{"id":768,"date":"2011-02-07T13:22:39","date_gmt":"2011-02-07T11:22:39","guid":{"rendered":"http:\/\/www.invest-aura.com\/?p=768"},"modified":"2025-03-17T11:20:18","modified_gmt":"2025-03-17T09:20:18","slug":"what-does-service-costing-bring-to-pricing","status":"publish","type":"post","link":"https:\/\/www.investaura.co\/wordpress\/2011\/02\/what-does-service-costing-bring-to-pricing\/","title":{"rendered":"What does service costing bring to pricing?"},"content":{"rendered":"

Comparing prices with costs is a most enlightening exercice.\u00a0 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.<\/p>\n

In many cases, prices for telecom services are set too low by the marketing team.\u00a0 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.\u00a0 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).<\/p>\n

In the telecom service provider business, more than in any other business, most costs are fixed in the short-term.\u00a0 However all costs are variable in the long-term.\u00a0 If most costs are fixed in the short-term, this does not mean that the marginal costs of services are zero.\u00a0 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.\u00a0 Also, off-nets call lead to interconnection charges.<\/p>\n

In any case, however low they might be, all telecom services have a marginal cost that is greater than zero.\u00a0 As a minimum, service prices should be higher than their marginal costs.\u00a0 If not, then there is no way that these services will ever be profitable and the service provider is not only losing money but destroying value.<\/p>\n

In theory, there is nothing against certain type of services subsidising other type of services, as long as the majority of customers are individually profitable (the ideal case) or if not, at least the overall business is profitable.\u00a0 The issue become acute when 80% of services are priced below marginal costs.\u00a0 Then the remaining 20% of services have to generate extraordinary high profits to compensate – which is very difficult.<\/p>\n

But before discussing further how to apply service costing for pricing purposes, let us briefly step back and review what service costing is all about.\u00a0 If you are a telco, costing of end-user services has three main applications:<\/p>\n