Per-second Pricing

Continuing on the topic of pricing ploys...

Tata has managed to steal the thunder from Airtel and Reliance by adding more subscribers for the second month in a row – and by a wide margin too. It introduced pay-per-call on Indicom to let users talk as much as they want by paying a fixed price. Then, of course, DoCoMo let users pay per-second for calls and per-character for SMS. Has it paid a price in the process? TRAI is making noises about having all players move to per-second billing, and expectedly, the operators are upset. I think they should celebrate.

The data on the left is from Bharti’s Quarterly report. The average tariff is almost 1p/sec, which is what the new scheme offers too. The right side shows my calculations to determine revenue loss by offering per-second billing.

I am assuming the average call duration is 120 sec and that 30 secs are wasted every call – the call is terminated at 1 min 30 sec, but we get charged for 2 min. In this scenario, ARPU lost is about 23%, and that is a big drop.

However, I think people who opt for this scheme, or even subscribers to whom the scheme is made available (should other operators follow suit), will make additional calls. For two reasons. First, of course, is the genuine need to make those short calls to let someone know you are late etc. Right now, one might hesitate because the 5 second call will end up costing you 60p.

Second, and more interesting, is the need to make short calls so you can “realize” the savings. At least initially, when one has per-second billing and everyone else is on per-minute tariff. The temptation to “demonstrate” savings should not be undermined. In a group, if one has to make a call, it is the per-second guy that will go first to show everyone that he pays only for what he uses. I mean there is no point in going for per-second billing and then not reaping its benefits. So you make a 30-sec call, show everyone that only 30p has been deducted, and feel happy that you saved 30p.

Assuming these additional calls last an average of 15 seconds, calculating the # of new calls to make up for lost ARPU comes to about 14 calls per day. Should such a call last 30 sec, it only requires an addition 7 calls a day. I think that’s a small enough number. Also, notice that the difference in the ARPUs without considering additional usage is about Rs. 60, so I doubt if people are desperate to save that amount. Rather, most consumers would like to make sure the Rs. 300 they spend every month goes the extra mile. So my take is that usage will drastically increase with ARPUs increasingly slightly or staying constant.

Is that hard to believe? Why do we spend Re. 1 sending an SMS when a call is only 60p?