“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 that are connected directly to the perceived “value” of the applications or access. When networks are congested, for example, many consumers will be willing to pay for priority access.
The most rudimentary example of value based pricing is the shift to some modified version of “consumption-based” pricing for high-speed access, in place of an undifferentiated “unlimited” usage plan. Others include additional aspects of service as ways of shifting to a “value” approach.
Some suggest a better approach is to create retail products that use the network, but actually are sold as something else. Compared to simple “high speed access,” voice services are an example of selling an application that embeds use of the network into the product. The same is true of video entertainment services. Customers want the video, not the network that delivers the video.
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.
Others would point to priority use of the network, at a crowded sports venue, for example, as another example. As some users will pay for the rights to use a “toll” lane of a highway, rather than the “free lanes” at rush hour, so some users presumably will be willing to pay for priority use of a congested network.
Yet another way of using value is to charge different prices for the same “product,” a concept regulators traditionally forbid on common carrier networks, but which can increase the value and efficiency of a communications network.
Internet pundit Cory Doctorow thinks the economist’s concept of “price discrimination,” the charging of different prices for the same goods, actually is a good thing in the world of digital and virtual goods.
It might not be so easy to apply the economic concept of price discrimination so easily in telecommunications, but the principles are a mainstay of many common products, ranging from airline ticket and hotel room prices to delivery services.
Price discrimination is a mainstay of the travel industry. For example, travelers who won’t endure an overnight Saturday stay are presumed to be travelling on business, charging the ticket to someone else, and therefore less price-sensitive. So itineraries with Saturday stays are often much cheaper than those without.
In essence, Doctorow proposes greater use of pricing based on value for digital goods, where incremental costs are hard to quantify.
The marginal cost of distributing a digital good – an eBook, a game, a video, a song, is virtually nothing, he argues. With digital goods, the object isn’t to make the maximum profit per customer, but to make the maximum profit overall.
In a “perfect market,” goods could be priced to exactly align with the amount customers are willing to spend. Rent for a day, use for a week, buy to own or price a base product low, with additional features offered at incremental cost, as with a “freemium” model.
But those concepts arguably also can be applied to simple mobile broadband access as well. We already are quite familiar with the notion that slower speed services cost less than higher speed services, and that usage buckets are smaller for lower speed services, and bigger for higher speed services. But lots more is possible even for any given speed tier or usage cap.
In addition to priority access, consumers might be allowed to purchase on some basis other than “monthly,” as travelers often buy Internet access by the hour or day.
After all, if a service provider wants a customer to stop thinking about the product as a commodity, it helps when the product is not sold as a commodity. There is a role for simple pricing of basic high speed Internet access. But there also are opportunities for packaging that basic service in different ways, charging different prices for priority access.
By Gary Kim
Gary Kim is an active industry writer and analyst, editor of Mobile Marketing & Technology, Content Marketing News and Carrier Evolution. He is a frequent contributor to IP Carrier and TMCnet, and a good friend of Razorsight. Keep up with all his industry insight — follow him on Twitter @garykim.