It is evident from Mobile Benchmarks south asia that Sri Lanka has low mobile prices, but not the lowest. Looks like the Sri Lankan operators are working on changing that.
The OECD methodology that is the basis for the mobile benchmarking by LIRNEasia treats a minute as a minute, while the proposed pricing scheme differentiates. We will start working on a solution.
The approach used by the operator makes sense within the budget telecom network business model that we are beginning to describe. It is intended to increase revenue-yielding minutes. We will adapt the methodology to fit the model.
Sri Lanka Dialog Telekom offers discounts – LANKA BUSINESS ONLINE
Sri Lank’a dominant mobile phone operator Dialog Telekom said it will offer discounts from August 1 to attract more customers.
A company statement said Dialog has launched a ‘Lifetime Discount’ programme bringing all its packages under a new tariff platform.This entitles the entire Dialog customer base – 4.5 million post-paid and pre-paid customers – a range of discount offers, it said.
The discount programme gives customers a 50 percent discount on charges for all local outgoing calls from the third minute onwards.
A 25 percent discount is offered on the second minute.
These price reductions are great for consumers, but do you think the industry can handle these low margins? Is it sustainable?
Correct me if I’m wrong, but the Sri Lankan market seems pretty much saturated for mobile communications. The same subscribers seem to be passing hands between operators.
While the price reductions are wonderful, I wonder whether levels of service and quality will fall as a result. I guess we’ll have to wait and see.
If the operators can maintain high network utilization levels, it is indeed possible to lower prices to Bangladesh, Pakistan and India levels: please see the benchmark data we have compiled. At least in BD and IN the operators are making more than decent profits while offering prices lower than in LK.
The discount scheme seems intended to increase network fill. The price reductions apply only to 2nd and 3rd minutes and longer, not the first minute. It is definitely sustainable.
this is mere a marketing trick to create a perception in the market that this paticular operator is cheap. There are very few calls which carry a duration of more than 3 min. And these oporators charge for the entire minute and not for the exact usage. if they really want to offer some benifits to the customer they should offer per second billing…
Dear Prof. Samarajiva,
Regarding Absent’s comment of whether the recent price reduction by Dialog Telekom for beyond 3(?) minutes usage is just a marketing gimmick or not. – I have heard that in certain Western countries, for the usage of telephone, Internet, transport, etc. in cases which do not cost more to provide an extended service since the “water already flows on the pipeline though it is used or not” there are cut-off prices to let the users use the service unlimited or for an extended service without paying extra once the service provider’s profit margin is covered. Is this true?
For example, Q-Tel of Qatar offers local outgoing/incoming calls totally free and subsidized it from the Q-Tel’s profits on mobile phone service and the ISP service. Q-Tel has a monopoly in Qatar. (I am talking about the 2004 here.)
I have also heard that in Canada? the bus fair for long or short distance is the same on long distance public transport. Because the bus has to reach its scheduled distance even without a single passenger. So, what they must be doing is after assessing the pattern of the passenger transport they must have calculated how much they should charge from a passenger to keep the business running. Since Canada is in the developed world people can afford to pay the same amount that costs a long distance for a short distance as well without grudging.
The logic behind is that,
1. why charge when a business entity already gets sufficient profits to run the business from its diversified businesses(Q-Tel example) and
2 why charge extra when it does not cost extra (Canada? example)
Maybe Dialog Telekom has already envisaged that their profit margins for the present and future are sufficient to be the market leader and the calculated risk they get with this price reduction will ensure their number 01 position in the mobile telephony market. In fact, this kind of approaches should have been taken by the SLT which records bigger profits (June quarter profit shot up to 168% – http://www.lbo.lk/fullstory.php?nid=1317583599 ) due to its long standing monopoly in the telecommunication market.
I expect a clarification from Prof Samarajiva, the telecom guru of Sri Lanka on my doubts (?.) If you could elaborate beyond my concerns, so much the better.
Nandasiri Wanninayaka
Marketing is a good thing; it is a way of communicating to the consumer. I would not denigrate it by calling it a gimmick.
Two key concepts are relevant for the present discussion. One is marginal cost and the other is transaction cost.
Within a certain level of investment, one can argue that the marginal cost of an additional minute of use is zero. That is, if you freeze the network (could be a bus transport network or a mobile network) in time, the cost of carrying one additional passenger or one additional minute is zero. So, one could argue that passengers should be carried for free and minutes should be given away for free. Nobel Laureate Bill Vickrey actually made this argument, so I am not being facetious.
However, recall the assumption. Investments in network industries are lumpy. You add a bus or a base station. If all the traffic is carried for free, because marginal cost is zero, then the bus and the network will fill up very quickly. Then we have to ask the cost of serving the first passenger after the bus has filled up. His marginal cost is the cost of a bus, not zero. Not very realistic, is it?
So the bottomline in network industries is that suppliers have to charge above-zero prices. But the supplier has a lot of flexibility in setting these prices. As long as they cover his costs and give him a normal return, he’s okay. This is where marketing comes in.
Now comes transaction cost. There is a cost to each transaction: sending a letter or a bill; selling a ticket in a bus, etc. I would, for example, estimate that the cost of processing a single letter in a government office is over LKR 300 now. We do not think about this much, but we should. In a competitive environment, the benefit of a transaction has to exceed the cost. So in advanced economies where labor is expensive, they tend to charge flat/zonal fees for public transport. This is to keep transaction costs and pilferage down. The mobile industry has got transaction costs down quite a bit, through electronic recharges, prepaid cards, etc.
But in all cases, you cannot ignore the effect of price on behavior. If, for example, a supplier gives free/fixed prices calls, he can expect to see a marked increase in call durations. The network will get filled up, people will start to get busy signals, and he will have to spend more money to increase capacity.
Given that the fill in Sri Lanka mobile networks is quite high to start with, this will be a foolish way to proceed. Sri Lanka Telecom tried it by giving free calls for Avurudu and all they got was complaints from people would couldn’t even make urgent calls.
Dear Prof,
Thank you for the simplfied yet detailed explanation.
Are the sri lankan mobile companies using a wrong business model by selling more minutes at a lower prices which is a visous cycle ???
Have you comeacross similar price wars in other counties and what was the ultimate position in those markets????
Nothing wrong with price wars. It’s another name for competition.
The South Asian mobile operators are world leaders. They offer the lowest prices in the world and they make returns that are enough to keep investment going. We describe this as the budget telecom network business model (analogous to the budget airline business model). They fill their networks with more revenue minutes than others and they keep their costs down.
The discounts on 2nd and 3rd minutes fits the model perfectly.
The other side of price [tariff] is cost [of production of minutes]. The question is can operators bring down costs in the same way they bring down prices. The answer is not straightforward. Taking advantage of rapid technological advances across the network is one way and that will help all players. Substituting cheaper [Chinese] equipment for the current [European] ones is another. Then on the marketing side [lowering transactions costs] use of electronic recharges etc. is already being done. Squeezing dealer margins is another that operators are now employing [ask them, they will tell you how bad things have become for them]. But how low can you go?
Sooner or later quality will be affected. Already, for example, customer service for pre-paid users has gotten much worse than for post-paid ones. Even in the case of equipment, operators could [I am only speculating] be exceeding manufacturer limitations and so on which will show up in call quality etc.
The other point is will all 4 operators [and Airtel whenever it arrives] be able to continue this price war? Will one or more operators lose the war? This will also depend on [in my opinion] how diversified [risk allocation wise] the operators are? Is mobile telephony the only business? Does the parent have other profitable businesses which can sustain a lean period for the mobile unit? How small is LK from a global/regional perspective etc. In the end, what will that mean to the direction of prices, to quality and to the consumer in general when the war ends? These are all interesting questions for which answers are not readily available.
Poor quality of service is necessary feature of budget-service models. You get what you pay for. No one expects silver dinner service on Ryan Air.
I am surprised about the cross subsidy argument made by Harsha. The budget telecom model is high-risk, but very profitable: high risk, high yield. So the peaks and valleys should be manageable within the business itself.
Can the South Asian operators become more efficient? Without question. They are located in business cultures that are not the most efficiency driven. They can improve. Can Sri Lanka offer prices that are in the same range as Bangladesh and Pakistan? Not exactly, but they can do better than India, at least.
sent a comment a while back; but don’t think it came thru.
i fully agree with the budget telecom model. no disagreement there. my point in the example was that the service quality has already dropped for most users; already plastic silverware.
in terms of sustaining profitability during a long drawn out price war, diversification and the depth of pockets will matter. not all budget airlines make it [like you say high risk] and not all telecos will either.
Dear Prof,
With the recent 50% discount by Dialig, I think the company is trying its level best to retain its existing customers rather than attracting more or new customers, as they have said in the statement released to the media. It is evident that Mobitel and Tigo have become more aggressive in the market by means of innovation and services and as a result, some may shift from Dialog to either of them.
This is my view of the whole Dialog discount story. Appreciate your comments.
Could well be. I do not think our research can any special light on whether their objective is to hold present customers or attract new ones.
As increasing government taxes prevent the further lowering of prices, it is possible that the industry will hit the plateau sooner than later. Then of course, there will be no more new customers. The priorities will have to shift to keeping the customers you have and taking the customers of the competitors.
Of course, forward looking companies will not get trapped in this zero-sum game, but will try to see how they can provide additional services such as mobile money, information services, etc. and take more of the overall budget of the customer, rather than fight over the telecom budget only.
Prof.,
Can you please explain what is meant by “revenue minutes”?
Thank you.
I said revenue-yielding minutes, I think. Means what it sounds like. Minutes that result in revenues.
What are not revenue yielding minutes? those that customers originate but do not pay for: like various free minutes offers (like in Upahara). One could argue that this is implicit in bucket pricing also. On the other hand one could say that bucket offers create incentives to use the network and that all minutes in a bucket are revenue minutes.
In a broader sense a network is capable of carrying x number of minutes 24/7. In the off peak time and in the middle of the night, y much less than x is carried. One could argue that x-y is the sum of non-revenue yielding minutes.
Prof,
Thanks a lot for your response.