Many emerging market operators have begun to seriously consider whether they should move from flat pricing to dynamic pricing. A dynamic tariff discounts a call based on the location and the time the call is made, and the discount increases in areas with lower network traffic and during off-peak hours. MTN Group was the first operator to introduce dynamic pricing with its MTN Zone tariff in Swaziland and South Africa in February 2008, and has since rolled it out to 11 of its 21 operations. Vodacom South Africa quickly followed suit and introduced its own dynamic tariff, Yeboforless, in May 2008. More recently, Orange Botswana launched its new prepaid dynamic tariff (Sesolo Zone) in July 2009 and Safaricom Kenya announced the launch of its new prepaid dynamic tariff (Supa Onega) in September 2009. Orange Group has indicated that it is looking to trial a dynamic tariff offering in most of its African subsidiaries.
Dynamic pricing discounts are often based on the assumption that the level of usage, while peaking at low-loads, will ultimately be well-distributed between low and high loads. However, the introduction of dynamic pricing in markets with high price elasticity tends to alter the shape of the usage curve more than expected by operators. Price-sensitive customers have a propensity to sharply alter their usage. In real terms, with heavily discounted rates in previously low-load areas, this behavioural shift can outstrip the expected gains of dynamic pricing.
Therefore, how dynamic pricing is configured can make the difference between an operator making a profit or a loss. Figure 1 shows the discrepancy between the shape of the curve of the pre-launch network load versus the post-launch network load. Post-launch network load exhibits a strong spike in high-discount (i.e. low load) areas; as a result, traffic in lower margin areas is maximised whilst traffic in higher margin areas is minimised.
Figure 1: Impact of dynamic pricing on network load and pricing [Source: Analysys Mason]
Given these consumer tendencies, how can operators introduce dynamic pricing and still increase revenues and margins? Operators can influence customer’s behaviour to encourage more level usage by not consistently and disproportionately rewarding low-load areas. The potential loss-making area can be minimised by shifting the dynamic price points so that the relative discount during low loads is reduced and the discount during higher loads is increased. The shape of the dynamic pricing curve should be optimised so that the network load peak is located in higher margin areas. To do so, operators must carefully analyse network usage and usage drivers such as location of dwellings and commercial areas, and make sure that areas with potential load hikes are priced at a premium.
Operators can still offer highly-competitive, attention-grabbing, headline discounts (such as ‘99% off’), although less frequently. In order to be profitable, dynamic pricing needs to be based on a sophisticated understanding of pricing and consumer behaviour as well as the organisational agility to quickly adapt price points as necessary to counter margin-eroding behaviour.
Analysys Mason has helped many mobile operators in emerging markets, in particular in North Africa and sub-Saharan Africa, to optimise their pricing strategy and analyse tariff profitability on a site-by-site basis.