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.