Fixed-Rate Pricing Capitalizes on Consumer Usage Trends

Wireless communications providers know a little secret: Most consumers think they consume more than they actually do. This is undoubtedly true for mobile-handset consumers, who often burn far fewer minutes and make much less use of wireless services than they think.

This piece of inside knowledge is very much evident in the adoption of flat-rate pricing by three of America's largest wireless carriers: Verizon, AT&T and T-Mobile, as well as an expected move in kind from T-Mobile.

"The adoption of such schemes appears to be a move by the wireless carriers to gain market share from their rivals by using aggressive pricing," said David Carnevale, vice president, multimedia content and distribution, for iSuppli. "But rather than the first shot of a new price war, these moves are intended to drive up the wireless carriers' pricing plans - and to boost their Average Revenue Per User (ARPU). These deals start at $99 per month, although the ARPU for U.S. wireless communications subscribers averages only $50. Even if these companies manage to raise the ARPU only to $60, it will vastly increase their profitability."

Carnevale noted that most wireless customers are on existing plans that offer a given quantity of minutes for a fixed price, but charge for minutes that exceed the plan. On average, people use fewer minutes than their plans allow. As a result, their "cost per call" is higher than they may think.

"Customers that use a ton of minutes will, without question, save money - but those that do not will spend measurably more," he noted. "Flat-rate pricing is a marketing program that allows consumers to guarantee that their bill is not going over the top. None of these companies want to lose revenue; they want to generate more."

iPhone problem?

For AT&T, the adoption of flat-rate voice pricing brings an interesting twist: data services can be added on top of the fixed pricing plan - at what appear to be reasonable rates, but the iPhone and other smartphones now are excluded. Their current high-end $99.99 plan for the iPhone offers unlimited data but caps voice at 1,350 minutes.

"This could be one issue that causes a bit of a problem for AT&T," Carnevale said. "The iPhone has been driving unheard rates of data traffic in Europe and other regions. If this trend continues for the iPhone and other smartphones as subscribers increase, unlimited data will require increased investments in equipment and communication data portals. AT&T will have difficulty recouping these expenses using aggressive fixed-rate data plans."

Posted to the site on 25th February 2008