In my earlier blog, Bill Shock, I recounted the story of a young woman who had been treated to a bill of £27,000 after losing her phone overnight. This prompted me to look at the relationship between price and usage.
Data on cost and usage of international roaming traffic, especially data traffic, is not widely available, but that for domestic traffic is more readily available. Prices and usage for domestic mobile calls vary considerably between countries, which permit comparison of any relationships between the two.
Using data on voice ARPU and average called minutes from a large number of mobile operators worldwide, I prepared the chart shown here. It shows the average minutes of use per subscriber and the average price per minute for each mobile operator. The trend line drawn through it shows that revenue increases as the price decreases. International roaming charges are not shown, but in many cases will be well off the top of the left hand axis on the chart.
However, as many of the data points are bunched on the left of the graph, I decided to see if the data could be divided to help take account of the very different market conditions faced by operators. I found it helpful to split them into two groups based on their GDP/capita, developing and developed countries. Trend lines drawn through each group show a clear relationship between price and usage in line with typical price sensitivity curves.
Based on these curves, I produced two tables of price versus revenue, one for each group. For developed countries, the curves indicate that any decrease in price will increase usage such that revenues will increase.
However, if prices are reduced too far, then despite increased usage operators will suffer a loss of revenue. This is illustrated by the figures taken from the graph for developing countries. However a small reduction in the range of prices, say by increasing the 500 minutes figure from €0.010 to €0.016, would result in the same revenue figure as for 100 minutes at €0.07. Altogether, the curves suggest that for domestic calls at least, optimum revenues are most likely to be achieved with prices in the range between around 4 and 7 Euro cents.
Of course this picture does not consider a number of more detailed factors, such as the additional capacity that might be required, nor the fact that in many developed countries handsets are subsidised by increased tariffs. Nevertheless, the principle can still be expected to apply. It would seem reasonable to assume that similar results would be produced by carrying out a similar analysis for international calls, preferably for both voice and data traffic, assuming the data were available. Given that many users avoid making calls while roaming in order to minimise the risk of bill shock, the increase in usage in practice could be markedly more dramatic.
Perhaps it is time for operators to recognise that reducing prices can generate positive results both in revenue and image and take action accordingly.
Food for thought…