Should Network Service Providers Raise Their Prices?

Considering the structural changes occurring in the fixed network communications industry, one wonders whether service providers should consider raising their prices to keep up with reduced legacy revenues and rising costs.

In many ways, fixed network service providers, most especially small, independent, and regional ones, are increasingly crushed by diminishing sources of revenue from their core voice-based products, even though the demand for broadband and video entertainment is still relatively strong. And as this demand for voice products declines, the costs on a per-customer basis rise because the fixed costs are being rolled out to a meager customer base.

In order to recover costs, raising the prices of the service would have been a logical move. Another reason is that the remaining customers are likely the ones who value the product more than those who have already cancelled their subscription.

To sell more to the same customer, a service provider can always go to the tested approach of bundling. There's the inevitable price discounting, but bundling has been proven to work in terms of selling more units to the same customer.

However, there's an irony. Many in the rural part of the business avoid package deals, teaser rates, and other initiatives that can be misconstrued as devaluing the product.

"If you might characterize large telcos as being contemptuous of their customers, you might characterize rural telcos as being afraid of their customers," said Kent Larsen, CHR Solutions SVP. "Customers want those deals and even might expect it."

There's no getting around it. Marketing matters. Large telcos and cable companies discovered long ago how consumers appreciate triple-play deals because it can save them money. There's always the risk of product devaluation that comes with bundling services together, but the truth of the matter is that consumers are drawn to the underlying premise behind the triple-play scheme: when you buy in bulk, you save money.

Sometimes, the solution is for a service provider to "hide" the actual cost of the products. To offer a customer something that can be viewed as "free" is one marketing technique, even though all costs, in actuality, are earned back.

For instance, Verizon Wireless has turned the domestic voice and text messaging in the U.S. into a form of "network access fee," a prerequisite for use of the network, while broadband access serves as the adjustable cost part of the service. In short, to use Verizon's network, its customers pay a flat fee for unlimited voice and text messaging in the U.S. then choose from a suite of data usage options across all devices.

Customers of fixed network voice providers need persuasion to retain their voice service. And bundling it with broadband and video is most likely the easiest way to make them keep their voice service, which at some level, has been "devalued" by the bundling model. But the alternative to this scenario is losing the customer, with an extra advantage: reduced churn rate.

It may be difficult to measure the level of customer satisfaction among triple-play subscribers. However, they are known to be more loyal or to churn less. So, if that is the consequence, triple-play customer satisfaction may not matter much as long as those customers do not choose another provider, regardless of what they might say.

Take note that, according to the American Customer Satisfaction Index, fixed line telephone service consistently ranks among the U.S. industries possessing the lowest consumer satisfaction ratings. Scores for subscription TV rank much lower, but those scores have increased since 1994. And as for mobile phone service, reported satisfaction ratings have soared since 2004.

Phone service satisfaction has dipped 13.6 percent since 1994, the lowest drop for products across all industries. This is followed by newspapers with an 11 percent drop since 1994.

On the other hand, product abandonment is not necessarily a consequence of getting low consumer satisfaction scores. People still buy airline tickets even if airlines are routinely plagued by low satisfaction score. But despite this argument, high satisfaction is still the favored upshot of any business operation.

However, it can be argued that there are, indeed, structural problems faced by airlines and fixed network telcos. For one, U.S. domestic airlines cannot offer lower fares while providing high-quality service. Otherwise, airlines cannot stay in business. The same rationale may apply to fixed network communications providers. With their weakening customer base and growing cost pressure, it becomes more and more difficult to increase investment in the aspects of the service that would boost consumer satisfaction.

Can a network service provider enhance its service? Some people would argue that it is possible to deliver high-definition voice or better calling features, for example. However, network telcos may not want to invest and would resort, instead, to lowered pricing and bundling strategies.

The major issue is this: whether the fixed network telephone industry is characterized by the same attributes as the airline industry, such as the lack of ability to simultaneously offer low fares and excellent service.

Another issue has to do with the way prices can be inflated in order to offset rising costs in a time when demand is moving away from legacy voice products. The apparent candidate is broadband because raising the price of retail video over a long-term period poses another problem.

All in all, fixed network voice is going to be confronted by cost pressures regardless of what network service providers do - and even if they improve their features and value. (KOM) Link