All things Telecom: Determining an Efficient Video Service Pricing Str...

All things Telecom: Determining an Efficient Video Service Pricing Str...: "Continuing on from my previous post, one of the key influencers of the success of any video service launch is going to be the pricing strat..."

Determining an Efficient Video Service Pricing Strategy

Continuing on from my previous post, one of the key influencers of the success of any video service launch is going to be the pricing strategy employed. Determining an Efficient Price is a tricky proposition at the best of times due to the surfeit of factors that drive it. Pricing is one of the fundamental aspects of any business model and is one of the key determinants of revenue or business value along with customer base and loyalty. 

When one needs to price a video product in a cluttered market with several players, standard offerings and a poorly defined customer segment it can become a major cause for headache. So a good price should do three things:

1.      Achieve the financial goals and ROI set out in the business model

2.      Factor in the realities of the marketplace in terms of customer demands, competitive landscape, regulatory environment and supplier considerations

3.      Be cognizant of the costs involved in designing, manufacturing, distributing and promoting the video service to achieve its desired positioning

A good pricing strategy would be the one which could balance between the Floor Price and the Ceiling Price. So how does one measure the efficacy of the pricing strategy employed by a video or content service provider? One of the ways of doing that is to measure Customer Value. Customer Value can be defined very simply as the difference between the cash flow (revenue) generated by a video subscriber and the cost of acquiring that subscriber. The price charged for any video product or service needs to ensure that all current and prospective new subscribers are adding to the Business Value of the project.

Business Value for a Product (or Service) (BV) = Revenue generated per subscriber (R) * Number of current and future subscribers (S)

  

Any pricing strategy for a video service needs to strike a balance between the value derived per subscriber and the number of subscribers. Varian (2002) & Goolsbee (2002) independently estimated that the demand for broadband based services (including video) is very elastic with cross price elasticity for dial up and ADSL based services ranging from -1.3 to -3.1 and -2.15 to -3.76 respectively. This shows that a small change in price can have a significant effect on the quantity demanded or in this case the number of subscribers that join in. In this backdrop it becomes even more important to balance the price set with the estimated subscriber numbers that the service hopes to attract.

The above figure shows the relationship that price has with the number of subscribers and the revenue generated per customer, we get an Inflection Point I. Theoretically, Business Value for the video service should be greatest at this point and hence pricing a service as close to this point must be the aim for any strategy. Combinations before or after this point may lead to an inefficient utilization of market potential or addition of subscribers with negative customer value.

While we have attempted to evolve a measure of an effective pricing strategy we still need to figure out the determinants of this strategy? How does the market environment affect price? One way of doing this is by segregating and classifying these factors under a few distinct and logical heads but more on that in my next post.

Creating a Winning Video Service Launch Strategy

These are desperate times for Telecom Companies worldwide due to a spurt in competition, falling revenues and increased customer churn. In such a dynamic market environment, the last thing Telcos want is to be seen as mere communications bandwidth providers. Small wonder then that most of them would want to jump into the video services and content provision business. Increasingly, Triple and Quad play services are being seen as the key to retaining customers and driving up the value gained from customers. Recent research has shown us that average churn for a triple/quad play service is about 3 times lower than stand alone business while revenue per user can double simply by the addition of video services. Add the fact that cable companies worldwide are increasingly coveting the voice services market and one can understand the need for Telcos to fight back.

While Telcos do have some inherent advantages like established infrastructure and links with the customers, their lack of experience in managing and providing content to these customers is a major challenge. As with any other launch, creating and implementing a strategy which works for the Telco is critical.

So what constitutes a Video Strategy? One of the first steps is to establish the end outcomes that one hopes to achieve. The outcomes must be clear and formulated in a manner which sets the tone for drafting a strategy. Increasing Subscriber Base and Competitive Ability, Improving utilization of assets and enabling customer stickiness seem to be some obvious outcomes.

Once we have established the outcomes, it is time to identify the various decision areas that would lead to the fulfillment of these outcomes.  

·         Market Forces – The strategy should address the choices relating to the environment in which the video service is to be launched. It must factor in the realities of the market in terms of competition, customers, services and price and should suggest deployment models across these factors. The who, what, why and how for the service needs to be addressed here.

·         Technology Enablers – Once the Service and content offerings have been decided upon, the strategy should explore the technology and infrastructure requirements to launch the service. These would mean understanding technology and equipment requirements for the network, compression/encoding/encryption systems, Middleware and end user equipment etc. Evaluating the technology for capacity constraints and expansion perspective and optimizing technology based on gap analysis between new and legacy systems

·         Operations Enablers – Operations support required to fulfill the service should be looked at and opportunities to merge services based on geography, product or service type as well as improving efficiencies through process reengineering should be studied.

·         Business Enablers – These are extraneous factors that have a bearing on the overall offering. Factors such as manpower planning and regulatory compliance must be understood to devise a watertight strategy 

Very simply, evaluation of the above decision areas can be condensed into a set of considerations that are mutually exclusive and cumulatively exhaustive. A matrix of these considerations could look something like this:

Market Forces ·         Customer Behaviour ·         Competitive Barriers ·         Supplier Ability ·         Product Mix ·         Pricing	Technology Enablers ·         Infrastructure Deployment ·         Capacity Development ·         System Integration Requirements
Business Enablers ·         Skill Set Availability ·         Manpower Planning ·         Regulatory Compliance	Operations Enablers ·         Operational Convergence ·         Process Efficiency

Drilling down into a set of determinants for each of these considerations would enable one to stitch them together into a single blueprint which achieves the key outcomes.  One way of doing this is to list the deployment options available to the Telco under each decision area. “Joining the dots” to combine the selected options provides a distinct roadmap of recommendations. Telcos must then carefully and diligently identify the choices in front of them and embark upon a systematic evaluation process to home in on the correct one. Establishing a blueprint which addresses all the key parameters eases the process of making the right choice. However, the ultimate success of any strategy depends on the rigor put into understanding the objectives and the outcomes and walking on the path thus chosen.