Somewhere from my fuzzy recollection of economics classes, I seem to remember that as products evolved in their lifecycles, you moved from “charge what market will bear” to “variable cost pricing “ – i.e. make sure price covers your variable costs and there is some left over to cover residual fixed costs. If anything, I would have thought this would apply in spades in the telecom sector, with its significant fixed cost network capacity investments.
In the last month, I have been reminded by three instances of why the industry seems to not apply variable cost pricing
- I lost my wallet in Paris couple of weeks ago, so I had to call my card companies. All of them say “call collect” from overseas so the hotel patiently connected me to the AT&T operators (multiple times - most of the AT&T operators are too impatient to navigate the card company IVR and would hang up if they did not get a human voice to accept the toll charge - as we know a human takes a few minutes to find in most card companies). But that experience was a good reminder of the calling card charges we all loved from AT&T in the 90s. Massive charges for minutes persisted even as local stores in various markets were selling prepaid cards for a fraction, and we all steadily quit carrying the AT&T calling card in our wallets.
- I recently wrote about the GoGo wi-fly network on the New Florence blog. What was interesting to read was Aircell was leveraging its experience in airphones we had in most seatbacks in the 90s. It was also a reminder that in spite of a significant investment in infrastructure on the planes and the ground, Verizon and other carriers did not move to variable pricing. They stubbornly kept pricing at almost $ 3 a minute till most CFOs banished them from expense reports. Surely their variable cost pricing could have come down to 25 to 50c a minute. At those rates, many of us would have checked our voice mail boxes 1-2 times a flight and many would have called families for a quick goodnight call. Too simple - it was a lot easier to strip those phones off planes and take a writeoff.
- While in Europe, Pat Phalan kindly gave me a phone with his MAXroam SIM card which allowed me to stay in touch across the 5 countries I was in and make calls back to the US. My total cost was about 1/5th it would have been if I had used my AT&T mobile service (especially for the intra-European charges they expect with the add-on of a US relay element). In the meantime, every newspaper was reporting a further decline in mobile roaming rates across the Continent starting July 1. Indeed according to this article, roaming charges have fallen by an average of 73 percent in the EU since 2005. But nobody seems to have told AT&T that. I suspect they will persist with their “charge what market will bear” pricing till their roaming market share drops to nothing.
Readers – should variable cost pricing not apply in that industry?