provide support packs with higher call value available for weekly duration so

5

21

16

5

Monthly Usage

< Rs. 200

Rs. 200-500

Rs. 500-1000

> Rs. 1000

4

33

6

Amount of Recharge

Small Top Up (= Rs. 500)


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that the customers get an incentive to purchase more talk time.

9.MNP or mobile number portability seems to be the next big thing in reckoning

with plans of it being implemented in market within the next quarter. Mobile

Number Portability (MNP) is a technology that allows subscribers of various

network operators the opportunity to control their choice of keeping their

40

5 2

Promotional Offers

Yes

No

No Answer

20

25

2

MNP

Yes

No

Can't Say


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numbers, while changing from one network operator to another. Among the

respondents of this survey, there was an desire for MNP to be adopted soon in

India. As elsewhere, consumer perception seems to be that MNP is a technology

which gives the power back into the hands of the customers. This is reflected in

a 100% yes vote for adoption of MNP by the government, among the

respondents of this survey. But almost half the consumers are unwilling to

change their operator showing their faith in their service provider.

Among respondents who are unwilling to change their network, we see that the

majority are Airtel subscribers. This indicates a high degree of satisfaction

among existing Airtel users (almost 50%), and would translate into easier

customer retention post-implementation for Airtel in relation to Vodafone.

Customers are willing to pay a premium to avail of this facility.

0 5 10 15

Airtel

Vodafone

Idea

Aircel

Not Sure

11

3

3

1

13

Which Operator do you plan to Switch

to?

Which Operator do you

plan to Switch to?


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The primary reasons that came up for choosing MNP were better customer

service and better connectivity being available in airtels case. In Vodafones

case it was VAS and network availability that clinched the deal for a customer.

For most of the other operators, low call costs were the primary reason for

changing with intermittent replies of better connectivity or VAS.

CONCLUSIONS

Based on the Market Research done, the following points can be concluded:

1. People, as a whole are interested in MNP being implemented but are notreally willing to change their operators, this shows the confidence they have

in their service providers.

2. There are specific set of targets that a company needs to achieve eg. Airtelfares well on connectivity option but low on call rates. Therefore a well

thought out strategy needs to be evaluated by each operator to achieve

maximum possible expansion.

3. Value added propositions like week long-extra value add-on packs can proveto be successful strategy to boost revenue. It may help company expand and

once the market matures, the move towards higher revenue services can be

made.

4. Airtel emerged has the clear cut market leader with well thought outsegmentation of market ie the target is business person.

5. Prepaid even though being a lower revenue earning model of the strategy isthe bigger shareholder of market. This trend will change once the market

matures and moves towards the likes of US and EU markets.


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Questionnaire

Pricing Strategy for telecom industry

* Name

Age

Under 15 15-25 25-35 35-45 45+

* Gender

Male Female

* Occupation

Student Self-Employed Salaried Other

*Monthly Income


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NABelow

5,000

5,000-

10,000

10,000-

25,000

25,000-

40,000

Above

40,000

*What brand of cellphone do you use?

* Which of these is your service provider?

*What kind of connection do you use?

Prepaid Postpaid

*Generally what type of calls do you make?

Local STD ISD

* What facilities do you associate with these service providers?

Low

call

cost

Good

Connectivity

Internet

usageRecharge

Value

added

services

Better

Customer

care

Flexibility

to change

plans

Online

billing

Airtel

Vodafone


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Idea

MTNL

Reliance

TATA

DoCoMo

Aircel

* How often do you get a recharge done?

Multiple

times a weekWeekly Fortnightly Monthly

Postpaid

Connection

* What is your monthly usage(in Rs.)?

1000

*What amount of recharge do you get done usually?

Small Top-up(=500)


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mr_64_kshitij_pricing strategy review in telecom sector

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