Believe it or not, there are plenty of similarities between coffee and telecoms services (voice, data). Both are largely commoditised product. Then it shouldn’t come as a surprise that telecoms service providers and Starbucks have so much in common. For a start: discrimination. Price discrimination.
Price discrimination in telecoms (and in coffee shops)
There is plenty of price discrimination around us. People don’t pay the same for essentially the same goods or services. If that sounds unfair, then think of ‘discrimination’ as ‘differentiation’ instead. Economically speaking, price discrimination is often socially optimal as:
Telecom service providers are very capital intense businesses. Everybody knows that. But in addition, they are mostly fixed-cost businesses. Everybody seems to have forgotten that.
Fifteen years ago, when GSM really kicked off, there were still a lot of PAMR (Public Access Mobile Radio) service providers on the market. For those who don’t know or were too young to know: PAMR were deployed in the late 80s to provide services to corporate customers. Do you remember Dolphin in Europe? Now these operators have all gone, cannibalised as they were by GSM operators. But with PAMR, you did not have to pay per minute. You would pay per user, per month.
Comparing prices with costs is a most enlightening exercice. Unfortunately, service costing being as much an art as a science, many telecom service providers don’t do much service costing; and as a result, they don’t understand their service costs and their sources of profitability well enough.
In many cases, prices for telecom services are set too low by the marketing team. Under pressure to gain new customers and increase market share, setting low prices is certainly one of the easiest strategy to implement for new entrants. The thinking is the following: “in our business, almost all costs are fixed, so we need to build up market share quickly to reach profitability” (true) and “we have to be cheaper than the competition” (false) as well as “the marginal cost of our services is zero, so we can price our services very low” (false).
In the telecom service provider business, more than in any other business, most costs are fixed in the short-term. However all costs are variable in the long-term. If most costs are fixed in the short-term, this does not mean that the marginal costs of services are zero. In particular, for prepaid customers, commissions have to be paid to the sales channels (e.g. dealers) typically as a percentage of scratch card value. Also, off-nets call lead to interconnection charges.