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?

Pricing Ploys

My dilemma in the previous post is not as far fetched as it seems. We are victims to such mind games everyday. For starters, we have come to subconsciously relate price with quality. I remember reading somewhere that in Japan, it is cool to show off the price tags on clothes even as you are wearing them.

The price-quality association is the least malign of the tricks. There are much more subtle ones out there. If you are looking to subscribe for the WSJ, you get three options: online only, print only and online + print. The pricing is such that the price for online + print and print are virtually the same. One would think its a really dumb move that would kill its print subscriptions, but apparently, this has increased the total number of subscriptions - of course, with most people going for the online + print deal.

One also routinely seen in magazine offers at almost 50% less than the cover price if you subscribe for a year. They are essentially hoping that the temptation to save so much money almost always overpowers any questions on the utility of such a subscription. And it does work in certain segments.

And, of course, if you are part of middle-class India, you know how our system of haggling works. The vendor almost always quotes a price that is three times what he is expecting. As a buyer, you are sort of aware that he is overcharging, but you dont know by how much. So you start with a price that is 1/2 what you are really willing to pay. Often the deal will conclude with you paying a little less that your max price and you will walk away satisfied. The vendor would have made a neat margin and is happy too. But as buyers, we will never know exactly how much we overpaid.

In some cases, pricing is simply gaming buyers, but in others, it is directly related to the value perceived by the buyer. Couple of days back, a bridge collapsed on the railway line in Mumbai thus disrupting and delaying all long-distance rail traffic. Airlines promptly jacked up their fares with a one-way Chennai-Mumbai ticket starting at 12K!! Clearly, anyone desperate enough to reach Mumbai will pay that.

P.S: Having got a return trip for half that fare, I think I should stop complaining now:))