Cost and profitability models should be considered as one valuable input into a strategic decision to design and launch an attractive offer.
Telecoms operators need to understand their cost structure in order to make informed marketing and pricing decisions. This ensures that pricing, volumes of usage and hence revenues can recover capital and operational expenditures with a proper return on investments and within an acceptable timeframe.
As markets mature and competition intensifies, operators are building innovative offers (service bundles, unlimited/large bundle tariff plans). In this context, cost and profitability models become even more important as they provide a unique insight into the launch of attractive and profitable offers.
Cost and profitability analysis involves a number of methodological points, which are complex to implement but can provide competitive advantage and additional value creation to operators that fully exploit them.
- Understanding of cost–volume relationship – operators need to understand their fixed costs (i.e. which do not vary with volumes) and variable costs. This allows an assessment of the impact of a specific offer on the total cost base.
- Relevant allocation of fixed costs – when analysing the profitability of an offer, operators need to assess whether fixed costs should be allocated to it. If the offer is expected to generate a low volume of traffic, the analysis can be done using variable costs (gross margin level). However, if the offer is expected to generate large volumes (e.g. unlimited on-net calls) and may affect network dimensioning, then it will be relevant to allocate some of the fixed costs to it.
- Depreciation of cost base over time – the main costs of a telecoms operator are network and licence costs, which have lifetimes ranging from 7 to 20 years, much higher than a typical commercial offer lifetime (about 1 year). It is therefore crucial to carefully select the methodology used to allocate costs over time (straight-line depreciation, economic depreciation, tilted annuities, etc.). If too many costs are allocated in the early years of operation, it may prevent any offer being seen as profitable for the operator. Alternatively,
if too many costs are allocated to later years, there is a risk that some costs will never be recovered.
- Understanding of traffic profile – network costs are mainly driven by network dimensioning at busy hour. Offers that increase capacity requirements in the busy hour are costly. However, there are also opportunities to launch profitable offers with large volumes, but whose traffic profile is outside of the overall network busy hour. These offers should be monitored with care to ensure that they do not affect the network load to the extent of changing the busy hour. If the busy hour is changed, then the overall network cost allocation needs to be reviewed appropriately. This highlights the need for a flexible and dynamic approach to telecoms cost modelling, in a way similar to yield management in the airline industry.
Overall, cost and profitability analysis should be considered as one valuable input into a strategic decision to design and launch an attractive offer, in light of market demand and commercial strategy.
Over the last ten years, Analysys Mason has been at the forefront of cost modelling for telecoms operators and regulators. Our unique understanding of financial, marketing, technical, and regulatory aspects of cost and profitability models enables us to provide our clients with reliable results and high-value business insight. We have in particular assisted operators with the profitability analysis of offers and promotions. We have also helped them revisit their pricing structure and level, and increase their profits.