Aligining Price With Value – Metering Vs. Versioning

In any  all you can eat pricing model, be it a lunch buffet or at&t iPhone subscription pricing, as long as the  total revenue  exceeds total costs, the business will make a profit  regardless of whether they lose money on any one customer.  There will always be a distribution of customers based on value they receive and price they pay

  1. Some customers get more value than what they pay
  2. Some don’t get as much value as they paid for

The problem occurs  when  the first segment uses a higher proportion of the service and risk completely starving the second segment.

AT&T says,

the heaviest data users, saying that 40 percent of AT&T’s data traffic came from just 3 percent of its smartphone customers

To provide appropriate level of service to the second segment AT&T needs to size their services so the big appetite of the first segment is served. Facing customer backlash from slowness, AT&T is trying to reduce data usage by the heavy iPhone users – this implies they are either working on introducing metered pricing or a multi-version pricing.

Either of these plans require that their subscribers understand the value they get from the current unlimited plan. If the customers do not know  how much value they have been receiving they will balk at any changes to current pricing. AT&T has a leg up on this, they have been itemizing  data plan usage minutes (page after page if you received paper bill) even though the plan is supposed to be unlimited. It is arguable how many customers look at paper bill but the auditing does provide a way for AT&T to make a case with its customers when they introduce new pricing plan.

For example,

“Dear customer, do you know, on the average, you used 100 minutes of data service for 1GBytes download in the past 12 months. That’s $50 in value per month and $30 more than what other customers like you receive. To better serve your needs and those of all our customers like yourself we are introducing a new pricing plan …”

Which one will it be? Will it be metering, charging per minute or megabyte of download of data usage? Will it be a set of new data plan versions offering a combination of minutes and download? Which has better chances of succeeding?

I do not believe it will be usage based pricing. It does not align with the current minutes plan and the  problem it introduces with customers constantly worrying about using the data service.  AT&T already has a track record in executing a successful multi version pricing plan for its wireline high speed service (see figure left). Modeled after this we should expect to see three to six different data plans at different price points, each offering a combination of minutes and download (GBytes).

Versioning is about offering multiple versions at different price points so the customers self select- in this case it also helps to better align the value customers have been receiving with the price they pay.

iPhone Data Plan Versions

at&t is most likely to offer a new data plan at lower price for its iPhone subscribers. Previously I wrote that they should not simply cut the price of current plan. Such a price cut would require them to add subscribers at a much higher rate than they are adding today to recoup lost profits. Obviously at&t is considering price discrimination using multiple data plan versions. As the saying goes, if one price is good two prices are better. Reuters reports that at&t executive confirmed versioning:

The executive said it would be costly for AT&T to cut the price of its unlimited Web surfing service. The minimum plan for iPhone users is $70 a month, which includes unlimited Web surfing and a certain amount of voice calls.

at&t is probably looking at  consumer surplus for different segments for these two plans to set the price of the new plan. The new version will come with severe bandwidth restrictions – it will be designed such that the new subscribers will self select themselves when presented with the two versions.

Those who want iPhone for its simplicity, cool-ness, music and games capabilities but do not care for bandwidth most likely did not get iPhone until now because of their lower willingness to pay for data plan.  These will now be incented to pick the low-priced data plan despite the restrictions. (These could be customers who would prefer an iPod Touch that has mobile phone capabilities)

Serious iPhone subscribers with need for email and extensive web surfing will be nudged to pick the current data plan and not the low priced restricted option.

In fact if at&t’s market research data indicates that there is a higher percentage of the first segment then they might even increase the price of current data plan while introducing the lower priced version.


Before you cut prices

In 3 components of effective price management I talked about the need for doing an incremental analysis before making changes to pricing. For instance:

  1. What is the sales change expected for a given price cut?
  2. What is the minimum  increase in sales required to keep profit at levels before the price cut?

In other words  what is the price elasticity of demand for your product and does it justify the price cut?

Here is a real business example of such an analysis for the proposed $10 price cut by at&t for its iPhone subscribers.