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Fixed versus Usage-Based Billing: Reasons
to Keep it Simple
Making real cents with simplicity over delving too quickly into
usage-based options
By: Bruce Bahlmann - Contributing Author (your
feedback
is important to us!)
Created: August 3, 2003
This paper is the product of
Broadband Cable Business Market Research which is available from
Birds-Eye Network Services.
Besides death and taxes, there are some other known facts in this
universe when it comes to delivering modern day telecommunication services –
like keeping your monthly service fees very simple. Simplicity is what
drives innovation and what differentiates market leaders from wannabes. In
this article we look at the “hype” surrounding usage-based pricing while we
provide you with a bit of history along with a different perspective about
why you should think twice before changing your existing fixed monthly fee
pricing for these “next generation” usage-based alternatives.
History of Usage-Base Pricing
Ask anyone for examples of successful usage-based pricing models and
their immediate responses will likely include telephone, electric, and
cellular phone services. Interestingly enough, telephones didn’t start out
as a usage-based service. Instead, telephone service was initially
established using a fixed monthly fee in the early 1900s. Similar to modern
day high-speed Internet services, at that time phone services were highly
criticized as being “wasteful” and that it “favors large users” by
“independent” investigations. One of the facts that these claims had going
for them at that time was that the setup and tear down of each phone call
was completely manual. Warehouses full of telephone operators were required
to carryout telephone calls – thus one could consider this requirement of an
army of telephone operators as a significant, but necessary, fixed cost of
doing business. Since the rate of labor generally increases over time, one
could say this was an increasingly important cost that telephone companies
needed to account for and track. As time passed, the “wasteful” criticism
eventually suck and most of the world’s phone companies moved to metered (or
usage-based) billing.
Like the phone company, electric companies faced similar challenges in
distributing power to growing nations. While today’s power companies face
increased competition in delivering power to homes and businesses, there are
one or more significant, but necessary, fixed costs associated with that
industry including fuel for the power generation plants. The presence of a
significant, but necessary, fixed cost plays an important role in the
pricing of a service – especially if this fixed cost seems to fluctuate or
has a tendency to increase. Such costs are strong indicators for potentially
successful usage-based pricing models. Beyond these unique cases such as
generating electricity, few of these models actually exist because
simplicity is what drives innovation, and innovation ultimately lowers,
nullifies, or eliminates fixed costs. What is odd about usage-based billing
is that even companies who must use this method to remain profitable find
ways to offer simpler billing options to their customers. For example, most
electric companies now offer budget plans that can average each customer’s
yearly utility bills in an effort to offer services that more closely
represent fixed monthly fees even though they still monitor and report each
customer’s usage.
Some people would argue that usage based billing is popular, widely
accepted, and allows service providers to maximize profits. I would argue
that normal people only pay these usage-based charges because they can’t do
without the associated technology, so they “have to” pay for the convenience
yet are “hungry” and “ripe” for fixed cost alternatives. Essentially,
usage-based charges were put in place by service providers out of the fear
of losing money in delivering newer services. Therefore to maximize profits
when subscriber usage is unknown or directly linked to significant, but
necessary, fixed costs these complicated service plans (including
usage-based options) receive serious consideration. However, as has time
passes, the costs to deliver these services significantly drops, initial
capital investments are paid down, and the competition for these services
increases, you begin to see service plans simplify.
Today, you no longer pay for local phone calls and many new long distance
carriers now provide an “all you can eat” service plan for a fixed monthly
fee. Perhaps you thought the telephone companies were riding the high road
to profits by exploiting their highly lucrative usage-based pricing plans.
Guess what? Simplicity even prevails over technological innovations geared
to maximize profits from telecommunications. Why? Because ultimately service
providers need customers to survive so to cater to the masses, the service
provided must be simple to use, simple to understand, and most importantly -
simple for their users to justify the expense. In the case of the telephone
industry, simplicity (or fixed monthly fee) is the phoenix that has overcome
previous termination and is on target to once again dominate the
marketplace.
I anticipate that within the next few years, even cellular services will
abandon usage-based service plans. Why would cellular give up this gem? The
answer lies in the hidden costs of supporting usage-based billing options as
well as the unintended consequence that usage-based billing options have on
customer usage of the technology.
Misconceptions Regarding Usage
There is nothing but complexity associated with usage-based pricing. From
the technology it takes to accurately collect and store it to the systems
required to properly calculate and bill for it, usage based billing is a
drain on the economics of service delivery. Take Cinglar’s new plan that
allows you to carry forward paid for but unused minutes from month to month.
This is a very innovative feature for them, but it has to be a nightmare for
the billing department – not to mention the financial health of the company.
If monthly revenues rise and fall based on customer usage, Cingular’s
competition has got to be licking their chops.
Another problem associated with usage-based billing is that discourages
use. In studies where similar groups with usage-based billing were compared
with flat rate billing the usage based groups maintained relatively flat
usage growth. Perhaps early phone companies were motivated to implement
usage-based billing out of the necessity to limit usage during a time when
their capacity to handle calls was limited by the human capacity to manually
make the connections. Fixed monthly billing however has shown to stimulated
growth in usage in addition to growth of new subscribers. In fact, services
that have migrated over to fixed monthly billing from usage-based billing
have seen their service usage triple. Clearly, customers prefer to deal with
known quantities when paying for telecommunications services. The more
variables within a plan, the more complex it is, and ultimately the less
popular it is among its customers.
Interestingly, for any telecommunications service ‘usage’ is something
that should be revered, not controlled or exploited. I feel
telecommunications companies seeking to move to usage-based billing options
are really not paying much attention to history. Clearly, usage-based models
will maximize revenues only at what costs? Service providers moving to
usage-based service plans open their doors for unnecessary competition that
can place their core customers at risk. I believe the true cost of
usage-based plans is that it discourages the very behavior that all
telecommunications companies want to encourage and cannot survive without -
USAGE. Usage is what justifies businesses and creates opportunities for
businesses to diversify. I perceive telecommunications companies seeking
usage-based options are only seeking near term profits – not long-term
growth. For those of you who stand by your fixed monthly fees, remember this
– history is on your side.
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