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STOCKHOLM UNIVERSITY SCHOOL OF BUSINESS MASTER THESIS, 10 POINTS TUTOR: ANDERS PEHRSSON
THE PRICING STRATEGIES
FOR THIRD CELLULAR OPERATORS IN THE EUROPEAN MARKET
SPRING OF 1998
AUTHORS
FREDRIK ERIKSSON KATARINA KEKKI MARTIN SANDÉN TABLE OF CONTENTS
Executive summary…...... …………...... ….……………5 Preface...... …...6 INTRODUCTION...... 7
1.1 BACKGROUND...... 7 1.2 PROBLEM DISCUSSION...... 8 1.3 PURPOSE...... 9 1.4 DEMARCATIONS...... 9 THEORETICAL FRAMEWORK...... 10
2.1 BASES OF PRICING STRATEGY...... 10 2.1.1 Factors influencing pricing strategy...... 10 2.1.1.1 Organizational and marketing objectives...... 11 2.1.1.2 Pricing objectives...... 11 2.1.1.3 Cost...... 11 2.1.1.4 Other marketing mix variables...... 11 2.1.1.5 Channel members’ expectations...... 13 2.1.1.6 Customer’s demand and price sensitivity...... 13 2.1.1.7 Competition...... 14 2.1.1.8 Legal and regulatory issues...... 15 2.1.1.9 The state of the economy...... 15 2.1.1.10 Supply levels...... 15 2.1.1.11 Social responsibility...... 15 2.2 PRICING APPROACHES AND MOTIVES...... 15 2.2.1.1 Cost-oriented approaches...... 15 2.2.1.2 Competition-oriented approaches...... 16 2.2.1.3 Demand-oriented approaches...... 17 2.3 PRICING STRUCTURES AND MOTIVES...... 19 2.3.1 Linear pricing...... 19 2.3.2 Nonlinear pricing...... 19 2.3.2.1 Forms of nonlinear pricing...... 19 2.3.3 Price bundling...... 20 2.3.3.1 Forms of price bundling...... 20 2.4 SUMMARY...... 21 METHODOLOGY...... 22
3.1 SCIENTIFIC VIEWS...... 22 3.1.1 Positivism and Hermeneutics...... 22 3.1.2 Holism and Individualism...... 23 3.1.3 Quantitative and qualitative methods...... 23 3.2 OUR HERMENEUTICAL APPROACH...... 24 3.2.1 Our research process...... 24 3.3 OUR METHODOLOGICAL CHOICE...... 25 3.3.1 Case studies...... 25 3.3.1.1 Why case studies?...... 25 3.3.1.2 Requirements on the investigators...... 25 3.3.1.3 The researches...... 26 3.3.1.4 The primary research...... 26 3.3.1.5 The secondary research...... 27 3.3.2 The analysis...... 28 3.3.3 Validity and Reliability...... 28 3.3.3.1 Internal validity...... 28 3.3.3.2 Reliability...... 28 3.3.3.3 External validity...... 29
2 3.3.4 Selection of cellular operators...... 29 OUR EMPIRICAL STUDY...... 30
4.1 THE EUROPEAN MARKET...... 30 4.1.1 Country A...... 30 4.1.1.1 Third operator Aa...... 30 4.1.2 Country B...... 31 4.1.2.1 Third operator Ba...... 31 4.1.3 Country C...... 31 4.1.3.1 Third operator Ca...... 31 4.1.4 Country D...... 32 4.1.4.1 Third operator Da...... 32 4.1.5 Country E...... 32 4.1.5.1 Third operator Ea...... 32 4.1.6 Country F...... 34 4.1.6.1 Third operator Fa...... 34 4.1.7 Country G...... 34 4.1.7.1 Third operator Ga...... 34 4.2 THE FOCUSED COUNTRY (H)...... 35 4.2.1 Market shares and service development...... 35 4.2.2 Financial results...... 35 4.2.3 Price development...... 36 4.2.4 Subsidizes...... 36 4.2.5 Distribution...... 37 4.2.6 Operator Ha...... 37 4.2.6.1 Subscriptions...... 38 4.2.6.1.1 Summary of the subscriptions...... 39 4.2.7 Operator Hb...... 39 4.2.7.1 Subscriptions...... 39 4.3 THE CASE COMPANY (HC)...... 40 4.3.1 Distribution...... 40 4.3.1.1 End-User Profile...... 40 4.3.2 Subscriptions...... 40 4.3.2.1 Summary of the subscriptions...... 41 5 ANALYSIS...... 42
5.1 THIRD OPERATOR AA...... 42 5.1.1 Analysis of pricing structures...... 42 5.2 THIRD OPERATOR BA...... 43 5.2.1 Analysis of pricing structures...... 43 5.3 THIRD OPERATOR CA...... 43 5.3.1 Analysis of pricing structures...... 43 5.4 THIRD OPERATOR DA...... 43 5.4.1 Analysis of pricing structures...... 43 5.5 THIRD OPERATOR EA...... 44 5.5.1 Analysis of pricing structures...... 44 5.6 THIRD OPERATOR FA...... 45 5.6.1 Analysis of pricing structures...... 45 5.7 THIRD OPERATOR GA...... 45 5.7.1 Analysis of pricing structures...... 45 5.8 CASE COMPANY (HC)...... 46 5.8.1 Analysis of bases of pricing strategy...... 46 5.8.1.1 Organizational and marketing objectives...... 46 5.8.1.2 Other marketing mix variables...... 47 5.8.1.3 Customer’s demand and price sensitivity...... 47 5.8.1.4 Competition...... 48 5.8.2 Analysis of pricing approaches and motives...... 48 5.8.3 Analysis of pricing structures and motives...... 48 CONCLUSIONS...... 50 Literature...... …….53
3 Appendix I...... …...55 Appendix II...... …...84 Appendix III...... …...87
4
EXECUTIVE SUMMARY
In many countries in the world third cellular operators are starting to establish or have already been established. We define the third operator as the operator that started its commercial operations as the third player on the market. In this master’s thesis we have studied the structure of pricing strategy for eight European third cellular operators. With “structure” we mean which combination of different prices the subscription consist of, e.g. a combination of one connection charge, a monthly fee, and three different prices per minute. In the term “structure” we also involve the number of subscriptions the operator offers. In addition to this we have done a deeper case study of one of these operators to find out the bases of and the motives behind the choice of the pricing strategy. With “bases” we mean the factors, both external and internal, that have had the largest influence on the choice of pricing strategy, e.g. competition and customers demand and price sensitivity. By motives we mean the intentions behind the choice of pricing strategy. We also examine different pricing approaches for this case company. “Approaches” are different pricing forms that are based either on cost, demand or competition, e.g. cost plus pricing and skimming pricing.
The purpose with a pricing strategy is to achieve organizational objectives, goals and targets, implement the organization’s overall strategy, and conform to policies.
Although we have discussed all traditional marketing tools, including three new tools used in service marketing; Participants/People, Physical evidence, Process, we have focused on the price. Price is a distinctive element in the marketing mix for the seller, because it is the only one that generates revenue. All the other elements represent outgoing costs.
Our study shows that the most important Bases of pricing strategy are: Organizational and marketing objectives, other marketing mix variables, mainly the service itself, customer’s demand and price sensitivity, and competition. Our study also shows that following Pricing approaches have been used: Market segmentation pricing, geographical pricing, synchro- pricing, and tie-in sales. The Motives for these approaches are that the operators want to take advantage of differences in customers price sensitivity and differences in demand. For geographical pricing the motive is also to take into consideration differences in costs for local and national calls. The motive for synchro-pricing is also to smoothen out the demand. For tie-in sales the motives is also to fast increase the customer stock and to capture market shares. The Pricing structure used among third cellular operators is a typical form of Non- linear pricing. The structure for all operators could be summarized as a Multi-block, Two- block or Single-block price combined with a Multi-part, Two-part or Single-part price. The Motive for having different structures and subscriptions is to take advantage of differences in customer price sensitivity and demand.
5 PREFACE
In many countries in the world a third cellular operator is starting to establish or has already been established. Some third operators have had problems taking market shares and generating profit. All operators on the studied market have done a lot of changes in their price structure and subscription forms. The price level though, has been the same for some years. Because of this we have developed an interest in pricing strategies in general, and for third cellular operators in particular.
We would like to thank our supervisor Anders Pehrsson, Ericsson Radio Systems, the third operator in the focused country and the respondents.
Fredrik Eriksson, Katarina Kekki and Martin Sandén have carried out this master’s thesis during the spring 1998. We are attending the MarknadsAkademien at School of Business, Stockholm University, and this thesis is our last ten points before taking our master’s degree.
6 1 INTRODUCTION
This master’s thesis is a study of pricing strategies for cellular operators in Europe being the third player in the market. We define the third operator as the operator that started its commercial operations as number three in the market. The first chapter is an introduction to the topic, with problem and purpose definitions. The second chapter gives the theoretical framework while methodological issues are discussed in chapter three. The empirical research is presented in chapter four followed by the analysis in chapter five. The final chapter contains our conclusions.
1.1 BACKGROUND
There is a growing recognition in Europe of the importance of cellular communication for economic and social development. Cellular communication is fast becoming an essential tool for business users seeking to boost efficiency in competitive markets, as well as for personal communication users in areas as diverse as convenience in social relations, personal security and public safety. The competition is driving the growth of the cellular communications into new markets, particularly personal communication. The primary tool being used by operators in the first stage of openly competitive markets has been price differentiation.
The cellular telecommunication market in Europe can be broadly segmented into three groups. First, there is a group of countries still having monopoly provision of cellular telecommunication services. These countries are quite few. Second, there is a group of countries having two operators in service; this group is also rather small. The third group of countries has three or more competitors. This group is getting larger and larger, due to liberalization. This is one of the reasons we find this group the most interesting to study.
Four reasons are behind the increasing liberalization of cellular telecommunication markets (OECD, 1996). An important reason is the growing recognition of the benefits of infrastructure competition in the provision of telecommunication services. Many factors have been put forward to explain the variable pace in development of cellular service in different countries, but experience has invariably shown that performance is vastly improved after the introduction of competition.
Another reason for increased liberalization is the growing evidence that a second operator can provide a major stimulus to the market, when it is allowed to compete in a fair and reasonable regulatory structure. The problems prevalent in duopolies emerge in other markets after a number of years. This is not to argue; performance may not continue to improve but it may not be at an optimal rate without open competition.
A third reason is that technological change is bringing forth new options for the provision of cellular telecommunication such as personal communication services (PCS). Indeed, several countries in the world are taking advantage of this technology to go beyond duopolies.
7 The final reason, and perhaps most crucial, is that competitive markets have proven be ablest in building significant growth beyond the business market. Competition is forcing operators to address new markets, and in doing so is driving the development of personal communication. This is why markets with open competition are generally not only growing much faster than monopoly and duopoly markets but also changing the nature and characteristics of the subscriber base. The benefits of a competitive market have not only been proven in the field of service delivery but are increasingly seen as a vital link to the competitiveness of the manufacturing sector.
1.2 PROBLEM DISCUSSION
Cellular telecommunication could be classified as a service because it is intangible, you cannot touch a telephone call. It is heterogeneous for the customer, because no call is identical to another (from a technical point of view telecommunication may be classified as homogeneous). It is produced and consumed at the same time and it is perishable. (Zeithaml & Bitner, 1996)
When discussing pricing of services, ”price” could have many names: rent, tuition, fare, rate, interest, dues, charges, fees, tariffs etc. All this names express one common thing, what a customer must give up in order to obtain a product or service. Every transaction can be seen as an exchange of something of value, often money (i.e. the price), for some amount of satisfaction (i.e. a product or service). (Schewe, 1987)
Price is a distinctive element of the marketing mix for the seller, because it is the only one that generates revenue. All the other elements represent outgoing costs. Price change can also be made more quickly than changes in the other marketing instruments (Kotler, 1994; Oxenfeldt, 1975; Bradley, 1995).
There are two types of pricing consideration, the pricing strategy and the pricing tactics. The pricing strategy defines the organization’s value image in the eyes of the public and consists of a specific approach to achieving the objective and action plans to implement the approach. The tactical pricing is the organization’s day-to-day management of the pricing process. Two main considerations are the timing and the amount of price changes. (Montgomery, 1988) We have limited our thesis to just examine the pricing strategy.
Our examination of the pricing strategy consists of four parts:
The bases of the pricing strategy. With “bases” we mean the factors, both external and internal, that have had the largest influence on the choice of pricing strategy, e.g. competition and customers demand and price sensitivity. The motives behind the pricing strategy. By motives we mean the intentions behind the choice of pricing strategy. The different pricing approaches. “Approaches” are different pricing forms that are based either on cost, demand or competition, e.g. cost plus pricing and skimming pricing. The structures of the pricing approaches. With “structure” we mean which combination of different prices the subscription consist of, e.g. a combination of one connection charge, a monthly fee, and three different prices per minute. In the term “structure” we also involve the number of subscriptions the operator offers
8 To do this we have chosen to do an analysis of pricing structures for eight cellular operators being a third player in their market. Our main purpose is not to do a thorough comparison of the operators. Instead, the purpose is to get an overall picture of pricing strategies by studying the structure of all third cellular operators in Europe in order to find some similarities and differences between them. In addition to this we have done an analysis of bases of pricing strategy and an analysis of pricing approaches and motives for one of the operators.
An alternative to this method could be to do a case study for each operator. We were not able to do this due to lack of time and funding. Another approach would be to focus on only one operator as regards the structures, the bases, approaches and the motives for the pricing strategy. We believe that this approach is too limited to get a good understanding of pricing strategies for third cellular operators.
1.3 PURPOSE
Our study aims to develop an understanding about pricing strategies for third cellular operators. To achieve this we believe that the areas below are the most appropriate to examine.
The bases of the pricing strategy The motives behind the pricing strategy The different pricing approaches The structures of the pricing approaches
1.4 DEMARCATIONS
This study is limited to just investigate the third cellular operators in Europe. Another limitation is that we have chosen to focus on the pricing strategy, although we have considered other marketing instruments and factors affecting price. We have not considered the price levels, buying power, penetration level and market stage when doing this study. We have not calculated any prices; our interest lies only in the pricing strategy.
9
2 THEORETICAL FRAMEWORK
2.1 BASES OF PRICING STRATEGY
As mentioned in the “Problem discussion” bases are the factors, both external and internal, that have the largest influence on the choice of pricing strategy, e.g. competition and customers demand and price sensitivity.
2.1.1 Factors influencing pricing strategy
Pricing decisions are complex because there are a number of details that must be considered. Dibb et. al. (1994) believe that most factors that affect pricing decisions can be grouped into eight categories (See Figure 2.3).
Organisational Pricing Other and marketing objectives Costs marketing mix objectives varibles
Pricing decisions
Channel Customer’s Legal and member demand and Competition regulatory expectations price issues sensitivity
Figure 2.1: Factor affecting pricing decisions, (Dibb et. al., 1994. Slightly modified by us).
To this we could add: The state of the economy, Supply levels and Social responsibility (Schewe, 1987).
10 Below we will describe these eleven factors:
2.1.1.1 Organizational and marketing objectives
The company should set prices that are consistent with its overall goal and mission and with the marketing objectives (Dibb, 1994).
2.1.1.2 Pricing objectives
Pricing objectives are the firm’s desired outcomes and preferred states of affairs (Montgomery, 1988). Of course the pricing objective will be a considerable determinant on the price setting (Dibb, 1994). This factor also involve pricing policies, which are the directives to subordinates and are intended to improve the validity of decisions and to achieve consistency of action among members of the organization (Montgomery, 1988). Both the objectives and policies should be consistent with those of the firm itself (Tull & Kahle, 1990).
2.1.1.3 Cost
Obviously the costs are an important issue when to decide price. A firm can temporarily sell its services below cost to generate cash flow, but in the long run this is not possible (Dibb, 1994). There are three types of costs that must be considered (Nagle, 1987). First, forward- looking costs, are those costs the firm will incur in the future as the result of making a sale. Second, incremental costs, are the changes in costs that result from a pricing decision. The distinction between incremental and nonincremental costs parallels closely, but not exactly, the more familiar distinction between variable and fixed costs. Since pricing decisions affect the amount of business that a company does, variable costs are always incremental for pricing. Third, avoidable costs, are the costs that either have not yet been incurred or that can be reversed. A thorough understanding of the service’s cost structure is a must for successful pricing (Cressman, 1997).
2.1.1.4 Other marketing mix variables
While services are different from goods this requires a different marketing approach and a different marketing mix. Booms and Bitner (1981) suggests a modification and extension of the original four P’s: Product, Price, Promotion and Place (McCarthy, 1964), to better suit the service firm:
First of all Product also involves services. Then Booms & Bitner add three more P’s:
Participants/People. These are the people involved in providing and receiving the service. Important factors are, for example, personnel, interpersonal behavior, attitudes and other customers. Physical evidence. Here factors of importance are environment (furnishing, color, and layout), facilitating goods and tangible clues.
11 Process. This could involve policies, procedures, employee discretion, and flow of activities, customer involvement, customer direction and mechanization.
Nagle (1987) and Bradley (1995) discuss the price in relation to the other elements of the marketing mix.
The product/service, probably more than any other element, determines the viability of a price. With all its augmentations, the service determines relative value and indicating the levels at which price can be set.
Promotion influences pricing through its effect on price sensitivity. Advertisements can bring to the buyer’s attention information that may make price less important in their purchase decisions. Conversely, advertisements can provide information that makes buyers more aware of their alternatives and encourage them to focus on price as an important attribute of choice. Even advertising that does not directly attempt to influence price sensitivity apparently increases it, at least for consumer nondurables. Personal selling, on the other hand, generally reduces price sensitivity by enabling buyers to appreciate the differentiating attributes of unfamiliar brands and by facilitating augmentation.
Price itself is often an effective promotional tool. A high price can signal superior quality, a stable price can signal stability of value and the excess demand created by low price can draw attention to a service. A low price deal can induce buyers to try a service once and in doing so, educate them about attributes that will prompt them to make future purchases at the regular price.
The choice of a distribution channel should complement a service’s pricing. Services priced high to reflect their unique attributes or to insure exclusivity need channels that will communicate the service’s worth. Whenever the distribution channel is independent, a manufacturer must also consider how reseller’s pricing will influence the ultimate attractiveness of the service to consumers.
The literature does not discuss the price’s relation to the three last P’s, participants, physical evidence and process. Below we give our personal view on these relationships, how we think these could affect the price.
The participants in a service transaction are an important factor when the customer is estimating the value of the service and if the price is acceptable.
As place, physical evidence could communicate the service’s worth. A good physical surrounding could increase the value of the service and make the customer more willing to pay a higher price.
A highly mechanized service process could reduce the cost of the service provider. This could enable the firm to offer lower prices to the customers.
When examining telecommunication services we see that these types of services do not involve any personnel from the service provider and not necessarily any other customers. Sometimes there is only one person involved, due to answering machines etc. There is also no physical or tangible evidence of a telephone call. The process is worked out by the technology, by switches and radio base stations, i.e. it is rather mechanized.
12 All marketing mix variables are closely interrelated. The price influence decisions and activities that are associated with product, distribution and promotion (Dibb, 1994) as well as participants, physical evidence and process. Therefore the price must be consistent with the other elements of the marketing mix. Price must be an integrated element in harmony with the rest of the marketing mix instruments (Brassington & Pettitt, 1997).
2.1.1.5 Channel members’ expectations
When making pricing decisions the seller should consider what distribution channel members expect and demand. They expect to receive a profit for their service (Dibb, 1994).
2.1.1.6 Customer’s demand and price sensitivity
It is important when making pricing decisions to consider how important the price is for customers (Dibb et. al., 1994). It is also important to consider the demand and price sensitivity/elasticity (Nagle, 1987; Brassington & Pettitt, 1997; Cressman, 1997) There are nine factors in addition to the level of the price itself that influence price sensitivity (Nagle, 1987):
1. The unique value effect. The service's unique value in comparison to competing services. 2. The substitute awareness effect. Available substitutes, their value versus their price, in comparison to the firm’s service. 3. The difficult comparison effect. The difficulty of comparing and evaluating substitutes. 4. The total expenditure effect. The service’s price in relation to income and total expenditures for a person or household. 5. The end-benefit effect. The service’s final benefit or value creation. 6. The shared cost effect. To which extent the cost for the service is shared with someone else. 7. The sunken investment effect. Many purchases are used in conjunction with assets bought previously. 8. The price-quality effect. Buyers are less sensitive to a service’s price to the extent that a higher price signals a higher quality of the service. 9. Switching costs. The buyer’s cost for changing brand or supplier.
13 When considering the importance of price and the price sensitivity of the customers a company has four general alternatives. Either it can be active or passive in its pricing and it can set either high or low prices. This can be illustrated in the following model (Cravens, 1982):
A c t i v e s t r a t e g y
L o w r e l a t i v e H i g h r e l a t i v e p r i c e p r i c e
P a s s i v e s t r a t e g y
Figure 2.2: Price’s strategic arena (Cravens, 1982)
High-active strategy. When the buyer cannot easily evaluate the quality of the product, price can serve as a signal of value. High prices may be essential to gain the margins necessary to serve small target markets. Not widely used.
High-passive strategy: Management may choose to concentrate upon nonprice factors to convince buyers to purchase a certain service. Service features can be stressed when customers want quality.
Low-active strategy: When price is an important factor in the buyer’s decision, a low-active profile price strategy can be very effective.
Low-passive strategy. Firms with lower quality services than their key competitors adopt this strategy. By not emphasizing low price there is low chance that buyers will link price with quality. Not widely used.
2.1.1.7 Competition
A firm should consider the size and strength of the competition and also their reactions when taking a pricing decision (Dibb, 1994; Cressman, 1997).
14 2.1.1.8 Legal and regulatory issues
There may be some legal issues that the company must obey when setting a price.
2.1.1.9 The state of the economy
The economic situation in the country may have an impact on the pricing decision.
2.1.1.10 Supply levels
The demand influences the pricing as well as the supply levels.
2.1.1.11 Social responsibility
The firm may have some social obligations, especially if it is a governmental company. Even a private company may choose to take a social responsibility in their pricing.
2.2 PRICING APPROACHES AND MOTIVES
According to several authors (e.g. Bradley, 1995; Dibb, 1994; Nagle, 1987; Zeithaml/Bitner, 1996) the most important of the factors to be consider when formulating the pricing strategy are the costs, the demand and the competition. Sibson (1968) first introduced this categorization and it is now the most common way to categorize different pricing approaches.
1. Cost-oriented pricing. The price is mainly based on the firm’s costs. 2. Competition-oriented pricing. The price is mainly based on competitors pricing. 3. Demand-oriented pricing. This is sometimes also called customer-oriented or marketing- oriented pricing. The price is mainly based on customer perceptions of value, the customer price elasticity and the customer demand.
As mentioned earlier in this chapter the choice of price strategy is influenced by a lot of factors, not just cost, competition and demand. Most of the literature, though, divides different types of pricing approaches into these three groups. We will in the next section shortly describe the most common approaches in each group together with the motive for choosing that particular approach.
2.2.1.1 Cost-oriented approaches
Because of the difficulty in estimating demand, most pricing strategies have a decided reliance on cost as a basic function. These types of price strategies can be termed as either full-cost or variable cost approaches (Kerin & Peterson, 1987). Variable-cost strategies are forms of demand-oriented pricing and will be discussed under this section (See 2.2.1.3).
15 There are generally six forms of full-cost pricing:
Markup pricing. Some authors call this Cost-plus pricing (e.g. Schewe, 1987; Montgomery, 1988; Simon, 1989). The price is determined by adding a fixed amount to the total cost of the service. The fixed amount is usually expressed as a percentage of the service cost. Markup pricing is used most in routine pricing situations, due to its simplicity and flexibility. A drawback is that a single percentage is used all over the service line and not considering elasticity and competition.
Break-even pricing. The number of ”units” of a service that has to be sold to cover the total cost (Kerin & Peterson, 1987). The price of a unit of the service is set high enough to cover the variable costs of producing that unit as well as the fixed costs of producing the service (Schewe, 1987). This strategy is used to make sure that the total costs are covered.
Rate-of-return pricing. Also called Target-return pricing (Schewe, 1987). Price is determined to obtain a prespecified rate of return on investment for the organization. By working backward from a predetermined rate of return, it is possible to derive a selling price that will obtain that return. This assumes a linear demand function and insensitivity of price from the buyers (Kerin & Peterson, 1987). This is chosen because it is an easy way to get a rate of return.
Survival pricing. The price is set at a level that make the company stay in business until the crisis is over (Schewe, 1987). The motive behind this strategy is to survive.
Phase-out pricing. The price is set high while removing the services from the line (Montgomery, 1988). The motive is to get as much money as possible out of services that will be removed.
Early cash recovery pricing. The company set a price which will bring in cash at an earlier stage rather than in the long run (Bradley, 1995).
2.2.1.2 Competition-oriented approaches
There are five different types of competition-oriented approaches that are most common:
Price leader strategy. In some industries, especially oligopolies, one company sets the price for the whole industry. This type of price strategy demands that the firm is very familiar with the costs and demand conditions in the industry. (Schewe, 1987) The motive is to have control over the pricing in the industry.
Follow pricing. The price is set with respects to industry price leaders (Montgomery, 1988). This strategy presuppose similarity of cost structures and that the price leader’s strategy is not aimed at damaging the firm (Simon, 1989). This strategy is chosen because the firm does not want to have an active price competition.
Flexible pricing. Price is set to meet competitive or market conditions as these conditions change (Montgomery, 1988).
16 Preemptive pricing. The firm price it services to discourage competitive market entry (Montgomery, 1988).
Niche strategy. A niche strategy aims at deliberate differentiation from the competitors' prices. Price is set at a level where a price vacuum exists (Simon, 1989).
2.2.1.3 Demand-oriented approaches
The far most common demand-oriented approaches discussed in the literature (e.g. Zeithaml & Bitner, 1996; Jobber, 1995; Diamontopoulos, 1995; Nagle, 1987) are:
Penetration pricing. Involves setting a price far enough below the service’s economic value to attract and hold a large base of customers (Nagle, 1987). Penetration pricing is a strategy in which services are introduced at low prices to stimulate trial and widespread use (Zeithaml & Bitner, 1996).
Skimming pricing. Involves setting a price to capture a service’s economic value to relatively price-insensitive customers (Nagle, 1987). This is a strategy in which services are introduced at high prices with large promotional expenditures (Zeithaml & Bitner, 1996). Often this strategy is followed by a Slide-down pricing, which means moving prices downward over time (Montgomery, 1988).
In addition to these two there are several other forms of demand-oriented approaches:
Neutral pricing/Intermediate pricing. The intermediate approach is between the two extremes above (Kerin & Peterson, 1987). Involves setting a price in the range that most buyers would deem reasonable or appropriate given its economic value. It is a strategy that minimizes the role of price as a marketing tool in favor of other tools that management believes are more powerful or cost effective for this product (Nagle, 1987).
Synchro-pricing. Sometimes also called Elasticity pricing (Montgomery, 1988). The operator use price to manage demand for a service by using customer sensitivity. Pricing can play a role in smoothing demand and synchronizing demand and supply. Time, place, quantity, and incentive differentials have all been used effectively by service firms (Zeithaml & Bitner, 1996). Simon & Dolan (1996) have further developed the time differential and call it time customization. This means that the price is changed, either on a short-term or on a long term. Temporary price changes, i.e. short-term price customization, could range from a few hours each day to a couple of months. For example the price on a new service is lowered at the introduction and the tariff for a phone call is lowered in the nights.
Prestige pricing. A special form of demand-oriented pricing is prestige pricing and it is used by service firms who offer high quality or status services (Zeithaml & Bitner, 1996). The price is used as an image-creating instrument. The price is set high to make the service a status symbol that it is very prestigious to use/buy (Schewe, 1987).
Value pricing. The firm price their services according to the value to the customer (Bradley, 1995). There are two types of this strategy:
17 1. Perceived-value pricing. The price is set at the same level as the amount of value the customer is expected to receive when buying the service (Schewe, 1987). The company bases its pricing decision on the service’s perceived value (Bradley, 1995). 2. Value-in-use strategy. This approach is similar to the first with the exception that the price is set in accordance to the value that the service will provide when it is used (Schewe, 1987).
Zeithaml & Bitner (1996) have a different definition of value pricing. They define it as a pricing strategy that involves assembling a bundle of services that are desirable to a wide group of customers and then pricing them lower than they would cost alone. The most common name for this type of structures is Price bundling, which we discusses later in this chapter.
Market segmentation pricing. This pricing is based on the premise that different segments show different price elasticities of demand and desire different quality levels. The segmentation can be based on client category (students, seniors etc.) or service version (Zeithaml & Bitner, 1996). It involves setting different prices for different segments of the market (Montgomery, 1988). It is a hybrid of different generic strategies, combining elements of skim, penetration and neutral pricing (Nagle, 1987). Segmentation pricing could also be named Price discrimination, which means that different customers pay different prices for the same services (Schewe, 1987). Because different market segments perceive the value of a particular service differently, depending on the product’s importance, a company can charge different prices to different market segments. Price discrimination can be used to modify demand patterns, support sales of other services and respond to competitors’ activities. This is illegal in some countries. (Dibb, 1994)
Contribution pricing/Variable-cost pricing. This type of price is the minimum price at which the service can be sold. Since variable-cost prices are lower than full-cost prices, the assumption is that a lower price will stimulate demand and increase revenues, and hence will lead to economies of scale, lower unit cost, and greater profits. (Kerin & Peterson, 1996)
Customary-price strategy. The company maintains a traditional price level and tries not to change the price from its accepted level. Instead, it change other factors, for example the content of the service. (Schewe, 1987)
Geographical pricing. Sometimes companies differentiate their prices for different geographical areas, often also called zone pricing. This means that the seller divides a certain geographical area into different zones and set different prices for the different zones. (Schewe, 1987)
18 2.3 PRICING STRUCTURES AND MOTIVES
We have above discussed three alternative methods and different approaches, on which the pricing strategy can be based. In the next part we will discuss different ways in which the price can be structured together with the motive for choosing that particular structure. With “structure” we mean which combination of different prices the subscription consist of, e.g. a combination of one connection charge, a monthly fee, and three different prices per minute. In the term “structure” we also involve the number of subscriptions the operator offers.
There are three general structures: Linear pricing, nonlinear pricing and price bundling (Simon & Dolan, 1996; Wilson, 1993; Zeithaml & Bitner, 1996).
2.3.1 Linear pricing
Linear pricing is a uniform price schedule with a linear through-the-origin relationship between quantity and the total paid by the customer. The price per unit is constant (Simon & Dolan, 1996). We will not further discuss this type of pricing structure.
2.3.2 Nonlinear pricing
The generic term nonlinear pricing refers to any case in which the tariff is not strictly proportional to the quantity purchased (Wilson, 1993). Nonlinear pricing involves a discount in the price with increase in number of product or service units purchased. The price per unit declines with increasing quantity (Simon &Dolan. 1996).
2.3.2.1 Forms of nonlinear pricing
Simon & Dolan (1996) discusses five different forms of nonlinear pricing:
All-units quantity discount. If a certain quantity level is exceeded, the lower price applies to all units. In all these types of pricing the quantity breakpoints of the discounts and the prices for each interval have to be determined. The number of intervals also has to be determined.
Two-part price. Consists of a fixed charge and an additional marginal price per unit. Essentially the customer pays for the right to buy the services at a fixed charge and then pays the marginal price for each unit actually bought. This is the typical nonlinear pricing for telephone companies.
Two-block price. A price per unit is charged up to a certain quantity, then the price per unit changes to a smaller number for all units above this quantity. This is also called an ”incremental units quantity discount” as opposed to the all-units quantity discount.
Two-block price combined with two-part price. Each of the two ”blocks” has both a fixed and a variable price component. Telephone companies offer choices between combinations of
19 fixed and variable price components. This strategy is very popular in the cellular sector, in which the operators are offering a number of different subscriptions (See chapter 4).
Price points. A certain price is set for specific units, but in each case the pattern is nonlinear. For example, one unit cost $6; ten units cost $50 etc. Multiperson pricing is special form of price points, in which price discounts are awarded to a second or an additional person buying the same service as the first, main, person.
Nonlinear pricing has its motives in demand, cost or competition. To start with demand, the customer’s willingness to pay decreases for additional units, i.e. he/she is willing to pay more for the first unit than for the second. Selling larger quantities could lead to economies of scale and learning effects, which can induce lower unit costs. Quantity discounts etc. can build barriers to entry, since a customer has to go through the stage of high initial prices to get the big discounts. Two-part and multiblock tariffs can be a particularly effective way to lock competitors out. (Simon & Dolan, 1996)
2.3.3 Price bundling
Price bundling means that a multiservice company has the opportunity to sell bundles of services to a single price.
2.3.3.1 Forms of price bundling
Below we focus on the six most common price bundling forms (Simon & Dolan, 1996; Zeithaml & Bitner, 1996; Montgomery, 1988).
Pure price bundling. Only the bundle is offered, the single services can not be bought separately (Simon & Dolan, 1996). The motive for this approach is to make the customer to spend more money.
Mixed price bundling. Both the bundle and the individual services are offered for sale. Each service has a price and the bundle has one, so called ”mixed-joint bundling”. Zeithaml & Bitner (1996) define this strategy as ”a single price is formed for the combined set of services”. The motive is to increase demand for both services. The firm can also choose to take the full price for the ”leader service” and then give discount to the second, and so on. This strategy is called ”mixed-leader bundling” (Simon & Dolan, 1996; Zeithaml & Bitner, 1996).
Tie in sales. The buyer of the main service agrees to buy one or several complementary services, which are necessary to use the main service, exclusively from the same supplier. The typical offer among many cellular operators fall into this category, a package of a low-priced, subsidized phone and a small activation fee when the customer agrees to obtain service from the operator for at least a minimal time period. This strategy is called captive pricing by Zeithaml & Bitner (1996). The motive is to capture new customers.
Loss leader. Providers place a familiar service on special largely to draw the customer to the store and then reveal other levels of service available at higher price (Zeithaml & Bitner, 1996; Gabor, 1977; Montgomery, 1988).
20 2.4 SUMMARY
When to formulate a pricing strategy the operator starts with an examination of internal and external factors. The most important of these factors are the bases of the pricing strategy. This examination leads to certain motives that the operator wants to achieve. The choice of pricing approaches and pricing structures is based on these motives. These interrelationships can be summarized in the following model:
Bases of pricing strategy
Motives of pricing strategy
Pricing Pricing approaches structures
Figure 2.3: Summary of our theoretical framework
This model will serve as the basis for the analysis. For all eight operators we will study the pricing structures. For the case company we will also study the bases of pricing strategy, the motives for the pricing strategy and the pricing approaches. As we have done in this theoretical framework the motives will be analyzed together with the pricing approaches and the pricing structures.
21 3 METHODOLOGY
”If we successfully like to repudiate somebody’s opinion and make clear to her that she is wrong, we should give attention to her perspective, from where she is studying the situation, because she is usually right from her point of view. This we should admit and then show her the perspective that makes her statement wrong. Then she can let herself to be convinced. Because then she sees that she has not drawn a wrong conclusion, she had just not seen the situation from all angles. We do not get upset when we do not see everything. But we do not want to be wrong.”
Blaise Pascal 1623 - 1662
We have chosen to share our scientific view and our methodological choice because we will enable that this thesis’ contribution of knowledge can be used in a scientific way in the future. This could be done by research on related topics that we do not discuss in this thesis. By having a good methodology this thesis could serve as a reference in future research. We therefore believe that it is important that we share our methodological standpoint.
3.1 SCIENTIFIC VIEWS
The methodology of natural science is characterized by an objective view on the reality, which is made possible by the simplicity in doing repeated, identical experiments. The social science, under which we think marketing should be categorized, is characterized by a higher degree of subjectivity. One reason for this difference is the difficulty within social science to do repeated, identical experiments, and the difficulty to interpret human activities.
3.1.1 Positivism and Hermeneutics
There are two main research traditions within social science, positivism and hermeneutics. The aim of the positivistic tradition is to approach science with a neutral and objective view (Andersson, 1989). In this tradition, quantitative methods are dominant. Those who advocate positive science are more often spokesmen of a holistic rather than an individualistic approach, and tend to favor hard (quantitative) data before soft (qualitative) data (Hollis, 1994). Positivists explain human activities in terms of cause and effect or ”causes of action”. Phenomena should be described as they are, not as we want them to be. In order to reach objectivity and avoid personal influence, a distance between the object and the scientist is essential. The positivistic tradition aims at reaching generalities (Hollis, 1994).
The hermeneutic tradition aims at an interpretative or hermeneutic social science. Its central proposition is that the social world must be understood from within, rather than explained from without. Instead of seeking the causes of behavior, we are to seek the meaning of action, ”the meaning of behavior” (Hollis, 1994). Contrary to positivism, this tradition emphasizes
22 that all factors are influenced by personal values. In the hermeneutic tradition the qualitative research methods are emphasized and not the quantitative. These methods aim at comprehending individual, groups or organization situations. Validity is not the main issue; instead the main issue is to reach an understanding and to capture the nature of the individual (Holme & Solvang, 1991). Therefore, hermeneutics as a science should dedicate itself to problems and comprehensive orientation.
3.1.2 Holism and Individualism
There are two main traditions in the way of looking on the social reality, the holistic way and the individualistic way.
A holistic view on the reality means that the overall structure determines all activities of the individuals. It exists an invisible structure or system that influence and control the individuals. The behavior of individuals can only be explained from their position in the structure/system, their social being determines their consciousness (Hollis, 1994). The preferences of individuals are dictated by the overall structure. A holist means that there exist a necessity in human actions, i.e. he has a deterministic view on human actions. In economy the holistic view means that the individuals are controlled and must obey the market forces.
According to an individualistic view societies and structures are a result of human activities. Societies only exist because individuals find it rational that they exist. To explain social institutions and social change is to show how they arise as the result of the action and interaction of individuals. Their power depends on acceptance by individuals or on coercion of individuals by individuals (Hollis, 1994). The individuals have full freedom in their actions; i.e. there exist no determinism. An individualistic researcher is interested in studying separate companies or individuals and believes that understanding these separate parts is the only way to understand how the market as a hole works.
3.1.3 Quantitative and qualitative methods
There exist several different forms of practical research methods. Most of them can be divided into two groups, the quantitative and the qualitative methods. The difference is based on the way the researcher examines the information, the soft data and the hard data. Historically, there has been a heavy emphasis on quantification in science.
The quantitative methods are based on the positivistic tradition and are useful when the purpose of the research is to come up with objective findings (Jonsson, 1992). A quantitative study emphasizes the measurement and analysis of casual relationships between variables, not processes.
The qualitative method is based on the hermeneutic tradition and is useful when the purpose of the study is to make an interpretation of an observed phenomenon and to find out about the reasons behind it (Holme & Solvang, 1991). This method is less formalized and structured then the quantitative method and situates the researcher’s interpretation of the information in the foreground. The goal is to develop a deeper understanding of the society we live in. The method is also characterized by a proximity to the source that the researcher is gathering information from (Hollis, 1994).
23 3.2 OUR HERMENEUTICAL APPROACH
We share the hermeneutic view of the world and see the social reality as separate from the nature. Our interest lies in the motives behind pricing, in the ”meaning of behavior”, and not just the causes of it. We want to increase our comprehension of pricing strategies as a phenomenon. The explanation is an important part of our total comprehension, but it can never take us the whole way and fully replace the comprehension. We are therefore, interested in reaching comprehension to create a picture of pricing strategies for third cellular operators in Europe.
In the empirical part we will study a number of cellular operators in Europe that is the third player in the market. We will also do a deeper case study of one of these operators. Hopefully this will increase our understanding for any third cellular operator. This means that this thesis is done in an individualistic spirit.
To do a research with a hermeneutic and an individualistic alignment and with a purpose to make an interpretation of the pricing strategy-behavior of the cellular operators and to find out about the reasons behind them the natural choice of method is a qualitative method. This because this method is based on a hermeneutic tradition, it emphasizes comprehension and have a subjective way of looking at the reality. We think that this type of method is the most appropriate way to do this study.
3.2.1 Our research process
We believe that a master’s thesis will, one way or another, contribute with new knowledge within a specific subject, in our case pricing strategies for third cellular operators. While the thesis only comprise ten academic points the possibility of coming up with something entirely new is quite limited.
The word ”knowledge” can be divided into four components (Wikström et. al., 1994):
Information: Answer questions like: When? What? How? Who? etc. Know-how: Answer the question: How to do? Explanation: Knowledge that answer questions like: Why? Comprehension: Knowledge that answer questions like: What is the interrelationship? How does the pattern look like?
These four components illustrate our research process. By collecting relevant information by studying, directly and indirectly, those who have the know-how we intend to explain and then also understand the phenomena we have studied to further increase the know-how for those who are involved in pricing and pricing strategies.
3.3 OUR METHODOLOGICAL CHOICE
24 3.3.1 Case studies
We have chosen to do an overall study of eight European cellular operators that are the third player in their home market. We have then taken a closer look at one of these markets and done a deeper case study of the third operator on this market. There are several other ways of doing social science research, for example experiments, surveys, histories and analysis of archival information (Yin, 1986), but we have used case study as research approach.
3.3.1.1 Why case studies?
We believe that case studies are the most appropriate method for us, because this method belongs to the qualitative research and is in accordance to our scientific view. It is the appropriate method when the objective of the study is ”to develop a better understanding” (Kenny & Grotelueschen, 1980) and when the aim ”is not to find the correct or true interpretation of the facts, but rather to eliminate erroneous conclusions so that one is left with the best possible, the most compelling, interpretation” (Bromley, 1986). Another reason is that case studies are different from other research designs because they strive for an ”interpretation in context” (Cronbach, 1975), i.e. this approach aims to uncover the interaction of significant factors in pricing and pricing strategies. The final reason is that case studies are particularly suited to situations where it is impossible to separate the phenomenon’s variables from their context (Yin, 1986), as for pricing strategies. For these reasons we have chosen case study as our methodological approach.
Our case studies could be categorized as interpretive (Merriam, 1988). We have made a description of the situations and also made interpretations of them. The end result is a description together with an analysis that, hopefully, gives the reader an enlarged comprehension of pricing strategies for third cellular operators.
3.3.1.2 Requirements on the investigators
Merriam (1988) also discusses what are required of us as investigators when doing case studies, as we are the primarily instrument for gathering and analyzing data. First, we have to have a large tolerance for ambiguity, because there are no procedures or lists that are possible to follow step by step. No established format and no routines. But this is also the appealing thing about doing case studies, the uncertainty of what the end product finally will be. It is a puzzling with a large amount of uncertainty. Second, we have to be sensitive to the situation we study, the information we obtain and most of all we have to be aware of our personal biases and how they influence our interpretations and conclusions. Third, we must be good communicators, to be able to empathize with our respondents’ situation and way of thinking. This follows with a hermeneutic view on reality that emphasizes empathy with the studied objects. This second part is the main problem for our thesis, while we have made our interviews by telephone (See ”Primary research” below). It is difficult to build confidence when you do not meet face-to-face.
3.3.1.3 The researches
25 Case studies use data that is expressed in words, i.e. qualitative data. This type of data consists of three things: detailed description of situations, events, people, interactions and/or observed behavior, direct quotations from people interviewed and extracts from documents etc. (Patton, 1980).
Evidence of case studies may come from six sources: documents, interviews, archival records, direct observations and physical artifacts (Merriam, 1988). We have only used the three first. The last two had required that we traveled to eight countries, which had not been possible due to the delimitation in time and financial resources. In conducting the case studies we used primary and secondary sources to gather data.
3.3.1.4 The primary research
The primary research is conducted with the help of telephone interviews. The purpose of these interviews were to find out the motives behind a pricing strategy, but also which factors the choice of pricing strategy were based on.
Interviews involve, first of all, determining which people to interview (Holme & Solvang, 1991). For our qualitative study it was of importance that the people who answered our questions had knowledge and/or influence on pricing strategies for third cellular operators. To identify those people we first asked the switchboard operator at our case study company who he/she thought was the best person suited to answer our questions. We had to talk to several persons before we got in touch with the most appropriate person. Then we called Ericsson Radio Systems, Post- och Telestyrelsen, MobilTeleBranschen and the first and second operator on our studied market. These efforts resulted in four interviews.
The most common way to decide which type of interview to be used is to determining the amount of structure that is desired. Our interviews could be classified as semi structured (Merriam, 1988). We had a set of questions that all our respondents got, but these questions were open and unstructured to their nature (See Appendix III).
Our questions were primarily opinion/value questions, because they were aimed at getting the respondent to share his/her thoughts about the motives behind the pricing strategy of a third cellular operator, but also which factors had the largest influence on the choice of pricing strategy. We have tried to formulate the questions in a language, using words that the respondent is familiar with. We have tried not to use any theoretical expressions or terms that the respondent may not understand.
26 3.3.1.5 The secondary research
The major drawback with interviewing people is that they are limited to those who are accessible and are willing to cooperate. For these reasons we have done a secondary research in which we have used literature, published journals, databases, reports and the operators home page on the Internet. With help of the information reviewed we were able to formulate the problem. This information also served as base when formulating our questionnaires and undertaking our primary research.
When to evaluate a data source, first, the researcher should ask whether the source contains information or insights that are relevant to the research question and, second, if the data can be obtained in a reasonably and practical way (Merriam, 1988). If the data has these two characteristics it should be used, of course. Our major source of information about the cellular operators pricing strategies is a detailed description of all operators subscriptions obtained from EMC World Database and from the homepages. This source is highly relevant because it is a detailed description of the operators pricing strategy and it has also been easy to obtain. We have also used other databases and documents to investigate the contexts in which the studied cellular operators exist, for example OECD report of 1996 and EMC Cellular Market Report.
A drawback with documents is that they are not developed for research purpose and therefore may be incomplete from the investigator’s perspective. This is the situation for us, which is the reason for doing the primary research. In our study the secondary research primarily answer the question ”how does the pricing strategies look like?” and the primary research primarily answer the question ”which are the bases of and the motives behind the chosen pricing strategy?”
Another major problem with documentary is usually to determine its authenticity and accuracy. Determining this is an essential part in the research process and therefore the researcher should control the documents origin, reason for being written and in the context that it is written (Burgess, 1982). In our case we strongly believe that the descriptions of the subscriptions are both authentic and accurate, because it is information addressed to the customers. We, therefore, do not see any reasons why the cellular operators should lie in these descriptions. There may, though, exist an incentive to not telling the whole truth or hide some information. Because of this we have checked the information from the operators with an impartial survey institute, EMC.
Using documents as source has some further advantages. First, documents can yield more and/or better data and maybe also at a less cost than other types of tactics. The data in our study have definitely been obtained at a less cost than the data from the interviews. If the data has been better or more is hard to determine, while the two researches have had some different purposes. Second, documents can sometimes be the only way to obtain information to investigate certain problems. It would have been possible to get the information obtained by the secondary research from interviews. This had, though, been more difficult, taken longer time and been more costly. Third, ”documentary data are objective sources of data compared to other forms” (Merriam, 1988). Unlike interviewing the researcher does not alter what is being studied by his/her presence. Finally, documents are well suited for qualitative case studies because they can give a description of the context of the research problem.
27 3.3.2 The analysis
For all eight operators we will analyze the choice of pricing structures. For the case company we will also analyze the bases of pricing strategy, the motives for the pricing strategy and the choice of pricing approaches.
3.3.3 Validity and Reliability
All research is concerned with producing valid and reliable knowledge. This is the situation for a qualitative case study, as well. Validity and reliability can be approached through ”careful attention to a study’s conceptualization and the way in which the data were collected, analyzed and interpreted” (Merriam, 1988). The discussion of validity and reliability tries to make it clear to which extent the researcher and readers can trust the findings.
3.3.3.1 Internal validity
Internal validity deals with the question of how our findings match reality. Do the results capture what is really there? Have we really studied what we think we have studied?
We have tried to capture the phenomenon of pricing strategies as it appears to the cellular operators we have studied. In this thesis we have been more interested in perspectives rather than the real truth and we have tried to present a more or less honest description and comprehension of how informants actually view the pricing strategy and their motives with it.
Our choice to ensure internal validity has been to use triangulation (Merriam, 1988), which means that we have used multiple investigators, multiple sources of data and multiple methods to confirm the findings. We have also chosen to clarify our worldview and theoretical orientation. In addition to this we have discussed our method, choice of operators and findings with people working together with cellular operators. The reasons for this choice of strategy were that we thought that these were the most convenient and less time consuming ways to ensure the internal validity of our thesis.
3.3.3.2 Reliability
Reliability refers to the extent to which our results or findings can be replicated; i.e. if our study should be done once again will it yield the same results? This is problematic because human behavior is never static. To be able to discuss reliability in a traditional way the research design must be based on the assumption that there is a single reality, as in the positivistic tradition. This is not the case in our study; rather we have tried to create an understanding for pricing strategies. Because of this we can not make a repeated study and establish reliability in the traditional sense. Reliability and validity is linked in the conduct of research. According to Guba and Lincoln (1981) it is not possible to have internal validity without reliability. This should mean that while we have demonstrated an internal validity we have also demonstrated reliability.
Since reliability in traditional sense not can be obtained in a qualitative study Guba and Lincoln (1981) suggest that we should use the term ”dependability” or ”consistency” instead.
28 By ensuring a strong internal validity, mainly through triangulation, as discussed above, we believe that we have ensured also the dependability, or reliability.
3.3.3.3 External validity
External validity is concerned with the extent to which the findings of one study can be applied to other situations, i.e. how generalizable are the results of our study? Before even discussing this we must have ensured that the study has an internal validity, because there is no reason examine if meaningless information and results can be generalized.
The reason for doing a qualitative study is to understand the studied phenomenon in depth, not to find out what is true of the many. It is also hard to apply generalizations to individuals. The issue of generalizability in case studies is whether it is possible to generalize from a single case and if so in what way? There are two different views. Either you assume that you cannot generalize from a single case study and thus regard it as a limitation of the method or you try to strengthen the external validity.
We have chosen to strengthen our reliability by studying the same phenomenon in several case studies. But it is much up to the reader and other practitioners of pricing strategies to judge if there is something that is possible to use in other situations.
3.3.4 Selection of cellular operators
Selecting a sample of cases involves selecting research site, time, people and events (Burgess, 1982). The time for us is given, while this thesis must be finished during the spring 1998. The event is pricing strategies for third cellular operators in Europe, as mentioned before. The site is Europe to limit the number of operators that can be examined. The choice of people is based on their knowledge and/or influence on third cellular pricing strategies.
Our sampling strategy could be said to be comprehensive (Merriam, 1988), which means that we have examine every third cellular operator in Europe. We have, though, just made one deeper case study. We chose to focus on country H and the third operator Hc, because we found it to be an interesting operator to study.
29 4 OUR EMPIRICAL STUDY
4.1 THE EUROPEAN MARKET
In our thesis we have chosen to study the cellular market in Europe, with the focus on the third operators. The first and second operators are not dealt with, except for the focused country. We have greater interest in focusing on the third operators that have to find their place in the market to survive. Because of a request from an operator in the focused market we have chosen to make all the operators anonymous.
We have named the countries ”Country A-H”. The last one, ”Country H” is the object for the case study on one third operator. Before the description of the third player in each country, a description of the market in each country is presented. In our focused country we begin with a general description of the market. Then there is a short description of the two other operators on the market, ”Operator Ha” and its subscriptions ”Ha1-Ha9” and ”Operator Hb” and its subscriptions ”Hb1-Hb2”. Finally, we do a deeper case study of the third operator (Hc) and its subscriptions ”Hc1-Hc8”.
4.1.1 Country A
The cellular market in Country A is one of the largest in Europe. The population is 59 million in the area. The Country A market is one of the most competitive cellular communication markets in the world. There are four operators, with Aa as the third player on the market. (The Strategis Group, 1997)
4.1.1.1 Third operator Aa
Aa launched in 1993. It was then one of the first GSM 1800 operator in the world. All four operators are carrying out aggressive market strategies. They are all adding new pricing plans. (The Strategis Group, 1997)
A part of the strategy for the company is to focus on the mass/customer market. The mission statement of the company is as follows: ”To provide a low cost cellular phone service for the mass market”. A way to achieve this is by having low tariffs, which have been the case so far. Aa have four different tariff options (See Appendix I). They have different prices for calling other operators and for calling inside the own network. The tariffs are also divided by local and national calls. They also distinguish between peak and off-peak. One of the tariff options, Aa1, also has a super off-peak tariff. Three of the tariff options have minutes included, between 30-200 minutes. Aa1 and Aa2 are the tariff options most suitable for business users, due to lower tariffs per minute and higher monthly fees. Aa2 has the lowest tariff for calls to other operators and it is the least expensive subscription when using fax and data. This makes the Aa2 the best subscription for business users. All subscriptions have a connection charge. (EMC World Database, 1998; Aa’s homepage, 1998)
30 4.1.2 Country B
The telephony infrastructure in Country B is highly developed. With approximately 60 fixed telephone lines per 100 inhabitant, it has one of the highest penetration rates among European countries. Country B has been at the forefront of cellular development. In February 1998 there was 1 469 920 cellular subscribers. Country B has four different players. Ba is the third operator. (The Strategis Group, 1997)
4.1.2.1 Third operator Ba
Ba rolled out in February 1998. Following trends in other European markets, prices in Country B have begun to fall. As long as the subscriber remains within their home-zone the peak and off-peak tariffs can compete with fixed telecom service. All four operators in Country B now offer these types of subscriptions.
Ba offers only one subscription (See Appendix 1): ”Ba1”, which has no connection charge, but a monthly fee. There is a single tariff within the local zone and another tariff for peak times outside the local zone and one for off-peak times outside local zone. (EMC World Database, 1998; Ba’s homepage, 1998)
4.1.3 Country C
Country C’s telecom market is one of the most developed in Europe, and arguably one of the most developed anywhere in the world. Practically every household has conventional wired telephone connection, and almost one inhabitant in three carries a cellular phone. Country C has one of the highest penetration rate in Europe and in February 1998 Country C had 2 181 110 cellular subscribers. Currently there are five different players on the market. Ca is the third player. (The Strategis Group, 1997)
4.1.3.1 Third operator Ca
Ca launched a commercial convergent GSM 1800 network in May 1997 and position itself as a value-added local operator. The service is provided in one region and marketed to the local population as an extension of the fixed network. It is also understood that the system is the first network in the world to offer such services. The service is initially being targeted at small business customers, but since June 1997 it has also been aiming at larger corporate customers by pricing at a competitive level. A typical call will be charged US$ 0,09 for one minute. The tariffs will apply across the entire license area and handsets will be priced at 10-15 percent lower that the equivalent cellular handsets. (EMC World Database, 1998; Ca’s homepage, 1998)
Ca offers only one subscription (See Appendix 1): ”Ca1”, which has one single tariff. Connection charge and monthly fees are the same as the fixed network. (Ca´s homepage, 1998)
31 4.1.4 Country D
Country D had in February 1998, 6 377 940 cellular subscribers and the market has four different players, with Da as the third player. (The Strategis Group, 1997)
4.1.4.1 Third operator Da
Da launched its GSM 1800 service in May of 1996, with regional coverage initially in the main city. They intend to become the leading provider of cellular telephony in Country D within five years. (The Strategis Group, 1997)
Da offers two subscriptions (See Appendix 1): ”Da1” and ”Da2”. The subscriptions have a connection charge, a monthly fee and different tariffs for peak times and off-peak times. Customers can change tariff up to twice a year free of charge. The only difference between the two subscriptions is that ”Da2” has a cheaper monthly fee than ”Da1”, which has 240 minutes included in the monthly fee. (EMC World Database, 1998; Da’s homepage, 1998)
4.1.5 Country E
Telephony infrastructure in Country E is considered to be among the world’s most highly developed and technologically advanced. Nationwide, there are estimated 50 main telephone lines per 100 inhabitants, which are well distributed throughout the population. The total number of cellular subscribers in February 1998 was 8 782 300. Currently there are three cellular operators on the market, with Ea as the third player. A fourth player is expected to begin commercial operations in the second quarter of 1998. (The Strategis Group, 1997)
4.1.5.1 Third operator Ea
In May 1993, the government granted a DCS 1800 license to Ea. The network was launched one year later, in May 1994. In an attempt to differentiate itself from the competition, Ea is offering additional services to its customers. For example, Ea subscribers can receive up-to- date market and sport news through their handsets. (The Strategis Group, 1997)
The presence of Ea in the market has generated new and innovative tariff structures. As a result, customers have the choice among several different tariff structures and schemes. Prices for service in Country E plummeted during the later half of 1996 as new segments were targeted. Ea lowered per minute prices for its low volume users by 43 to 50 percent, while the prices for average calls fell 17 percent. Cellular operators have also decided not to include the handsets for free in the deal, and therefore subscribers are required to purchase their own phones. Consequently, the value of secondhand phones will increase as a result of the tariff changes. (EMC World Database, 1998; Ea’s homepage, 1998)
Ea has ten different types of subscriptions (See Appendix 1). Four subscriptions, Ea1 to Ea4, have no connection charge, a monthly fee that includes minutes of airtime and different tariffs for peak and off-peak hours. There are also different tariffs for making a call within the Ea- network and for making a call to some other cellular network. The Ea1-subscription has the lowest monthly fee but the highest peak tariff; the off-peak tariff is the same for all
32 subscriptions. For the Ea4-subscription the situation is the reversed, compared to the Ea1- subscription. (EMC World Database, 1998; Ea’s homepage, 1998)
Ea also have the two additional subscriptions, Ea5 and Ea6. These subscriptions have a connection charge, a monthly fee that does not include any minutes of airtime and different tariffs for peak and off-peak hours. There are also different tariffs for making a call to a cellular phone within the Ea-network and for making a call to some other cellular network. The subscriptions must be signed for at least 12 months. Ea5 has half the connection charge, a slightly higher monthly fee but a lower peak tariff compared to the Ea6-subscription. If the Ea5-subscription is signed for 24 months there is no connection charge. If the Ea6- subscription is signed for 24 months the connection fee is reduced by 50 percent. (EMC World Database, 1998; Ea’s homepage, 1998)
For Ea5 and Ea6 there are some special conditions concerning the billing. There is a minimum airtime charge of US$ 4,82 a month and a minimum airtime charge of 60 seconds per call, thereafter the call is charged per second. The subscriber has an alternative call charged for an extra fee per month: 6 seconds minimum charge and thereafter 6 seconds billing. (EMC World Database, 1998; Ea’s homepage, 1998)
There are also two different Ea7 and Ea8 -subscriptions. These subscriptions are similar to the Ea5 and Ea6-subscriptions. They have a connection charge, a monthly fee that does not include any minutes of airtime, different tariffs for peak and off-peak hours and different tariffs for making a call to a cellular phone within the Ea-network and for making a call to some other cellular network. The Ea7 -subscription must be signed for at least 6 months and the Ea7 -subscription must be signed for at least 12 months. Ea7 has a slightly lower monthly fee, a higher peak tariff but a slightly lower off-peak tariff compared to the Ea7 -subscription. (EMC World Database, 1998; Ea’s homepage, 1998)
Then there is a subscription Ea9 that has no connection charge, a monthly fee with inclusion of any airtime minutes, and different tariffs for peak and off-peak hours. The tariffs are the same for all types of calls. This subscription has a higher monthly fee then the Ea5 to Ea8 -subscriptions but lower than the Ea3-subscription. (EMC World Database, 1998; Ea’s homepage, 1998)
The final option is a pre-paid option with no connection fee or monthly fee, just a single tariff for calls made both peak and off-peak and for all types. The tariff is the highest compared to Ea other subscriptions. The customer buys a card for a certain amount of money and is able to call for the whole amount. When the card is ”empty” it is possible to ”refill” it with more money. This can be done over the phone. (EMC World Database, 1998; Ea’s homepage, 1998)
4.1.6 Country F
Country F is the second largest cellular market in Europe, with 912 130 cellular subscribers (February 1998) and has currently three cellular operators. The second operator launched its service in September 1996, and was followed one month later by the third operator Fa. (The Strategis Group, 1997)
33 4.1.6.1 Third operator Fa
The service of Fa was launched in October 1996. The entry of the two last GSM operators have meant that all participants in the cellular market had to rethink their pricing plans. (The Strategis Group, 1997)
Fa has three different tariff options (See Appendix 1): Fa1 to Fa3. All three have a connection charge, a monthly fee that does not include any airtime and different tariffs for peak and off- peak hours. (EMC World Database, 1998; Fa’s homepage, 1998)
4.1.7 Country G
Major levels of investments in Country G’s telecommunications infrastructure began in 1991. Present-day infrastructure has relatively improved, but it is still poorly developed in a European context. Country G has estimated 13,1 main telephone lines per 100 inhabitants and 236 100 cellular subscriber in January 1998. There are three players in the market, with Ga as the third player. (The Strategis Group, 1997)
4.1.7.1 Third operator Ga
Their services began on 6th June 1997. In Ga’s license, the operator is required to provide 89 percent coverage by June 1998. In mid July of 1997, Ga had 25 percent coverage of the population. (The Strategis Group, 1997)
Ga has opted to simply charge the customer for outgoing usage and not for incoming calls. Ga ´s customer base is 70 percent business and 30 percent residential. This customer profile is estimated not to change significantly over the next 1-2 years. (The Strategis Group, 1997)
Ga offers four different subscriptions (See Appendix 1): Ga1 to Ga4. All four have a connection charge, a monthly fee and different tariffs for peak and off-peak hours. The first three subscriptions have 50, 150 and 300 respectively minutes of airtime included in the monthly fee. The Ga1 subscription has a low monthly fee but the highest tariffs. For the Ga3 -subscription the situation is the reversed. Ga4 has no airtime included, but the lowest monthly fee. The tariffs are relatively high though. (EMC World Database, 1998; Ga’s homepage, 1998)
4.2 THE FOCUSED COUNTRY (H)
If no other source is referred to the information in this section is based on the report ”The market for telecommunications in (”Country H”) 1997” by Stelacon Corp.
4.2.1 Market shares and service development
In the focused market country there has been an increase in number of subscribers in the GSM market during 1997; the increase has mainly been on the private market. Between 1994 and
34 1997 the increase of the number of subscribers was 472 %. Country H has three different players, with Hc as the third player. Hb, which has a total market share (both GSM and NMT) of 66% dominates it, but this player is loosing market shares to the competitors Ha and Hc. In the GSM-market, Hb is though increasing its market shares compared to its competitors.
The operator with the largest market share growth was Ha. During 1997 this operator increased its market share from 19% to 26%. A part of the increase is due to the launching of a prepaid card. Hc has also increased its shares, from 11% to 13%. 1997/1998 there was 3,17 million subscriptions for cellular services in country H. This is an increase with 700 000 which gives a market penetration of 36% of the population. 55% of the households had access to at least one cellular phone in April 1998. Country H has one of the highest penetration rates in the world.
During 1997 the supply of subscriptions and services increased, for example the prepaid cards, unified messaging etc. With the prepaid cards the second hand market of old cellular phones has increased, which gives greater possibilities for the cellular operators to lower the subsidies. Concerning the prices on the cellular services, no great changes have been made during the last year. The objectives with different market campaigns are to target the private market and to reach new customers and to use their net resources more effectively.
With the new frequency band, 1800MHz, the operators have a possibility to increase the number of customers and develop new services. Now the low speed in the GSM-net is a limitation for the service development. This is one of the reasons why data communication has not yet had its breakthrough. Keen competition and increased freedom of choice mean that the customer’s demands rule the development. This is often forgotten in a market being more oriented on technology than on the customer’s actual needs.
4.2.2 Financial results
The revenue for the operators depends on the type of subscriptions they offer. There is a difference between the operators’ market segments and the revenue from each customer. Worth noticing is that all of the cellular operators have a positive result for the second year in a row. The highest revenue per customer has Hc, while Ha has the lowest. In March 1997 Ha launched a prepaid card and in November Hc launched one too. Ha does not have this type of subscription yet, but is planing to launch in 1998. By the end of 1997, Ha had sold 228 000 prepaid cards and Hc 7 000 cards.
4.2.3 Price development
The pricing in the cellular services has not changed much in the last three years. The prices vary between the different subscriptions. The more kinds of subscriptions there are, the more the prices vary. The possibility to get a subscription has been limited to a certain time periods, which indicates that it is more a campaign than a general price reduction. These campaigns can contain price reductions up to 50% compared to the normal price. There are a wide variety of different services and the fees for these services vary between the different operators and subscriptions.
35 Instead of lowering the prices the operators have chosen to have volume discounts; the customers with a high call volume is benefited from this. Geographical variations is occurring; for example Ha offers a considerable lower call price for company customers in the northern parts of the country.
Except different subscription forms, the operators have different price tariffs. Ha is charging the calls in 10 seconds tariffs, while Hb and Hc charge by the second. In Spring 1998 Hb launched a starting fee of 0,04 US$.
The price levels have not changed since last year. The cellular operators’ costs for subsidizing of cellular phones, investments in net development and high marketing costs have led to limited opportunities to lower the prices. The prices haven not been lowered mainly due to the expansion of customers which has been sufficient to fill the operators’ frequency space. A price drop of the call prices would lead to both more customers and increased call volumes per customer, which increases the demand of temporary frequency space. Because of the increased space in the GSM 900-net and the expansion of the 1800 band, this should not be a problem for the next couple of years. The campaign offers have mainly been focused towards the private market, which has lead to increased traffic volume also during off-peak hours. Considering the revenues and the pressure on the net the cellular operators pricing has been ideal. The price development in the cellular market has not been beneficial from the customers’ perspective.
4.2.4 Subsidizes
The cellular operators have during 1997 continued to subsidize the cellular phones. The operators want to decrease these costs. The customers are used to the price level on handsets and that is why it is hard for the operators to stop subsidizing them. The operators tie the customers with 24-month subscriptions and try to lower the subsidies. During the spring of 1998 they have offered the customer to buy a subsidized phone, and even if they only extend the contract period, they have decreased the cost.
The most likely development is that the subsiding of simpler phones will decrease. Concerning the new dual band phones they will be highly subsidized. During the last two years they will probably be connected to heavy users with a minimum contract period of two years. The average price drop for handsets from the phone manufactures in the combination with the continued increase of prepaid cards will be profitable for the operators.
4.2.5 Distribution
1994 was named as ”distribution war” year, as cellular operators sharply increased dealer commissions, making it possible for subscribers to buy handsets for practically nothing. Hb spent US$ 80 million to maintain market leadership. After a short quiet period in 1995, Ha raised considerably its distribution bonuses to accelerate market growth. Hb followed, while Hc did not, on the grounds of internal capital requirements.
Operators compensate their dealers by giving up-front bonuses for each new connection. Most operators are also increasingly offering airtime residuals and customer retention bonuses to dealers shying away from straight commissions on contract sold. Such practices may have
36 destabilizing effects on market growth, as distributors use part of these bonuses to lower handset prices and stimulate short-term demand.
There are four distribution channels to end-users; retail chains, trade dealer chains, network operator owned chains and independent trade dealers. Retail chains have the total of 400 outlets. Trade dealer chains have totally 200 outlets. Hb and Hc have their own stores, Hc has 21 outlets selling both subscriptions and terminals. Terminals are purchased from suppliers or wholesalers. Most large or medium volume trade dealers have joined trade dealer chains. Hb and Hc also mainly use trade dealer chains, while Ha primarily uses retailer chains. (EMC Cellular Market Report, 1996)
The suppliers’ control the handset prices to distribution channels, but the end user prices are decided by network operator connection bonuses and distribution channel pricing polices. Supplier no longer decides which outlets should sell the brand, as this now is the decision of the distribution channels.
To be able to analyze the pricing strategy of Hc, we have to consider the other players on the focused market.
4.2.6 Operator Ha
Ha has offered cellular services in Country H since 1981, and in September 1992 they launched one of the worlds first private GSM 900-network. Their strategy is to offer customers the lowest price in the market. Ha offers the largest 24 hours variations and geographical differences in their pricing. During 1997 they launched, as the first operator in the country, a prepaid option. Ha has focused on a good coverage indoors and in the big cities. Ha has been awarded a GSM 1800 license. (The Strategis Group, 1997)
Here is closer description of the nine Ha subscriptions (See Appendix 1), ”Ha1-Ha9”. (Ha´s homepage on the Internet, 1998)
37 4.2.6.1 Subscriptions
Ha1 is the subscription for the customer that uses the phone on a daily basis. There are three price levels, with an automatic discount system. The more calls you make, the cheaper it gets, with discounts up to 25%.
Ha2 is a subscription favorable for the family. For a monthly fee the customer can stay in contact with his/her children, spouse and so on. The members of the family can call each other for half the price. With Ha2 the customer pays a monthly fee and the amount that is left in the end of the month can be saved and used next month. All members in the family call for half price and the subscription is limited to six persons. One person is the first-customer and the rest of the family members are secondary-customers.
Ha3 gives access to all GSM services; for example the customer can send and receive data, text messages and faxes. Included services are personal answering machine, call waiting, number presentation and a package with data, fax and five different block services.
Ha4 is the subscription for the customer who has three or more subscriptions registered in Ha, mostly corporate customers. Included services are personal answering machine, call waiting, number presentation and a package with data, fax and a block.
Ha5 is a subscription for companies in the northern part of Country H.
Ha6 is a subscription for the customer as a private individual. The customer pays a monthly fee in advance and can then make calls for this amount. If not all used the rest is automatically saved to the following months.
Ha7 allows the customer to call for an extra low cost, if the customer is under the age of 28 and registered at a College or University. The customer has to show a student-ID with a valid certificate for the present semester when he/she signs a 12-month Ha6-subscription. Then he/she receives a 20% discount on all calls 24 hours a day. With Ha6 he/she pays a monthly fee for the service. This monthly fee can be used for calls. If not all used the rest is automatically saved to the following months.
Ha8 is a generous subscription. It gives the customer free calls in the evenings, at night and weekends to friends who also have a ha8 subscription.
Ha9 is a prepaid alternative. The customer can call without a subscription and even without an own cellular phone. There is no credit or age limit to get this. This subscription has one service included; it is text number presentation service. If the customer is not available, the caller can leave his/her number.
38 4.2.6.1.1 Summary of the subscriptions
All of the subscriptions have a monthly fee except Ha9, which is a pre-paid subscription. Ha2, Ha4 and Ha6-7 lets you call for all or most of the monthly fee, if not the whole amount is used, it is saved to the next month. Every subscription except Ha5 has a connection fee. All of the subscriptions have peak and off-peak tariffs, except Ha5. All subscriptions also have a super off-peak tariff, except Ha5 and Ha9. There are also different tariffs for making calls to other cellular networks and calling within the Ha network. Ha1 and Ha3 have three price levels, with an automatic discount system. The more calls you make, the cheaper it gets, with discounts up to 25%. Ha5 lets you call in an area with low coverage to a low price and a single tariff. Ha5 and Ha7 require that you sign the subscription for at least 12 months. Ha9 is a prepaid option. You recharge it with buying a code from a store.
4.2.7 Operator Hb
Hb was the GSM market leader by the end of1995, with 466 000 subscribers. At year-end 1996, Hb was converted into a company solely for the operation of cellular networks, and was renamed. In the transformation process, parts of the operations were transferred to other Hb group units. Historically, Hb has been at the forefront of wireless communications development, operating one of the first radio systems in the world in 1955, and taking a major role in research and development of radio technologies. It is the largest operator on the market and has a license in all areas within cellular services. It is the only cellular operator that offers services based on the NMT technology. Hb is targeting the whole cellular market and the objective is to offer complete solutions. 1996 Hb received a license for a GSM 1800 network and in November 1997 they, as the first operator in country H, used this frequency band. (The Strategis Group, 1997)
4.2.7.1 Subscriptions
Hb has two different subscriptions (See Appendix 1): Hb1 and Hb2 (Hb´s homepage on the Internet, 1998). Both have a connection fee and different tariffs for peak, off-peak and super off-peak hours. There is a monthly fee for the Hb2 subscription. Hb1 also have a monthly fee, but it can be used for calls.
39 4.3 THE CASE COMPANY (HC)
In 1991 the company got a permission to offer cellular services based on GSM 900. They have also been given a license for GSM 1800. Hc launched its GSM 900 network in September of 1992. At the end of 1994, the network covered 94 percent of the population. As of December 1997, there were 424 000 subscribers in Hc’s network, representing an increase of 45 percent from the previous year. In May 1994 the operator was introduced to the Stock exchange. (The Strategis Group, 1997)
4.3.1 Distribution
Hc has increased their presence in the retail channel by setting up 21 own retail stores in the main city area, which sell exclusively Hc subscriptions, GSM handsets and accessories. Hc’s subscriptions are also distributed through other retailers all over the country. (EMC Cellular Market Report, 1996)
4.3.1.1 End-User Profile
Hc is targeting on customers with a high usage rate, i.e. companies and customers on the private market that have high usage volume. The private market has been the focus in the last year, one example of this is the launching of the prepaid card. Hc has an ambition to be early with new value added services based on the GSM technology and to widen the different use areas for the technology, for example a form of wireless access to the fixed network. (The Strategis Group, 1997)
Hc’s annual revenues per customer are above its competitors due to the higher proportion of business users in its network. 80 percent of subscribers in Country H are now low users and 20 percent are high users. Hc has at least 30 percent high usage subscribers. (The Strategis Group, 1997)
Below is a closer description of the Hc eight subscriptions (See Appendix 1), Hc1 to Hc8. (”Subscription information brochure” for Hc, 1998)
4.3.2 Subscriptions
Hc1 is a subscription that the customer should choose if he/she only makes occasional calls during the daytime and instead use the phone mostly during evenings and weekends. There is a monthly fee that can be used for calls. If the customer do not use the whole amount during the month, it is automatically saved for the following months. Private persons can take out this type of subscription.
Hc2 is a subscription for a person who uses the cellular phone mostly in evenings and weekends and who has a higher usage and a greater demand for quality and service.
Hc3 is the subscription for the customer who use the cellular phone both during the day and in the evening. This is a choice of subscription for both organizational and private subscribers.
40 The customer should choose the Hc4 subscription if he/she use his/hers phone more that six minutes a day and would like to pay less per minute the more calls he/she makes. Number Presentation, voice and text are included.
The customer should choose the Hc5 subscription if he/she is seldom at the office. Voice, text, number presentation and fax (an own fax-mailbox) are included.
Hc6 is as close as one can get to the expression "The office in your pocket." Talk, receive a fax message directly to the customer’s computer, sending his/hers own fax messages or transfer them as data files to colleagues, customers and/or suppliers. Included in the Hc6 package are voice, fax, text and data.
Hc7 is the ultimate alternative if the customer to be connected to Internet. The Hc6 package gives the customer the possibility to receive and send messages on the Internet. The cellular phone informs the customer upon receiving e-mail, and he/she will have direct access to Internet.
Hc8 is a pre-paid subscription with two different tariffs a connection fee and a no monthly fee. The services included are number presentation, call waiting, and text.
4.3.2.1 Summary of the subscriptions
Hc have eight different subscriptions and all of them have a monthly fee, except Hc8, which is a pre-paid subscription. The same applies concerning the connection fee except for Hc1. All of the subscriptions except Hc8 have different tariffs for peak, off-peak, and super off-peak hours. There are different tariffs for calling to other cellular networks and Hc2-3 have higher tariffs than the other subscriptions in this. Hc4-7 has three price levels, with an automatic discount system. The more calls you make, the cheaper it gets. The second level starts at 300 minutes and the third level at 500 minutes. This discount is only valid at peak time. In Hc2 most of the connection fee is allowed to call for each month, the money that is not used is saved for the next months. For Hc1 all of the monthly fee can be used for calls.
41 5 ANALYSIS
5.1 THIRD OPERATOR AA
5.1.1 Analysis of pricing structures
Company Aa uses a typical non-linear pricing (See 2.3.2). They offer four different combinations of fixed and variable components, i.e. subscriptions. This we will call multi- block price (own extension of Two-block price, 2.3.2.1). The customer can choose between different ”price blocks”. All alternatives consist of a connection charge, which we call a start- up price, a fixed monthly fee, which we call single-part fee, and additional marginal prices per minute. This combination we call multi-part price (own extension of Two-part price, 2.3.2.1).
In three of the subscriptions, Aa1-Aa3, the fixed monthly fee includes a certain amount of minutes a month without paying any extra, but the monthly fee. The higher the fixed monthly fee is, the larger amount of airtime is included. The three subscriptions represent three different levels of the monthly fee: High, Medium and Low. This means that one part of the monthly fee is a fixed cost (single-part fee) and one part is a variable cost paid in advance. The airtime can be saved for the following months. The variable cost does not consist of just one tariff. Aa3 has three tariffs: One for day times, one for evenings and weekends and one for calls made to other cellular networks. Aa1 and Aa2 has four different tariffs: One for daytime local calls, one for daytime national calls, one for evenings and weekends and one for calls made to other cellular networks. This structure can be called a multi-part tariff.
In Aa4 the monthly fee do not include any airtime, which means that the whole fee is a fixed cost for the customer. The variable cost consist of four different tariffs: One for daytime, one for evenings and national calls on weekends, one for local calls on weekends and one for calls made to other cellular networks, i.e. multi-part tariff. In addition to these costs there is a connection charge (start-up price) and therefore this subscription also has a multi-part price (a start-up price, a single-part fee and a multi-part tariff).
Aa also use a strategy were they subsidize a handset to make the customers to buy a subscription for a certain amount of time. This is a typical example of tie-in sales (See 2.3.3.1).
To summarize the structure of Aa’s pricing strategy could be called a Multi-block price (four subscriptions) in combination with a multi-part price (a start-up price, a single-part fee and a multi-part tariff). This is our own extension of Two-block price combined with a two-part price (See 2.3.2.1).
42 5.2 THIRD OPERATOR BA
5.2.1 Analysis of pricing structures
Company Ba uses non-linear pricing (See 2.3.2). They offer only one ”price block” (subscription), i.e. combinations of fixed and variable components. The situation for Ba could be called single-block price (own modification of Two-block price, 2.3.2.1). The Ba1- subscription has a combination of a fixed monthly fee (a single-part fee), and additional marginal prices per minute. This structure is called two-part price (See 2.3.2.1). The variable cost consists of three different tariffs, which we can call multi-part tariff. There is one tariff for calls within local zone; one for peak-times outside local zone and one for off-peak times outside local zone.
To summarize the structure can be called a Single-block price (one subscription) combined with two-part price (a single-part fee together with a multi-part tariff).
5.3 THIRD OPERATOR CA
5.3.1 Analysis of pricing structures
Company Ca also uses non-linear pricing (See 2.3.2) They offer also only one ”price block”, i.e. a single-block price (own modification of Two-block price, 2.3.2.1) with a combination of a one-time connection charge (start-up price) a fixed monthly fee (single-part fee), and one additional marginal price per minute (single-part tariff).
The structure can be said to be a Single-block price (one subscription) in combination with a multi-part price (a start-up price, a single-part fee and a single-part tariff).
5.4 THIRD OPERATOR DA
5.4.1 Analysis of pricing structures
As the above-analyzed operators Da also uses non-linear pricing (See 2.3.2) The company offer two ”price blocks” (i.e. two-block price) with a combination a connection charge (i.e. start-up price) a monthly fee, and additional marginal prices per minute. For Da1 the monthly fee includes a certain amount of airtime. This means that one part of the monthly fee is a fixed cost (single-part fee) and one part is a variable cost paid in advance. The variable cost consists of two tariffs, one for peak-times and one for off peak times (i.e. two-part tariff). This means that Da1 has a multi-part price (own extension of Two-part price, 2.3.2.1) (i.e. a start-up price, a single-part fee and a two-part tariff).
The Da2-subscription has a similar structure, with the exception that the monthly fee does not include any airtime. This means that the structure could be characterized as a two-part price (a start-up price together with a two-part tariff).
43 Da also use a strategy were they subsidize a handset to make the customers to buy a subscription for a certain amount of time. This is a typical example of tie-in sales.
To summarize, the structure of the pricing strategy can be called Two-block prices (two different subscriptions) combined with a multi-part price (a start-up price, a single-part fee and a two-part tariff) or a two-part price (See 2.3.2.1) (a start-up price and a two-part tariff).
5.5 THIRD OPERATOR EA
5.5.1 Analysis of pricing structures
Company Ea uses a typical non-linear pricing. They offer as much as ten different ”price blocks”. This is called multi-block price (own extension of Two-block price, 2.3.2.1).
In four price blocks, Ea1-Ea4, there is only one fixed monthly fee, so called single-part fee. This fee includes a certain amount of airtime, i.e. the customer can call a certain amount of minutes a month without paying any extra, but the monthly fee. This means that one part of the monthly fee is a fixed cost (single-part fee) and one part is a variable cost paid in advance. The four subscriptions represent four different levels of the monthly fee and airtime included: Very high, High, Medium and Low. The variable cost do not consist of just one price, but four, one for peak-times, one for off-peak times, one for calls made within Ea network and one for calls made to some other cellular network. This can be called a multi-part tariff.
The pricing strategy structure for the Ea1-Ea4 subscriptions is a Multi-block price (four subscriptions) combined with a two-part price (See 2.3.2.1) (a single-part fee together with a multi-part tariff).
The structure of Ea5-Ea8 is almost the same as for Ea1-Ea4, with some exceptions. First, the monthly fee does not include any airtime. This means that this fee is a fixed cost (single-part fee) for the customer. Second, the subscriptions must be signed for a minimum time period, six or twelve months, depending on choice of subscription. This is a form of captive pricing (See 2.3.3.1). Third, there is a minimum airtime charge a month and a minimum airtime charge for 60 seconds per call. The customer can, though, for an extra charge a month choose lower minimum airtime charge per call. These charges can be viewed as fixed fees, and can be called multi-part fee, i.e. the fixed monthly fee is divided into several parts. In addition to these costs there is a connection charge, i.e. a start-up price.
The Ea9 subscription is similar to Ea1-Ea4 with some exceptions. First, the monthly fee does not include any airtime. There are just two different tariffs, one for peak-times and one for off- peak times, i.e. two-part tariff.
The pricing strategy structure for the Ea5-Ea9 subscriptions is a Multi-block price (See2.3.2.1), five subscriptions, combined with a multi-part price (own extension of Two-part price, 2.3.2.1), a start-up price, a multi-part fee or a single-part fee together with a multi-part tariff or a two-part tariff.
44 The final option has only a single variable cost per minute, a so-called single-part tariff. Though the customer has to pay a certain amount of money in advance. The structure is not a non-linear approach, but a linear. The price is strictly proportional to the quantity purchased.
To summarize, the structure of Ea’s pricing strategy is rather complex and can be called Multi-block prices (ten different subscriptions) combined with a multi-part price (a start-up price, a single-part fee or a multi-part fee and two-part or a multi-part tariff), two-part price (a single-part fee together with a multi-part tariff) or a single-part price (See 2.3.2.1.), a single- part tariff.
5.6 THIRD OPERATOR FA
5.6.1 Analysis of pricing structures
As all other studied operator Fa uses non-linear pricing. Fa offers three different subscriptions (multi-block price). All three consist of a combination of a connection charge (start-up price) a monthly fee (single-part fee), and additional marginal prices per minute. The additional marginal prices are divided into two different tariffs, one for peak-times and one for off-peak- times (two-part tariffs).
This gives that the structure of the pricing strategy can be classified as a Multi-block price combined (three subscriptions) with a multi-part price (own extension of Two-part price, 2.3.2.1), a start-up price, a single-part fee and a two-part tariff.
5.7 THIRD OPERATOR GA
5.7.1 Analysis of pricing structures
Company Ga uses a typical non-linear pricing. They offer four different subscriptions (multi- block price, extension of Two-block price, 2.3.2.1). Each of the four alternatives consists of a fixed monthly fee and additional marginal prices per minute a so-called two-part price (See 2.3.2.1). In three of the subscriptions (Ga1-Ga3) the fixed monthly fee includes a certain amount of airtime, i.e. the customer can call a certain amount of minutes a month without paying any extra, but the monthly fee. The higher the fixed monthly fee is, the larger amount of airtime is included. The three subscriptions represent three different levels of the monthly fee: High, Medium and Low. The airtime can be saved for the following months. This means that one part of the monthly fee is a fixed cost (single-part fee) and one part is a variable cost paid in advance. The variable cost do not consist of just one price, but two, one for peak-times and one for off-peak-times, which can be called a two-part tariff. In the fourth subscription (Ga4) the monthly fee is lower than the others, but does not include any airtime, which means that this fee is a fixed cost.
In addition to these costs the customer has to pay an activation or a connection charge, and a start-up price. The level of this start-up price is the same for all subscriptions.
45 To summarize the structure of Ga’s pricing strategy can be called Multi-block prices (four different subscriptions) combined with multi-part prices (one start-up price, one fixed fee and a two-part tariff).
5.8 CASE COMPANY (HC)
The analysis of this third operator will be more extensive than of the other operators, because we have done a deeper case study of this company. The difference is that we here do three different analyses, instead of one:
Analysis of bases of pricing strategy. Analysis of pricing approaches and motives. Analysis of pricing structures and motives.
5.8.1 Analysis of bases of pricing strategy
The first part of our analysis of the operator Hc consists of a closer examination of the bases of the pricing strategy.
There are several factors that influence the choice of pricing strategy, as discussed in chapter two. According to Mr I (See Appendix II) the following factors have had the largest influence on the choice of pricing strategy for Hc:
Organizational and marketing objectives. Other marketing mix variables, mainly the service itself. Customer’s demand and price sensitivity. Competition.
Of course the costs are considered, but the factors above have the largest influence.
5.8.1.1 Organizational and marketing objectives
The strategic intention and overall company objectives of Hc is to be service- and quality leader. This to reach the high-user segment. Hc want the pricing strategy to be an integrated part of the overall company strategy, a pricing strategy that is in harmony with the company’s objectives (Mr I). Therefore Hc has chosen to price their services at a higher level than the competitors, i.e. high relative price, to mark Hc’s brand position.
5.8.1.2 Other marketing mix variables
Hc strives to be innovative and develop high-quality services. They think that they have premium services in comparison to the other operators in the market (Mr I). Hc wants the customer to perceive the company as service- and quality leader. While Hc want the price to be in harmony with the overall strategy and objectives as well as in harmony with the other
46 marketing mix variables. They have chosen a pricing strategy, where the price is at a higher level than the competitors, as mentioned above, a high relative price (Mrs III).
5.8.1.3 Customer’s demand and price sensitivity
The aim of Hc is to attract customers who want more from their cellular telecommunications. They focus on the high-user segment and tries to satisfy these customers’ demands (Mr IV). For this segment service range and quality are the most crucial factors (Mr II). This segment is also rather price insensitive. This means that the price is not of great importance to the customers. When the customers are considering a purchase they are not focusing on price, other factors are more important, as mentioned above. The price is, though, not totally unimportant (Mr I). This has led to a high-passive strategy; the price is set relatively high and Hc do not use price actively in their marketing. This situation can be shown in the figure below, earlier presented in chapter two, 2.1.1.6.
Active strategy
Low relative High relative price price
Hc
Passive strategy
Figure 5.1: Hc’s position on the pricing strategic arena
47 5.8.1.4 Competition
When Hc entered the market one of the operators, Hb, had a ”everything to everyone”- strategy. The other operator had a ”low price”-strategy. Hc choose to profile itself as a ”high price, high quality” alternative. This is a typical form of Niche strategy (See 2.2.1.2). Hc choose to differentiate itself from the competitors’ prices, they set a price were they thought it existed an empty space in the market, a price vacuum.
5.8.2 Analysis of pricing approaches and motives
The above discussed strategy is a form of Skimming pricing (See 2.2.1.3), while the price is set to capture the services economic value to relatively price-insensitive customer.
Hc also uses Prestige pricing (See 2.2.1.3). The price is set at a higher level just to mark that Hc stands for high quality and premium services. They want to create an image of innovation and quality. One example of this is the price of the pre-paid card that is set at a slightly higher level than the competitor’s pre-paid option.
Another approach that is used is Customary-price strategy (See 2.2.1.3). Instead of reducing the price, Hc offer more services included in the subscription. The reason for this is that a price reduction may negatively affect the high-quality, high-price image.
Something that is also interesting to notice is that in spite of Hc’s clear focus on the high- usage segment they offer as much as eight different subscriptions option. The different forms are related to market segmentation. Hc has divided its broad segment into several smaller segments (Mr I). This approach could be called Market segmentation pricing (See 2.2.1.3). The pricing is based on the premise that different market segments have different price elasticities of demand and desire different quality levels.
All Hc’s subscriptions have two or three different price per minute depending on which time in the day the call is made. This is a typical example of Synchro-pricing or Elasticity pricing (See 2.2.1.3). The price per minute is much lower when the demand is low, e.g. in the evenings and nights and in the weekends. The price is used to smoothing demand and to take advantage of differences in price sensitivity among the customers. Earlier these different prices per minute were totally related to the capacity in the network. This could also be called short-term time customization.
5.8.3 Analysis of pricing structures and motives
As all other studied operator Hc uses non-linear pricing. The case company offer eight different price alternatives, multi-block price (own extension of Two-block price, 2.3.2.1). The motive for having several subscriptions is to take advantage of differences in price sensitivity for different market segments. Hc8 is a ”prepaid”-alternative. It has a connection charge consisting of two parts, one fixed one-time cost (start-up price) and one variable cost paid in advance. There is no monthly fee, but three different marginal prices per minute: One for peak-times, one for off-peak-time calls within Hc’s network and one for off-peak-time call to some other cellular network, fixed or cellular (multi-part tariff). The combination with a start-
48 up price and a multi-part tariff could be called a Two-part price (See 2.3.2.1), a start-up price and a multi-part tariff.
Hc1 has a combination of a monthly fee, which is a variable cost paid in advance, and two different prices per minute, one for peak-times and one for off-peak times (two-part tariff). This subscription only has a variable cost, though some of it is paid in advance. Therefore this could be called a Single-part price (See 2.3.2.1), only a two-part tariff.
Hc2 has a combination of connection charge (start-up price), a monthly variable cost paid in advance and three different marginal prices per minute: One for peak-times, one for off-peak- time calls within Hc’s network and one for off-peak-time call to some other cellular network, fixed or cellular (multi-part tariff). This subscription has a similar combination as Hc1 above, which can be called Two-part price (See 2.3.2.1), a start-up price and a multi-part tariff.
Hc3-Hc7 consist of a combination of a connection charge (start-up price) a monthly fee (single-part fee), and additional marginal prices per minute. The cost per minute is very differentiated. Hc3 has three different tariffs: One for peak-times, one for off-peak times and one for super-off-peak-times (See Appendix I for explanations), i.e. multi-part tariff. Hc4-Hc7 have as much as six different tariffs: Three peak-time tariffs (depending on how much you call), one off-peak tariff, one super-off-peak tariff and one for off-peak and super-off-peak calls made to some other cellular network, fixed or cellular (multi-part tariff). The structure for Hc3-Hc7 is called Multi-part price (a start-up price, a single-part fee and a multi-part tariff).
Hc also use a strategy were they subsidize a handset to make the customers to buy a subscription for a certain amount of time. This is a typical example of tie-in sales (See 2.3.3.1).
To summarize Hc has a Multi-block price (eight subscriptions) in combination with a single- part price (only a two-part tariff), a two-part price (a start-up price and a multi-part tariff) or a multi-part price (a start-up price, a single-part fee and a multi-part tariff).
49 6 CONCLUSIONS
Our deeper case study showed that the most important factors influencing the choice of pricing strategy are:
Organizational and marketing objectives. Other marketing mix variables, mainly the service itself. Customer’s demand and price sensitivity. Competition.
Common for all the third cellular operators is that they use non-linear pricing. They have, though, chosen different forms and structures of this non-linear pricing.
Five of the operators have a Multi-block price, i.e. they offer more than two subscriptions. One operator, Da, has a Two-block price, i.e. two subscriptions. The two remaining operators have a Single-block price, i.e. they offer only one subscription. This shows that the operator have a different view on market segmentation. Only two has, though, chosen not to segment the market at all. The other six operators have used a Market segmentation pricing. The reason for market segmentation is that the companies want to take advantage of differences in customers price sensitivity and differences in demand. The numbers of subscriptions for these operators vary from two to ten. In our focused market one operator has two subscriptions and the other two have eight or nine. This indicates that these variations seem to be caused by different views and strategic approaches, rather than on variations in market conditions in the countries.
The operators have different price combinations. Six of the eight operators uses a Multi-part price- structure in at least one of their subscriptions. This means that they have a combination of start-up price, fixed monthly fee(s) and tariff(s). Four operators have a Two-part price- structure in at least one of their subscriptions, i.e. a start-up price or fixed monthly fee(s) and tariff(s). Only two operators use a Single-part price, i.e. only tariff(s). These also use a Single-block price.
Five of the operators have the same structure for all their subscriptions. Four of these have chosen a Multi-part price (Aa, Ca, Fa and Ga) as their choice of structure. The last one has chosen a Two-part price (Ba) as its choice of structure. One operator (Da) has chosen to use two different structures, Multi-part price and Two-part price, for its different subscriptions. The remaining two operator have used all three structures, but for different subscriptions of course. Worth noticing is that no operator has chosen to use only a Single-part price- structure.
The conclusion that can be drawn from this is that most of the operators have chosen to use a rather complex pricing strategy for their subscriptions. Only two have chosen a simple pricing structure.
50 All operators, except Ba, have a Start-up price in at least one of their subscriptions. It is a fixed cost that is commonly used. The motive for this is that this can be one way to decrease churn rate, to make the customers stay within the same operator.
Common for all operators is that they have a monthly fee in most of their subscriptions. Five operators (Aa, Da, Ea, Ga and Hc) use a strategy were they include airtime in the monthly fee for at least one of their subscriptions. This means that this fee consists of two parts, one fixed cost and a variable cost paid in advance. These five also have subscription options were the monthly do not include any airtime. Three operators (Ba, Ca and Fa) have chosen to not include any airtime in any of their subscriptions. Ea and Hc have also one subscription each that does not have any monthly fee at all; this is a ”pre-paid” option. All operators have a Single-part fee, i.e. the monthly fee consist of only one fixed cost, except Ea which has four subscriptions that have a Multi-part fee, i.e. the monthly fee is divided into several parts.
A fixed monthly fee is a way to cover the fixed costs for the operators. It is also a way to get control over future income. By ”forcing” the customers to pay a fixed fee and/or a variable cost in advance the operator more easily can predict future income. The motive for including different amounts of airtime in the fee is that the operators make it difficult for the customers to compare subscriptions and operators. This is a way to change the customers’ focus away from price.
The tariff (price per minute) structure differs between the operators. All operator, though, have at least two different tariffs, except for Ca that only has one single tariff. The most common tariff structure is to have different prices for peak-times and off-peak times. Some operators also have a third tariff for super off-peak times. It is also common that the operators choose to take a slightly higher price if the call is made to another cellular network. Two operators (Aa and Ba) use different tariffs for local and national calls. This is a typical Geographical pricing. This is a way to adapt the pricing to differences in customer’s price sensitivity, but it is also a way to take into consideration differences in costs for local and national calls.
The use of different tariffs depending on when the call is made in the day is a way to smoothen out the demand, but also a way to take advantage of differences in customer price sensitivity. The price is often much higher during working hours, than during evenings and weekends. Six of the operators discriminate low-users (often private customer) by charging them a higher tariff during daytimes compared to high-users (often corporate customers). This is a typical example of Synchro-pricing (or Elasticity pricing).
Some of the operators (Aa, Da, and Ha) use a price bundling form called Tie-in sales. They subsidies the handsets to make the customers sign a subscription for a certain period of time. This strategy has mainly been used to fast increase the customer stock and hopefully capture market shares. It is, though, a very expensive way while the subsidies have been as high as US$ 500 per handset.
Our study shows that the most important Bases of pricing strategy are: Organizational and marketing objectives, other marketing mix variables, mainly the service itself, customer’s demand and price sensitivity, and competition. Our study also shows that following Pricing approaches have been used: Market segmentation pricing, geographical pricing, synchro- pricing, and tie-in sales. The Motives for these approaches are that the operators want to take advantage of differences in customers price sensitivity and differences in demand. For
51 geographical pricing the motive is also to take into consideration differences in costs for local and national calls. The motive for synchro-pricing is also to smoothen out the demand. For tie-in sales the motives is also to fast increase the customer stock and to capture market shares. The Pricing structure used among third cellular operators is a typical form of Non- linear pricing. The structure for all operators could be summarized as a Multi-block, Two- block or Single-block price combined with a Multi-part, Two-part or Single-part price. The motive for having different structures and subscription forms is to take advantage of differences in customer price sensitivity and demand.
52 LITERATURE
BOOKS
Andersson, S.: Positivism kontra Hermeneutik, 1989 Booms, B.H. & Bitner, M.J.: Marketing strategies and organization structures for service firms, in Donnelly, J & George, J.R. (eds.): Marketing of Services, Chicago: American Marketing Association, 1981 Bradley, Frank: Marketing Management: Providing, Communicating and Delivering Value, Prentice Hall, 1995 Brassington, F. & Pettitt, S.: Principles of marketing, Pitman Publishing, 1997 Bromley, D. B.: The case-study method in psychology and related disciplines, New York: Wiley, 1986 Burgess, R. G. et al.: Field research: A source book and field manual, Allen & Unwin, London, 1982 Cressman, E. G.: Snatching defeat from the jaws of victory, Marketing Management, Summer 1997 Cronbach, L. J.: Beyond the two disciplines of scientific psychology, American Psychologist, 1975; 30; p 116-127 David, W. & Cravens, Richard D.: Strategic Marketing Irwin inc, 1982 Diamontopoulos, A. & Mathews, B.: Making pricing decisions: A study of managerial practice, Chapman & Hall, Cornwall, 1995 Dibb, Sally., Simkin, Lyndon., Pride, William. M. & Ferrell, O. C.: Marketing: Concepts and strategies, 2nd European edition, Houghton Mifflin Company, Boston, 1994 Docters, G. R.: Price strategy: Time to chose your weapons, Journal of Business Strategy, September/October 1997 Donald S. Tull, Lynn R. Kahle: Marketing Management, Macmillan Publisher Company, 1990 Gabor, A.: Pricing and Practices, Heinemann Educational Books, London, 1977 Guba, E. G. & Lincoln, Y. S.: Effective evaluation, San Fransisco: Jossey-Bass, 1981 Hollis, M.: The philosophy of social science, Cambridge University Press, Cambridge, 1994 Holme, I. M. and Solvang, B. K.: Forskningsmetodik, Studentlitteratur, Lund, 1991 Honigmann, J. J.: Sampling in ethnographic fieldwork, in Burgess et al. (See Burgess, 1982) Johnson, R.: Utredningsmetodik, Högskolan Falun/Borlänge, 1992 Kenny, W. R. and Grotelueschen, A. D.: Making the case for case study, University of Illinois, 1980 Kerin, R. A. & Peterson, R. A.: Strategic marketing problems, fourth edition, Allyn and Bacon Inc., 1987 Kotler, P.: Marketing Management, Eighth edition, Prentice Hall International Inc, 1994, Merriam, S. B.: Case study research in education: A qualitative approach, Jossey-Bass Publisher, San Francisco, 1988 Montgomery, Stephen L., Profitable pricing strategy, New York, McGraw Hill, 1988 Nagle, T. T. & Holden, R. K.: Strategy and tactics of pricing, Englewood Cliffs, N.J.: Prentice Hall, 1995 Oxenfeldt, A. R.: Pricing strategies, Amacom, New York, 1975 Patton, M. Q.: Qualitative evaluation methods, Newbury Park, California: Sage, 1980 Schewe, Charles. D.: Marketing: Principles and strategies, Random House, New York, 1987
53 Simon, H. & Dolan, R.: Power pricing, The Free Press, New York, 1996 Simon, H.: Price Management, North Holland, Amsterdam, 1989 Wikström, S. et. al.: Kunskap och värde: företaget som ett kunskapsprocessande och värdeskapande system, Fritze: FA-rådet, Stockholm, 1994 Yin, R.K.: Case study research: Design and methods, Newbury Park, California: Sage publications, 1986 Zeithaml, V. A. & Bitner, M. J.: Services marketing, The McGraw-Hill Companies, New York, 1996
REPORTS
EMC Cellular Market Report, 1996 Mobile cellular communication - Pricing Strategies and competition, Organization for economic co-operation and development (OECD), 1996 Stelacon Corp., The market for telecommunications in (”Country H”) 1997 The Strategis Group, European cellulary/PCS-market: demand, distribution, and marketing trends, Part I, 1997 Financial report, for third cellular operator Hc, 1997
OTHER SOURCES
EMC World Database, 1998 The operators’ homepages, 2nd quarter 1998 Subscription information brochure, Hc, 1998 Mr I, Head of Business Development and Strategic Planning Mr II, Ericsson Radio Systems AB Mrs III, Head of market segment and business (worked with pricing strategies) Mr IV, Mobil teleleverantörerna
54 APPENDIX I
We have included as an appendix a more detailed description of the operators’ different subscriptions. The countries in Europe that have third operators are the countries A to H.
COUNTRY A
Country: Country A Operator Aa Subscription Aa1
Minimum contract length (months) n/a
Connection: 50,19 US$ Monthly fee: 43,02 US$ Minutes included in monthly fee: 100
Peak tariff (per minute) To other Local: 0,17 US$ National: 0,29 US$
To same: 0,17 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute) To other: Local: 0,14 US$ National: 0,14 US$
To same: 0,17 US$ Off-peak time: 1900-0700 weekdays + weekends
Notes: Reduced monthly fee of US$ 41,58 if paying direct debit.
55 Country: Country A Operator Aa Subscription Aa 2
Minimum contract length (months) n/a
Connection: 50,19 US$ Monthly fee: 58,79 US$ Minutes included in monthly fee: 200
Peak tariff (per minute) To other Local: 0,17 US$ National: 0,22 US$
To same: 0,17 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute) To other: Local: 0,14 US$ National: 0,14 US$
To same: 0,17 US$ Off-peak time: 1900-0700 weekdays + weekends + holidays
Notes: Reduced monthly fee of US$ 57,36 if paying direct debit.
56 Country: Country A Operator Aa Subscription Aa 3
Minimum contract length (months) n/a
Connection: 50,19 US$ Monthly fee: 26,52 US$ Minutes included in monthly fee: 30
Peak tariff (per minute) To other: Local: 0,44 US$ National: 0,44 US$
To same: 0,44 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute) To other: Local: 0,14 US$ National: 0,14 US$
To same: 0,17 US$ Off-peak time: 1900-0700 weekdays + weekends + holidays
Notes: Reduced monthly fee of US$ 25,09 if paying direct debit.
57 Country: Country A Operator Aa Subscription Aa 4
Minimum contract length (months) n/a
Connection: 50,19 US$ Monthly fee: 26,52 US$
Peak tariff (per minute) To other: Local: 0,44 US$ National: 0,44 US$
To same: 0,44 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute) To other: Local: 0,14 US$ National: 0,14 US$
To same: 0,17 US$ Off-peak time: 1900-0700 weekdays + weekends
Super off-peak tariff (per minute) To other: Local: 0 US$ National: 0,14 US$
To same: 0,17 US$ Off-peak time: 1900-0700 weekends
Notes: Reduced monthly fee of US$ 25,09 paying direct debit. Maximum 48 hours of free calls at weekends.
58 COUNTRY B
Country: Country B Operator: Bb Subscription: Ba1
Minimum contract length (months): n/a*
Connection: 0 US$ Monthly fee: 18,62 US$
Peak tariff (per minute): Local: 0,12 US$ Non local: 0,33 US$ Peak time: n/a
Off-peak tariff (per minute): Local: 0,12 US$ Non-local: 0,18 US$ Off peak time: n/a
Notes: Monthly subscription is paid on a quarterly basis.
*n/a = not available information
59 COUNTRY C
Country: Country C Operator: Ca Subscription: Ca1
Minimum contract length (months):
Connection: n/a Monthly fee: n/a
Peak tariff (per minute): 0,07 US$
Off-peak tariff (per minute): 0,07 US$
Notes: Connection and monthly fees are the same as the HTC fixed network.
COUNTRY D
Country: Country D Operator: Da Subscription: Da1
Minimum contract length (months): 12
Connection: 47,73 US$ Monthly fee: 37,50 US$ Minutes included in the monthly fee: 240
Peak tariff (per minute): 0,27 US$ Peak time: 0800-2130 + weekdays
Off-peak tariff (per minute): 0,14 US$ Off-peak time: 2130-0800 + weekdays + weekends + national holidays
Notes: Customers can change tariff up to twice a year free of charge.
60 Country: Country D Operator: Da Subscription: Da2
Minimum contract length (months): 12
Connection: 47,73 US$ Monthly fee: 23,86 US$
Peak tariff (per minute): 0,27 US$ Peak time: 0800-2130 + weekdays
Off-peak tariff (per minute): 0,14 US$ Off-peak time: 2130-0800 + weekdays + weekends + national holidays
Notes: Customers can change tariff up to twice a year free of charge.
COUNTRY E
Country: Country E Operator: Ea Subscription: Ea1
Minimum contract length (months): n/a
Connection: 0 US$ Monthly fee: 56,69 US$ Minutes included in the monthly fee: 60
Peak tariff (per minute) To other: 0,58 US$ To same: 0,29 US$ Peak time: 0700-2000 Weekdays
Off-peak tariff (per minute) To other: 0,24 US$ To same: 0,14 US$ Off-peak time: All other times
61 Country: Country E Operator Ea Subscription Ea2
Minimum contract length (months) n/a
Connection: 0 US$ Monthly fee: 78,38 US$ Minutes included in the monthly fee: 120
Peak tariff (per minute) To other: 0,56 US$ To same: 0,29 US$ Peak time: 0700-2000 Weekdays
Off-peak tariff (per minute) To other: 0,24 US$ To same: 0,14 US$ Off-peak time: All other times
Country: Country E Operator Ea Subscription Ea3
Minimum contract length (months) n/a
Connection: 0 US$
Monthly fee: 98,10 US$ Minutes included in the monthly fee: 180
Peak tariff (per minute) To other: 0,54US$ To same: 0,29US$ Peak time: 0700-2000 Weekdays
Off-peak tariff (per minute) To other: 0,24 US$ To same: 0,14 US$ Off-peak time: All other times
Country: Country E Operator Ea
62 Subscription Ea4
Minimum contract length (months) n/a Connection: 0 US$
Monthly fee: 117,82 US$ Minutes included in the monthly fee: 240
Peak tariff (per minute) To other: 0,51 US$ To same: 0,29 US$ Peak time: 0700-2000 Weekdays
Off-peak tariff (per minute) To other: 0,24 US$ To same: 0,14 US$ Off-peak time: All other times
Country: Country E Operator Ea Subscription Ea5
Minimum contract length (months) 12 Connection: 23,58 US$
Monthly fee: 10,59 US$
Peak tariff (per minute) To other: 0,79 US$ To same: 0,28 US$ Peak time: 0800-1800 Weekdays
Off-peak tariff (per minute) To other: 0,19 US$ To same: 0,14 US$ Off-peak time: All other times
Notes: Free connection for 24 months contract. Tariff option only available to students under 27 years who reside in Country E. Unitisation after minimum charge: 6 seconds.
Country: Country E Operator Ea Subscription Ea6
63 Minimum contract length (months) 12
Connection: 47,65 US$ Monthly fee: 9,60 US$
Peak tariff (per minute) To other: 0,86 US$ To same: 0,28 US$ Peak time: 0800-1800 Weekdays
Off-peak tariff (per minute) To other: 0,19 US$ To same: 0,14 US$ Off-peak time: All other times
Notes: Longer contract of 24 months has connection fee of US$ 23,58. Minimum airtime charge of US$ 4,82 a month. Minimum airtime charge: 60 seconds per call. Unitisation after minimum charge: 1 seconds. Alternative unitisation for a charge of US$ 2,40 per month: 6 seconds minimum charge and thereafter 6 seconds billing.
64 Country: Country E Operator Ea Subscription Ea7
Minimum contract length (months) 6
Connection: 47,65 US$ Monthly fee: 28,39 US$
Peak tariff (per minute) To other: 0,57 US$ To same: 0,28 US$ Peak time: 0800-1800 Weekdays
Off-peak tariff (per minute) To other: 0,24 US$ To same: 0,14 US$ Off-peak time: All other times
Notes: US$ 23,58 connection fee for 12 months contract. No connection fee for 24 months contract. Unitisation after minimum charge: 6 seconds.
65 Country: Country E Operator Ea Subscription Ea8
Minimum contract length (months) 12
Connection: 47,65 US$ Monthly fee: 28,85 US$
Peak tariff (per minute) To other: 0,43US$ To same: 0,28 US$ Peak time: 0700-2000 Weekdays
Off-peak tariff (per minute) To other: 0,28 US$ To same: 0,14 US$ Off-peak time: All other times
Notes: Connection fee for 24 months contract is US$ 23,58. Minimum airtime charge is US$ 5,53 a month. Minimum airtime charge is: 60 seconds per call thereafter 1 seconds billing. Alternative unitisation for US$ 3,0 is 6 seconds and thereafter 6 seconds billing.
66 Country: Country E Operator Ea Subscription Ea9
Minimum contract length (months) n/a
Connection: 0 US$ Monthly fee: 33,93 US$
Peak tariff (per minute): 0,54 US$ Peak time: 0800-1800 Weekdays
Off-peak tariff (per minute): 0,22 US$ Off-peak time: All other times
Country: Country E Operator Ea Subscription Ea10
Minimum contract length (months) n/a
Connection: 0 US$ Monthly fee: 0 US$
Peak tariff (per minute) To other: 0,79 US$ To same: 0,50 US$
Off-peak tariff (per minute) To other: 0,79 US$ To same: 0,50 US$
67 COUNTRY F
Country: Country F Operator Fa Subscription Fa1
Minimum contract length (months) n/a
Connection: 141,36 US$ Monthly fee: 21,20 US$
Peak tariff (per minute): 0,34 US$ Peak time: 0700-2000 weekdays
Off-peak tariff (per minute): 0,16 US$ Off-peak time: 2000-0700 weekdays + weekends
Country: Country F Operator Fa Subscription Fa2
Minimum contract length (months) n/a
Connection: 141,36 US$ Monthly fee: 9,90 US$
Peak tariff (per minute): 0,51 US$ Peak time: 0700-2000 weekdays
Off-peak tariff (per minute): 0,21US$ Off-peak time: 2000-0700 weekdays + weekends
68 Country: Country F Operator Fa Subscription Fa3
Minimum contract length (months) n/a
Connection: 141,36 US$ Monthly fee: 41 US$
Peak tariff (per minute): 0,24 US$ Peak time: 0700-2000 weekdays
Off-peak tariff (per minute): 0,14US$ Off-peak time: 2000-0700 weekdays + weekends
COUNTRY G
Country: Country G Operator: Ga Subscription: Ga1
Minimum contract length (months) n/a
Connection: 50 US$ Monthly fee: 20 US$ Minutes included in the monthly fee: 50
Peak tariff (per minute): 0,33 US$ Peak time: n/a
Off-peak tariff (per minute): 0,22US$ Off-peak time: n/a
69 Country: Country G Operator: Ga Subscription: Ga2
Minimum contract length (months) n/a
Connection: 50 US$ Monthly fee: 40 US$ Minutes included in the monthly fee: 150
Peak tariff (per minute): 0,18 US$ Peak time: n/a
Off-peak tariff (per minute): 0,15 US$ Off-peak time: n/a
Country: Country G Operator: Ga Subscription: Ga3
Minimum contract length (months) n/a
Connection: 50 US$ Monthly fee: 60 US$ Minutes included in the monthly fee: 300
Peak tariff (per minute): 0,16 US$ Peak time: n/a
Off-peak tariff (per minute): 0,14 US$ Off-peak time: n/a
Country: Country G Operator: Ga
70 Subscription: Ga4
Minimum contract length (months) n/a
Connection: 50 US$ Monthly fee: 12 US$
Peak tariff (per minute): 0,25 US$ Peak time: n/a
Off-peak tariff (per minute): 0,15 US$ Off-peak time: n/a
COUNTRY H
Country: Country H Operator Ha Subscription Ha1
Minimum contract length (months) n/a
Connection: 48,14 US$ Monthly fee: 15,50 US$
Peak tariff (per minute): 0-140 0,46 US$ 140-450 0,29 US$ 451- 0,15 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0-140 0,36 US$ 140-450 0,29 US$ 451- 0,15 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0-140 0,34 US$ 140-450 0,29 US$ 451- 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
71 Country: Country H Operator Ha Subscription Ha2
Minimum contract length (months) 6
Connection: 26 US$ Monthly fee: 26,10 US$
Peak tariff (per minute): Within the family 0,36 US$ Other calls 0,72 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): Within the family 0,13 US$ Other calls 0,26 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): Within the family 0,07 US$ Other calls 0,13 US$ Super Off-peak time: 0100-0700 weekdays + weekends
Notes: To other cellular subscribers it costs 0,72 US$ weekdays 0700-1900 and other times 0,26 US$. With no cellular phone buy: There is no monthly fee for the secondary subscribers for 24 months, but then it costs 0,13 US$ per month. With a cellular phone buy: There is a 16,32 US$ monthly fee for the secondary subscribers for 12 months, but after that it is no monthly fee.
72 Country: Country H Operator Ha Subscription Ha3
Minimum contract length (months) n/a
Connection: 64,46 US$ Monthly fee: 24,85 US$
Peak tariff (per minute): 0-140 0,46 US$ 140-450 0,29 US$ 451- 0,15 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0-140 0,36 US$ 140-450 0,29 US$ 451- 0,15 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0-140 0,34 US$ 140-450 0,29 US$ 451- 0,15 US$ Super Off-peak time: 0100-0700 weekdays + weekends
73 Country: Country H Operator Ha Subscription Ha4
Minimum contract length (months) n/a
Connection: 38,51 US$ Monthly fee: 50,26 US$
Peak tariff (per minute): 0,29 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,23US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,12 US$ Super Off-peak time: 0100-0700 weekdays + weekends
Notes: It is only 39,16 US$ of the monthly fee that the customer can use for calling costs. All of these prices on this subscription are without VAT.
Country: Country H Operator Ha Subscription Ha5
Minimum contract length (months) 12
Connection: 0 US$ Monthly fee: 3,26 US$
Tariff (per minute): 0,13 US$ Time: All the time
Notes: The minute cost is without VAT.
74 Country: Country H Operator Ha Subscription Ha6
Minimum contract length (months) n/a
Connection: 26 US$ Monthly fee: 16,32 US$
Peak tariff (per minute): 0,72 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,26 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,13 US$ Super Off-peak time: 0100-0700 weekdays + weekends
Country: Country H Operator Ha Subscription Ha7
Minimum contract length (months) 12
Connection: 0 US$ Monthly fee: 16,32 US$
Peak tariff (per minute): 0,57 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,21 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,10 US$ Super Off-peak time: 0100-0700 weekdays + weekends
Notes: The connection fee is 26 US$ when buying a cellular phone.
75 Country: Country H Operator Ha Subscription Ha8
Minimum contract length (months) n/a
Connection: 48,30 US$ Monthly fee: 6,53 US$
Peak tariff (per minute): 0,65 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,26 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,13 US$ Super Off-peak time: 0100-0700 weekdays + weekends
Notes: The cost fee from the customer to his/hers choice of special customer per minute is: Weekdays: 0700-1900 0,65 US$ 1900-2100 0,26 US$ 2100-0700 0 US$ Fri 2100 - Mon 0700: 0 US$
76 Country: Country H Operator Ha Subscription Ha9
Minimum contract length (months) n/a
Connection: 0 US$ Monthly fee: 0 US$
Peak tariff (per minute): 0,72US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,26 US$ Off-peak time: 1900-0700 weekdays
Super Off-peak tariff (per minute): 0,26 US$ Super Off-peak time: weekends
Country: Country H Operator Hb Subscription Hb1
Minimum contract length (months) 6
Connection: 32,64 US$ Monthly fee: 19,58 US$ (The customer can call for this amount)
Peak tariff (per minute): 0,78 US$ Peak time: 0800-1800 weekdays
Off-peak tariff (per minute): 0,26 US$ Off-peak time: 1800-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,26 US$ Super Off-peak time: 0100-0700 weekdays + 0700-0100 weekends
77 Country: Country H Operator Hb Subscription Hb2
Minimum contract length (months) 6
Connection: 32,64 US$ Monthly fee: 21,21 US$
Peak tariff (per minute): 0,47 US$ Peak time: 0800-1800 weekdays
Off-peak tariff (per minute): 0,33 US$ Off-peak time: 1800-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,33 US$ Super Off-peak time: 0100-0700 weekdays + 0700-0100 weekends
Country: Country H Operator Hc Subscription Hc1
Minimum contract length (months) 6
Connection: 0 US$ Monthly fee: 19,58 US$ (The customer can call for this amount)
Peak tariff (per minute): 0,78 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,26 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,26 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
78 Country: Country H Operator Hc Subscription Hc2
Minimum contract length (months) 6
Connection: 32,64 US$ Monthly fee: 23,50 US$ (The customer can call for 19,58 US$ this amount) Peak tariff (per minute): 0,78 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,15 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
Country: Country H Operator Hc Subscription Hc3
Minimum contract length (months) 6
Connection: 57,11 US$ Monthly fee: 15,50 US$
Peak tariff (per minute): 0,48 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,31US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
79 Country: Country H Operator Hc Subscription Hc4
Minimum contract length (months) 6
Connection: 57,11 US$ Monthly fee: 15,50 US$
Peak tariff (per minute): 0-299 0,37 US$ 300-499 0,35 US$ +500- 0,34 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,31 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
Country: Country H Operator Hc Subscription Hc5
Minimum contract length (months) 6
Connection: 73,43 US$ Monthly fee: 33,45 US$
Peak tariff (per minute): 0-299 0,37 US$ 300-499 0,35 US$ +500- 0,34 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,31 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
80 Country: Country H Operator Hc Subscription Hc6
Minimum contract length (months) 6
Connection: 89,75 US$ Monthly fee: 35,08 US$
Peak tariff (per minute): 0-299 0,37 US$ 300-499 0,35 US$ +500- 0,34 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,31 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
81 Country: Country H Operator Hc Subscription Hc7
Minimum contract length (months) 6
Connection: 155,03 US$ Monthly fee: 48,14 US$
Peak tariff (per minute): 0-299 0,37 US$ 300-499 0,35 US$ +500- 0,34 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): 0,31 US$ Off-peak time: 1900-0100 weekdays + 0700-0100 weekends
Super Off-peak tariff (per minute): 0,15 US$ Super Off-peak time: 0100-0700 weekdays + 0100-0700 weekends
82 Country: Country H Operator Hc Subscription Hc8
Minimum contract length (months) 6
Connection: 50,26 US$ Monthly fee: 0 US$
Peak tariff (per minute): National: 0,78 US$ Others: 0,78 US$ Peak time: 0700-1900 weekdays
Off-peak tariff (per minute): National: 0,26 US$ Others: 0,39 Off-peak time: All other time
83 APPENDIX II
Below follows summaries from the interviews we carried out during our study.
INTERVIEW WITH MR I
Mr I is head of Business Development and Strategic Planning at Hc. The strategic intention with Hc’s pricing is to be product and quality leading, not price leading. Therefore the strategic intention is that their price should be somewhat higher then the competitors, to be able to mark their brand position. Hc stands for premium products. The objectives with this pricing strategy is that customers will see Hc as an operator that, is product and quality leading. Hc believes that the customer find the company’s services and subscriptions slightly more expensive then its competitors, but that this is worth the money.
When Hc started as a cellular operator on the market Hb had already the position as the safe alternative with a market segment that covered the whole market. Ha chosen the warehouse line, a budget alternative. Hc believed that the only option was to profile itself like a quality alternative. This was a hard way to go, but at the same time a way to reach the profitable high users. By taking the most profitable customers the company gets high revenue per customer and currently they have the highest revenue per customer on the market. It was on these ideas they based their pricing strategy on.
The customers don’t choose Hcs’ products because of the price, they choose the services and subscriptions because they are innovative and have quality. The price is of course important, it has to go along with the market strategy of the company.
The peak times are originally related to the capacity on the net. By controlling the demand through the pricing strategy, the investments in the network can be limited. There are of course some commercial aspects in the choice of peak times, which depend on the company’s judgments of the customers price sensitivity. The subscription forms are of course related to the segmentation. The reason why it is seven different subscriptions isn’t anything to give pay that much attention to. There is constantly a re-segmentation and an overview of the subscription forms, as the market is changing.
84 INTERVIEW WITH MR II
Mr II is the head of the business support. He believes that Hc doesn’t have a large market segment, but the company has focused on a high profitable segment, which gives them desirable revenue per customer.
The most important factor to consider, when deciding a price is what the customer is willing to pay. The cheaper it is the longer the customers talk. The demand and the price sensitivity are different for different marketing segments, and the companies consider where their customers’ optimum in price is. Another aspect when considering a price is, if the price is of a reasonable level compared to the competitors. Both of these two factors have to be considered when setting a price, because if the price is not right it can have a negative effect. The price has to catch the companies segments’ attention. When they have decided a price it is crucial to follow up with a marketing campaign, to inform the customers.
Hb’s marketing segment is private customers and a more traditional company market. It is a tradition within the business world to choose this company’s services and subscriptions. Ha’s segment is only the private market and Hc focus on the business segment. They attract the modern companies not the traditional ones.
There is a big difference in the structures on the subscriptions of the three companies on the market. There is no right number of how many subscriptions a company should have. Hb for example have the strategy to have only a few subscription, because the want to make it easy for the customer to choose. ”Make it simple, we make the choice for you.”
INTERVIEW WITH MRS III
Mrs III works with pricing strategies and is a head of market segment and business. Mrs III believes the prices on the market will be lowered in the future. Hc are focusing on the business segment, with good quality and high technology. Price is not the main factor for the customer, because it is high.
For the customers it can be hard to choose a subscription. All operators on the cellular market has similar structures on the subscriptions for example they all have a connection fee around the same amount. There is three different operators on the market and some of the have seven or eight subscriptions. It results in a total of 21 different forms of subscriptions that the customer can choose between. And the customer wants to find the right subscription fast. This is the reason why Hb has changed their strategy. They have simplified for the customer, buy taking away all different volumes and currently they only have two different subscriptions to choose between. In the rest of Europe the development are moving the other way, with a lot of different tariffs and choices. But when Hb has discussed with these companies, they admit that it is probably the wrong way to go.
Hb is the market’s leader because of the simplicity of the structures, safety and the reliability on the operator. A lot of customers that stand in front of all these choices choose this operator because it is safe and reliable. Ha tries to have the lowest prices, but Hb would only loose on a similar strategy. The customers that have a subscription and have signed a 12-month contract may feel fooled. Price is not the final factor, but it is important with a satisfying price
85 strategy. Other important factors are the brand name and the customers feeling for the brand. Hb isn’t the cheapest choice, but they have 40% of the customers on the market. The prices and the subscriptions are becoming more alike but the different brand images differs.
Hb is going to launch their prepaid card this summer. It is six month later then their competitors. That the launching date was later than their competitors were no conscious strategy.
INTERVIEW WITH MR IV
Mr IV is a cellular industry analyst. Mr IV said that we should read a report from 1997 from Stelacon. It is a market description of the cellular market in the country H. He gave us a name, which would make it easier to get a hold of the material.
To be able to lower the price is important to reduce the costs in the operation. A clear trend is rationalizing. An operator has to pay for the invoices, with paper, invoice remainders, administration etc. A rationalization of all bills concerning telecommunication is an answer to reduce these costs. The operators want to have a sort of collection bill where all the calling costs are included, mobile costs, telephone costs, cable subscription costs etc. Another way to solve this problem is the prepaid system, because the operator receives the money in advance.
Ha’s segment is the private market, they have low prices that attract the private customer. But there is of course some smaller companies that use Ha as an operator, because it is the cheapest. Hc has focused on the business segment, a segment that calls a lot and is willing to pay a lot. This has lead to the result that Hc has the most revenue per customer on the market. Hb has chosen to try to reach to whole market, with the exception of prepaid cards. They are launching their prepaid card this summer. They want to make their prepaid card better for the customer cheaper then the competitors and with the ability to call abroad.
86 APPENDIX III
THE INTERVIEW STRUCTURE
These were the questions asked to the respondents. After each question we have written to whom the questions have been asked.
What are your strategic intentions with your pricing? Mr I What are your objectives with this pricing strategy? Mr I What is the choice of pricing strategy based on? (e.g. the competition, customer’s price sensitivity, cost etc.) Mr I How important is price as a marketing tool for your company and why? Mr I What role has price in the marketing mix? Mrs III, What factors affect your choice of your pricing strategy? (external and internal) Mrs III Is price an essential factor in the industry? Mrs III, Mr IV, Mr II Why do you have do you have the structure you have on the subscriptions? (peak times, number of subscriptions, fees etc) Mr I, Mrs III Are you a price leader on the market? Mrs III Why do you have start up fees and different tariffs? Mr I, Mrs III What segments are you focusing on? Mr I, Mrs III What do you think about Hc’s pricing strategies? Mr II, Mr IV What do you think about Hb’s pricing strategies? Mrs III, Mr IV ,Mr II What do you think about Ha’s pricing strategies? Mrs III, Mr IV ,Mr II How important is price in the strategic planning? Mr I, Mrs III How much does these factors affect the choice of pricing strategy; competition, demand and price sensitivity from the customers, product/service quality, and the company’s general objectives? Mr I
87