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8/2/2019 McKinsey Telecoms. RECALL No. 01, 2007 - Pricing
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Telecommunications
Pricing
RECALL No1
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3RECALL No 1 Pricing
Welcome ... to the first issue of Recall, a new publication for
executives and board members that provides insights
into marketing and sales for the telecommunications
industry.
Our industry is changing at an unprecedented pace.
Market saturation, new technologies, regulatory pres-
sures, and the emergence of new players are just a few
of the issues among many. The way in which successful
companies currently create marketing opportunities in
this space is very different compared to just some years
ago and will again be different in the years to come.
Marketing and sales in telecommunications has never
been more exciting and challenging.
Recall aims to offer you a holistic view of the implica-
tions of these challenges and to recall how successful
companies managed to take advantage of them and,
how they have created positive recall with customers
and consumers and hence, value. Recall will cover one
marketing or sales topic at a time and is firstly published
on the McKinsey Telecommunications Extranet (to
register, see page 47). Topics will range from pricing via
branding to channel management, striving to provide
you with the latest thinking on telecommunicationsmarketing and sales.
The authors of Recall are members of McKinsey &
Companys Global Telecommunications Practice,
a group of more than 380 dedicated practitioners and
some 60 research analysts. Together with leading
academics, they aim to bring you an integrated
perspect ive on key marketing and sales topics.
We hope that you find Recall interesting and that it
provides you with unique insights and ideas that are
useful in your daily work. We look forward to your
feedback and thoughts on relevant topics you would
like to see covered in this publication.
Jrgen Meffert
European Leader of McKinseys
Telecommunications Practice
Thomas Barta
Leader of European Telecoms Branding /
ROI, Editor Recall
Pedro Mendona
Leader of McKinseys Marketing
in Telecommunications Practice
Boris Maurer
Leader of McKinseys
Telecommunications Extranet
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About This IssuePricing is the focus of this first issue of Recall. It starts
with Triple-play pricing. Like no other area, this topic
combines many industry challenges into one: fixed-
to-mobile substitution, migration towards flat rates,
the increasing commoditization of broadband, and theemergence of IPTV. If you can make it there, you can
make it anywhere see what it takes to be successful in
this arena.
The next article is Value Pricing for Profitable Growth.
Maturing mobile markets make sustaining profitable
growth an increasing challenge for operators. Pricing
creates a host of opportunities for those who know how
to work with it, as examples show.
Second Brands & Wholesale Plays: Pricing Strategies
for a Changing Market is the next topic. A multi-brand
and wholesale strategy can play a fundamental role in
protecting the profitability of main brands.
Part four explains McKinseys CHESS approach.
This approach integrates pricing conjoint analysis,
brand analysis, and product optimization in a single,
comprehensive method that provides a way to increase
a brands consumer preference share by in some
cases 50 to 60 percent or more.
The fifth part Best-Practice Multi-Play for DigitalConvergence describes a market-research-based
methodology for defining an optimal range of bundles.
Digital convergence is quickly leading to the emergence
of various telecoms and media services bundles,
creating a new space of multi-market and product
competition. Bundling is a way to differentiate offerings
via complementary services and hence, reduce price
competition.
The first issue of Recall concludes with interviews
with the CMO of T-Mobile Croatia and Telenors Head of
Mobile. Get an inside viewpoint as T-Mobiles Hendrik
Kasteel describes his companys success in defending
itself against the market entrance of a new network
operator and as Telenors Jon Erik Haug shares his
perspective on pricing strategies and future develop-
ments in markets that have a heavy MVNO influence.
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Contents01 Value Pricing for Profitable Growth 9
02 Customer-Centric Success: Triple-Play Pricing 15
03 Beyond Traditional Market Pricing: Second Brands and Wholesale Play 21
04 CHESS Moves: Creating a Complete Customer Value Proposition 29
05 Best-Practice Multi-Play for Digital Convergence 35
06 Points of View 43
Appendix
RECALL No 1 Pricing
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9RECALL No 1 Pricing
Value Pricing for Protable Growth
01Value Pricing for Profitable Growth
Europes maturing mobile markets and price-testing
regulatory environment make sustained profitable
growth a newly daunting challenge for operators,
despite their significant brand-building investments.
This value-killing shift has been an emergent reality in
Europe since early in the decade, when revenue growth
and earnings quality began to wane as markets became
saturated. Regulation-driven cuts in interconnection
rates are expected to cause up to 35 percent of the industry
profit pool to evaporate over the next two to three years.
Additionally, new regulations for mobile virtual network
operators (MVNOs) are triggering price wars in basically
all markets.
To counter this downward spiral, operators should
adopt a value-based pricing strategy, something thathas, for the most part, been overlooked thus far. The
typical marketing approach taken in the mobile industry
has consisted of combining massive brand-building
investments (with leading mobile operators emerging
as top advertisers in each market) and more recently, a
general shift towards viral marketing again,
with significant investment into CRM systems and
capability development. However, between these levers,
little attention has been given to pursuing a consistent
pricing and portfolio design, which proves crucial in
effectively extracting the corresponding premium from
such heavy brand investments and better focusing
targeted promotional campaigns (Exhibit 1).
A value-based pricing strategy involves better matching
the natural segmentation of consumers reaction to
each of the mobile price components. Such an optimized
pricing structure should allow operators to capture
their brand premium from those who are less sensitive
to price, while exploring profitable trade-offs with those
who react to specific price components rather than to
the price as a whole. A dual strategy is often required
since, while on the one hand, a large majority of mobile
customers are stil l willing to pay a brand premium or
choose a price plan based upon a particular tariff
component and on the other hand, a growing segment
in each market is becoming increasingly sensitive to
transparent, simple value propositions (Exhibit 2).
Such a strategy, which takes advantage of the innate
brand-building skills that operators have developed,
consists of two complementary elements:
1. Leverage the inherent strength of the current mainbrand McKinsey & Company research conducted
across different European markets reveals that a
significant segment of customers (i.e., 30 to 40 percent,
depending upon market) choose their mobile service
based primarily upon brand appeal. Still, others react
to specific price components rather than to the price as a
whole. Operators should work to maintain and enhance
the brand premiums captured from these customers
by differentiating pricing according to a given groups
willingness to pay, while exploring profitable trade-offs
among the price components.
2. Launch a value-focused second brand and/or open
own network to third parties Value-driven brands can
enable operators to de-complicate pricing structures
for price-driven customer groups. These new price-
focused brands allow operators to protect their premium
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Value-based pricing (and product) design should be regarded as a crucial
element to ensure marketing spend effectiveness01
brands price position, while fighting for market share
in other, more price-sensitive customer segments.
Leveraging current brand power
Europes mobile operators have worked hard to build
power brands, having increased advertising spend
over the past decade to the point where they outspend
other traditionally brand-focused industries in
many markets. The results of this spending have beenimpressive McKinseys analysis reveals that brand-
driven price premiums can represent 30 to 50 percent
of a European operators margin pool (i.e., earnings
before interest, taxes, depreciation, and amortization
EBITDA). Unfortunately, these brand-based premiums
are expected to decline by a range of between 9 to 32
percent, depending upon the country.
To protect brand value, operators can explore a range
of possible trade-offs among selected price factors. One
key task involves clearly identifying price components
that are fully visible to customers, as well as those that
are less so (Exhibit 3). The former can include plans that
leverage on-/off-net pricing dif ferentials or the intro-
duction of minimum consumption schemes. Such offers
can have a big impact on churn and market share, but
typically require a structured approach in order to fully
explore the profitability trade-offs that each plan brings
with it. Less visible components, which can often be
addressed on a stand-alone basis, could include roaming
charges or fees associated with taxation periods.
Acting upon visible price components requires an
in-depth understanding of customer key buying factors
(KBFs). For example, in segmenting a market in terms of
price-sensitive buyers versus other types of customers
(e.g., those driven by brand, network size, etc.), takinga closer look can help to clarify true customer needs.
In one case, such an analysis revealed that fewer than
10 percent of price-sensitive customers were influenced
by overall pricing schemes, but instead, were actually
interested in specific aspects of their mobile pricing
plans (e.g., on-/off-net pricing, no minimum usage
requirements, etc.). Such an analysis can help operators
to pinpoint value drivers for different customer groups
and to maintain pricing levels (and associated profits)
in areas of less interest.
Price plans must be adjusted to exploit profitable trade-
offs that occur between different price components.
For example, the pricing plans of one operator were not
focused on delivering the value that customers in
different KBF segments wanted. By realigning plans to
better address true customer needs, the operator was
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To protect their revenues, MNOs should evolve towards a dual strategy,
better matching of significant differences in consumer price sensitivity02
able to meet the real requirements of specific customer
segments and boost its ability to capture value. In a plan
targeted towards on-net, price-driven customers, the
operator discovered that by making a small decrease in
the on-net tarif f (which customers sought) it was also
able to substantially increase off-net tariffs and thus,
capture additional value.
In addition, a brand price plan should be carefully
designed to retain and extract appropriate premiumsfrom brand-driven customers, but without destroying the
portfolios consistency (Exhibit 4). Such a plan should
be guided by two basic rules. First, no aggressive
discounts should be offered in any of the key price com-
ponents, which may include pricing for SMS (Europes
dominant text messaging technology), off-peak calling,
minimum consumption requirements, and on-/off-net
plans. Second, the brand must be more competitive
than other mobile network operator (MNO) brands in
terms of at least one of these price components.
By following these and other recommendations, one
European mobile operator experienced a 33 percent
increase in SMS ARPU (average revenue per user), with
little or no churn impact. Additionally, the operator has
already moved roughly 40 percent of its consumer
customer base onto the new price plans, which are
generating an ARPU increase of 8.5 percent.
Opening up to second brands:simplicity wins!
In most cases, boosting mobile plan simplicity and
transparency levels in order to attract price-sensitive
customers without damaging the primary brand can
only be accomplished by launching an own secondbrand or opening up the network to MVNOs and SPs
(service providers).
Over the last couple of years, tens of new mobile brands
were launched in European markets. Starting this new
category of secondary brands, MNOs goals include
protecting their main brands from aggressive price
movements; addressing an important and growing
consumer segment, estimated to represent more than
20 percent of most European markets; and, in some
cases, launching a preemptive strike against the expected
proliferation of MVNOs and SPs. Three common factors
characterize the positioning of most of these second
brands, either those belonging to MNOs or others
developed by third parties:
RECALL No 1 Pricing
Value Pricing for Protable Growth
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Visible and less visible pricing factors may vary by market and require
different approaches03
Simplicity:All elements of the offer should convey ease
of use and total transparency (i.e., no footnotes or tiny
type).
Low prices: Pricing should be competitive and based
upon a single plan that essential ly offers a 20 to 30
percent discount versus comparable MNO price plans
(no hidden charges).
Effectiveness: Although focused on the main servicecomponents, customer care should be distinctive
(it works). Goals include problem resolution on first
contact, innovative features that promote simplicity and
cost control, and automatic interaction either online or
through IVR (interactive voice response).
Any of four models can be used to create a second
brand (Exhibit 5), providing MNOs with a variety of
options that can be tailored to specific needs and
market conditions.
Brand positioning should be delivered via a no frills
value proposition. Pricing, for example, should be a
single, flat-tariff plan, featuring the 20 to 30 percent
discount versus comparable main-brand price plans.
Products and services should be based upon a SIM
card only offer, complemented by a limited portfolio
of low- to medium-range handsets. Distribution plans
can include remote (e.g., the Internet) and direct
(e.g., call centers) channels, complemented by non-
traditional physical distribution channels. From the
customer franchise perspective, the new brand should be
designed to allow for smart and effective media choices.
The above-mentioned elements must be supported by a
low-cost operational model. For example, customer care
should be very eff icient, based upon Internet and IVRaccess, and augmented by a paid customer helpline.
In terms of IT and systems, highly automated and
integrated IT systems can enable end-to-end work flows
and tariff flexibility. Human resources need to be
optimized in a low fixed-cost structure featuring a single-
layer organization of 30 to 40 dedicated people. Support
services could include formal service agreements
supported by service level agreements for network access
and shared services between MNOs and new operators.
Overall governance issues include the need for the new
brand to be managed in strict alignment with the MNOs
main brand in order to prevent cannibalization.
By Pedro Mendona, Duarte Begonha, and
Ole Jrgen Vetvik
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A consistent portfolio should be composed of x+1 default price plan04
RECALL No 1 Pricing
Value Pricing for Protable Growth
Recent proliferation of asset-light mobile brands has been taking place in
Europe illustrative examples/not exhaustive05
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Across both developed and emerging markets, wireline
operators are seeing substantial developments in the
marketplace, driven by the acceleration of f ixed-to-
mobile substitution, the continual migration towards f lat
rates, an increasing commoditization of broadband, and
the emergence of IPTV. When combined, these trends are
shifting the balance in the residential consumer demand
profile, reducing the value of traditional voice, limiting
the differentiation via broadband access, raising the
importance of new service lines (such as TV), and above
all, increasing the appetite for integrated home solutions
with multiple services in bundled offerings.
For incumbents, these trends clearly represent a threat,
but also some positive aspects. On the negative side,
they result (in most cases) in the ability of attackers to
undercut their offers with dual- and triple-play bundlesof 50 percent or higher price discounts, with a substantial
impact on market share. However, and depending
upon specific market conditions these changes also
represent an opportunity to proactively accelerate fixed-
line market growth through broadband and in some
cases, access uptake.
Responding to these strategic shifts poses substantial,
unseen challenges for incumbent operators: exploding
complexity in product options and bundles; risky choices
with substantial potential for cannibalization (e.g.,
flat voice, VoIP); complex trade-offs (e.g., regulatory
concessions); the need to develop new skills in previously
untested waters, which tend to be low-margin businesses
for incumbents (e.g., TV); and most importantly, the need
to deeply understand consumer demand and preferences.
The case for developing an integratedcustomer-centric approach
To effectively address the new paradigm, incumbent
operators must follow a set of fundamental principles.
These principles call for an integrated customer-centric
approach and must guide the way in which operators
develop and price their offer structure across the full
product portfolio.
1. Product and pricing architectures that focus on
segmented customer preferences can result in both
gaining penetration/share and improving ARPU.
Customer needs are not necessarily aligned with mini-
mizing prices. Systematically, in all cases, McKinsey has
identified sizeable segments of customers that are not
driven by pure total price, but rather by specific pricecomponents or other elements of the offer. For instance,
there are typically some segments that prefer lower-price
entry TV packages and are willing to heavily consume a
la carte channels and personalized on-demand content,
resulting in higher penetration and ARPU. Others prefer
an integrated, less flexible package. In a particular
example, an optimized design of an IPTV offering yielded
75 percent higher penetration and 10 percent higher
ARPU. In another example, for a particular customer
segment, a lower monthly rental was a key buying factor
in exchange for a higher per-minute price, thus allowing
the capture of an important share of mobile-only house-
holds with limited cannibalization.
In this context, designing suboptimal offer structures
based only upon traditional intuition may yield
02 Customer-Centric Success:Triple-Play Pricing
RECALL No 1 Pricing
Customer-Centric Success: Triple-Play Pricing
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substantial loss of penetration and more importantly,
lower product margins due to increased cannibalization.
On the contrary, by leveraging carefully designed market
research, operators can understand the key buying factors
(KBFs) behind the selection of individual products
(and bundled offers) and structure an offer that is able
to address the full range of customer segments, extracting
the maximum value (ARPU and/or increased share/
penetration) from each segment (Exhibit 1).
2. There is substantial value to be gained from taking
a comprehensive portfolio approachthat goes beyond
simple discounting. Matching underlying customer
needs in a holistic manner by redesigning and optimizing
a complete set/portfolio of integrated offerings in a single
effort allows for compensating the likely cannibaliza-
tion with increased up-selling and retention (namely,
of broadband). Many operators still see bundling as a
mechanism for delivering discounts. On the contrary,
experience shows that well-designed bundles can,
by far, compensate for the reduction of ARPU in some
customer segments, with substantial gains in other
segments. The key to success lies in being able to
simultaneously understand preferences and trade-offs
for multiple offerings, determining the net impact at the
consumer level by using market research coupled with
internal consumption data (Exhibit 2).
As an example of the benefits of applying these principles,
one incumbent operator managed to carefully design a
dual- and triple-play portfolio offering that resulted in
having, in terms of ARPU, an up-selling, retention, and
win-back potential six times higher than the cannibal-
ization risk (40 to 50 percent of the customers acquiring
any of the offers). This allowed the operator to achieve
all-time record sales in broadband (multiplying by a
factor of two) and a net ARPU increase in all segments,
significantly contributing to total revenue growth.The key to the design of the offer was to develop a structure
that was attractive to the segment at risk of churning,
while at the same time, providing significant up-
selling potential to a large share of the segment at risk
of cannibalization.
3. A consumer-integrated perspective should be taken
into consideration, even when designing product/pricing
architectures for individual products. A larger and
increasing share of consumers make their consumption
decisions in a comprehensive total spending manner.
Hence, when redesigning indiv idual products (e.g.,
ADSL structures), companies need to consider a full-
spending perspective on the consumer (Exhibit 3). In
fact, very often, new products derive more value from
the side effects of other products than from their own
self-standing business case (e.g., there has been a beneficial
Principle 1 design integrated offers that match the KBFs in the market01
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effect of IPTV on increased broadband uptake). Also, ade-
quate bundling can minimize cannibalization within a
specific product (e.g., bundling of f lat voice with DSL).
All of these are ef fects that can only be accounted for
if tackled from an integrated consumer perspective.
In one particular case, the optimized design of an
IPTV offer al lowed for a significant impact on ADSL
cross-selling, which added nearly 35 percent more
higher-margin ARPU to the initial business case. Theseprinciples will be critical for incumbent operators in
addressing individual and bundling product development
decisions in an effective manner:
In voice, flat-rate pricing requires a holistic approach.
In order to develop an aggressive offer that adds
significant value, operators need to move away from
launching offers on a product-by-product basis towards
the design of a full offer structure that covers the needs
of all segments from infrequent users (that for the
most part, will not buy flats) to more frequent users
(that will require premium voice offers to avoid the
reduction in ARPU from the unlimited f lat), e.g., the
new voice offer from Telecom Italia.
In broadband, offer structuring will become more
sophisticated.To further stimulate growth, operators
will have to explore the remaining opportunities in
order to adjust the existing offers (driven by speed and
price structure) to better match the existing structure
of customer needs. At the same time, they will need to
develop bundled offers with content and value-added
services, contributing to differentiation and unlocking
new broadband segments that are currently dormant
(e.g., the Comcast approach).
In IPTV, maximum value extraction for telcos requireseffective matching of consumers underlying needs.
Although new in the pay-TV markets, telcos must leverage
a higher degree of offer f lexibility than established
competitors (e.g., mini-basic entry packs or a la carte
channels, such as the PCCW offer). Telcos must also
provide a higher degree of interactivity (e.g., personal/
shift TV) with new creative pricing structures (e.g.,
flat rates for on-demand catalog movies, bundles of
channels with PPV/on-demand content). For optimum
design of their IPT V offer, operators need to use a
systematic approach based upon a deep understanding
of consumers underlying preferences.
Dual- and triple-play bundling requires sophisticated
pricing. As markets evolve into integrated home solutions,
operators will face the diff icult choice of pricing their
bundles to compete with aggressive attacker offerings,
Principle 2 focus bundling not on discounts but on up-selling02
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Customer-Centric Success: Triple-Play Pricing
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Principle 3 take an integrated perspective even when designing
individual products03
while avoiding the risk of cannibalization. To avoid this
deadlock, operators need a new way of thinking about
bundles, based upon launching all new bundled products
not necessarily developing individual products that
are then bundled at a discount, but rather thinking
about full offerings from the start (e.g., Fastweb triple-play
entry offer) that truly promote up-selling and retention.
Shifting from product-oriented to customer-centric
pricing will be a key differentiating element betweenbest and worst performers in the sector, particularly as
the market gets more competitive and complex. Players
that manage to develop the necessary capabilities and
processes will be able to sustain a higher premium and
take advantage of opportunities and threats that lie ahead.
The proposed customer-centric approach
While the challenges may be very specif ic, the approach
that operators should follow in order to develop their
offer structure is very similar. This approach can be set
up in two phases (Exhibit 4).
The first phase is based upon sophisticated consumer
market research, conjoint analysis, and will lead to the
identification and design of the ideal offer structure.
This would allow for the development of an integrated
(consumer- and competitor-based) market tool that
can be used for both tactical as well as for more strategic
pricing and product development.
Operators will be able to thoroughly understand consumer
preferences and potential decisions in each competitive
scenario. In fact, the approach includes the development
of an optimized product and pricing market segmentation
based upon key buying factors, which is instrumental for
the purpose of offer design and allows for the structuringof the full tr iple-play offer or specific components of it.
The model will simulate the likely customer adoption rates
given different price points and competitor reactions,
and will support the development of migration paths from
the current situation.
This first phase is required for in the complex design of
new products (i.e., identify ing what to offer), but could
be avoided if a clear idea of a desired offer structure
already exists.
The second phase will simulate up-selling, down-
selling, retention, etc., based upon a usage-oriented
segmentation and identif ied consumer preferences
in order to refine pricing and optimal structure of the
offer. Consumer preferences can be performed with the
conjoint simulator (if Phase 1 were conducted) or with
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Product and pricing approach based on an end-to-end customer-centric
integrated methodology04
simplified price-testing research. This phase, which
will be required in all cases, wil l result in the offer road
map, including key implications of implementation and
net impact on overall economics.
This overall approach would also allow for understanding
the impact of multiple critical decisions that take place
during product development, including technical,
operational, regulatory, and even those related to media
content acquisition, which are absolutely key to successfulnet value creation.
Wireline operators are facing new unforeseen challenges
in the marketplace, which will require a much more
sophisticated approach to product portfolio and pricing
design. Recent examples demonstrate that, by adopting a
systematic methodology to understand customer needs
and match the offer structure to satisfy these needs,
operators can extract substantial benefits (in volume
and/or ARPU) and significantly improve their competitive
positioning.
By Armando Cabral and Pedro Mendona
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Can mobile operators develop a successful multi-brand
strategy? Many apparently think so, judging by the
exploding number of virtual players entering the market.
In fact, over the past five years, players launched nearly 300
mobile brands worldwide (two-thirds of them in Europe),
significantly changing the traditional three-to-four-player
competitive market landscape in many countries.
Within the f lood of new offerings, most mobile virtual
network operators (MVNOs) and mobile network
operators (MNOs) second and sometimes even third
brands seem quite similar, as they typically feature asset
light low-cost operational structures that are 20 to 50
percent below those of MNO primary brands. However,
upon closer examination, significant differences emerge.
These new operators tend to assume different businessmodels, depending upon whether they possess their own
network code, interconnection agreements, customer
relationship management programs, or pricing schemes.
The different players align as follows:
MVNOs tend to control all four of the above elements,
thus ensuring full separation from the MNO.
ESPs (enhanced service providers) lack network code
(and may or may not have interconnection agreements).
MNO second brands are generally similar to ESPs,
but are MNO owned.
Brand partnerships (between an MNO and retailers)
feature separate pricing plans.
SPs (service providers)act as pure resellers of MNO
tariff plans.
Furthermore, the positioning of MVNOs and second
brands tend to vary across regions, since the competitive
challenges faced by players are significantly different
(Exhibit 1):
In Europe,where national regulatory agencies strive
to enforce the creation of wholesale offers in mature
markets with excess-installed capacity, MNOs must
decide whether to open their networks to MVNOs and/
or launch their own second brands. In either case, such
brands can address a growing market segment that
is sensitive to low prices and transparency (i.e., no
frills), but less demanding in terms of service or the
need for interaction.
In the United States, where there still remain important
penetration pockets, MNOs aggressively attempt to
gain market share through the development of wholesale
offers that allow different MVNOs to target and penetrate
specif ic sizeable groups, such as the youth and Hispanic
segments, as well as develop premium-based offerings.
In developing markets, where the most profitable
segments have already been skimmed, MNOs have
been launching second brands in order to prof itably
penetrate low-income customer segments. Focused on
affordable positioning (e.g., low consumption, low
denomination vouchers, inexpensive intra-group/zone
prices, and basic handsets), emerging operators seek to
ensure differentiation in terms of brand, product/
03 Beyond Traditional Market Pricing:Second Brands and Wholesale Play
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service, and channels to avoid cannibalization of the
existing customer base.
How MNOs can address the multi-brand issue
Clearly, questions surrounding MVNOs and second
brands will continue to make their way to the top of the
mobile CEOs agenda either as major opportunities to
conquer additional market share (i.e., attracting new
customers via a differentiated positioning) or to preemptthird-party competitive moves driven by regulatory action.
Because the premature launch of a second brand or
aggressive pursuit of a wholesale strategy can jeopardize
the profitability of the current and potential new
customers, MNOs should consider two central dimensions
in order to determine the best time to act. First, they
need to evaluate their prospects for profitable growth in
terms of EBITDA, which hinge largely on market
competitiveness. Second, MNOs must assess the inherent
risk of these initiatives starting a price war, which
depends upon both the potential for price reductions
(measured by comparing the lowest flat fee versus
interconnection rate) and other specific market conditions,
including perceived price elasticity, current brand
positioning of different players, and current existence
of other MVNOs or second brands (Exhibit 2). Overall,
MNOs should develop a multi-brand strategy only when
it either presents a limited risk of triggering (or fueling)
a price war (having a negative impact on the current client
base) or when the actual market context indicates poor
future profitable growth prospects. However, if the high
risk of a price war exists and there are still interesting
growth prospects in the market, MNOs should maintain
a wait and see posture and evaluate trade-offs in cases
in which at least one of these elements may jeopardize
MNOs future performance. If the case for action isclear, MNOs need to decide between launching a second
brand or pursuing a leading wholesale market strategy,
taking into account their actual market position, the
strength of existing no frills players already operating in
the market, and the level of regulatory pressure focused
on opening up networks.
A critical aspect of this decision centers on the MNOs
current market position. Market leaders are able to offer
lower flat tariffs (due to a relatively higher portion of
on-net minutes at marginal costs), thus they typically
should pursue a second brand strategy instead of the
less attractive option of selling wholesale minutes to
MVNOs. Conversely, a mobile attacker will likely develop
a wholesale strategy because of its ability to offer lower
wholesale prices without the fear of cannibalizing its
(relatively smaller) customer base (Exhibit 3).
MVNOs/second brands dominant purpose and positioning have been
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The prevalence or lack of no fri lls operations in the
market should also influence MNO strategies.
Experience shows that a first mover in this category
clearly benefits from a winner takes all dynamic,
easily capturing a 10 percent overall market share,
which usually equates to a 50 to 60 percent share of the
no fril ls category. If no/a few strong no fril ls
competitors currently exist, launching a second brand
may seem like an obvious move. However, if many
planning-stage MVNO candidates may soon emerge,using a wholesale strategy to lock in potential winners
without losing control of prices or customers may
constitute a better approach. Finally, regulatory pressure
to accommodate MVNOs also drives MNO strategies
towards wholesale, since launching a second brand
while negotiating with MVNO candidates can reduce an
operators degrees of freedom and drive down wholesale
prices. As an alternative to launching a second brand
or opening its network to a wholesale play, MNOs can
consider collaborating with strong customer franchisees
or distributor networks in order to leverage their retail
brands, while maintaining some degree of control over
potential competitors. Partnership models can be
structured like second brands (e.g., simple brand-
licensing agreements) or like real MVNO wholesale
deals (e.g., selling large minute bundles to a jointly owned
new MVNO).
Typical positioning of a second brandin Europe
European operators position most second brands (e.g.,
Uzo, YESSS!, M-Budget, Tchibo, simyo) based upon
three fundamental factors simplicity, low prices, and
effectiveness. These factors differentiate virtual operators
from both the complexity inherent in main brand pricing
schemes and the need for massive communication of
low penetration services. Such positioning targets agrowing segment that according to extensive market
research in various European countries and five years
experience in Scandinavian countries can represent
from 20 to 25 percent of all current users, making it
much larger than any other market niche built upon
sociodemographic factors (Exhibit 4).
A no-frills value proposition relies upon four key
attributes. First, most no-frills players focus on a SIM
card only offer, complemented by a limited portfolio
of low- to medium-range handsets and a very simple
and reduced range of services. Second, from a pricing
standpoint, they offer single plans with f lat tariffs and
no minimum consumption obligations at a discount of
approximately 50 percent compared to similar plans
from main brands. Third, no-frills operations usually
offer a combination of remote and direct channels (e.g.,
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the Internet and call centers), complemented by non-
traditional physical distribution channels at half the
cost of telecoms retailers (e.g., post office branches,
kiosks). Fourth, no-fril ls players brand design and
positioning typically favor innovative and cost-efficient
marketing campaigns focused on younger customer
segments, but with universal reach.
In order to be able to systematically offer low prices,
MVNOs and second brands rely upon low-cost operationalmodels. The key elements of these low-cost models
include efficient Internet and IVR (interactive voice
response) customer care, complemented by a paid customer
helpline, and highly automated and integrated IT sys-
tems that enable end-to-end work flows and billing/cus-
tomer care f lexibilit y. Other features include a reduced
fixed-cost structure with a single-layer organization of
about 30 to 40 dedicated people and the outsourcing of
all shared services (e.g., accounting, human resources)
supported with pre-negotiated service level agreements
(SLAs) with the MNOs.
Best practice in designing a winning mobilewholesale strategy
When pursuing a leading wholesale market strategy,
MNOs must simultaneously take into account the effect
that wholesale will have on the operators market share
and ARPM (average revenue per minute). In this context,
designing a winning wholesale strategy requires the
answers to three fundamental questions:
What wholesale pricing conditions should operators
push for? While the maximum wholesale price per tran-
sit for MVNO breakeven typically runs at about half the
interconnection level, MNOs must avoid very low whole-
sale tariffs, since they will lead to MNO retail price cutsand thus, destroy value across the industry.
Therefore, MNOs should attempt to maintain as
much control as possible over wholesale pricing and
avoid indexing them to interconnection rates (that are
doomed to be cut in the future). Furthermore, leading
MNOs should resist engaging in wholesale price wars
in order to retain a fair market share, since in most
situations they are economically better off with a lower
wholesale market share than with lower retail prices
(induced by the wholesale price war).
Which services should be provided? Restricting an
MVNO to a basic offer limits its ability to compete in
high-end customer segments. However, enabling a
wholesale offer of data connectivity and content can
drive upscale MVNO business models focused on value-
added services that prevent pure voice price competition.
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Which partners should be engaged? Selecting wholesale
partners forces MNOs to make important trade-offs
between locking in potential winners in order to gain
share in the wholesale business and minimizing the
negative effects on retail prices by, for example, filling
the market space with non-voice-focused business
models.
To clear these significant hurdles while creating a
wholesale business model, MNOs should follow threebasic principles. They should establish a retail minus
wholesale pricing scheme that ensures better control
over the wholesale price and avoids setting prices that
are oriented to cost. Next, they should offer a stan-
dard closed list of services and maintain the ability to
negotiate ad hoc services according to the profile and
objectives of each MVNO. Finally, MNOs should provide
a balanced offer for different types of virtual operators
(such as pure MVNOs, enhanced service providers, and
pure service providers). At the same time, they need to
ensure a pricing scheme that allows for appropriate
profitability to different types of MVNOs one that
doesnt feature conditions that can be used by the NRA
(national regulatory authority) to impose special
benefits to pure MVNOs under the non-discrimination
principle umbrella.
Adjusting the organization to a multi-brandreality
As MNOs evolve into more customer-centric organizations,
selecting the right organizational framing for second
brands and/or wholesale businesses can help ensure the
appropriate coordination and development of value-
creating solutions going forward. To manage a second
brand, early evidence suggests that the most appropriate
framing is to position the new brand as an independentconsumer unit within the MNO organizational structure,
ensuring coordination through a unified command
(e.g., both reporting to the same COO). This model
fosters the independent and flexible development of a
second brand, enables accountability, and ensures basic
coordination between the main and second brands,
while preventing regulatory action. In short, an MNOs
second brand should be seen by consumers as a new
operator, by other departments in the MNO structure
as an autonomous but articulated marketing unit, and
by NRAs as just another tariff plan (Exhibit 5). MNOs
should avoid organizational solutions that either make
the second brand little more than a simple tariff plan
within the MNO consumer market division or create a
full-fledged independent operation with transfer prices
for network usage.
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To manage the wholesale business, MNOs should adopt
different organizational models depending upon the
nature of the contract and the relationship established
with the virtual operator (Exhibit 6):
Pure service providers should be managed by the MNOs
consumer business unit, which simplifies the close
articulation required between retail and wholesale, and
facilitates the contracting process.
Pure MVNOs should be managed by the interconnection
area or by the area that manages the MNOs business
with other operators. This makes for a less complicated
interface with the other areas, such as network and IT,
and increases transparency for the regulator and
contracting entities.
All enhanced service providers are best managed by
an independent business unit. This unit assumes
responsibility for the overall development and management
of the no-fri lls and other niche segments (including
potential MNO second brands).
Actual experience across markets shows that, in most
cases, few MNOs strictly follow these rules. Some attackers
opened wholesale access too early, jeopardizing
profitable growth. Market leaders often chose to open
their networks to third parties rather than launching
second brands. Several operators have launched their
second brands with no clear dif ferentiating positioning
or, even worse, as simple price plans. Given these missteps,
the mobile brand explosion under way legitimatelygenerates mixed feelings. However, McKinsey & Company
believes that when appropriately managed and positioned,
the multi-brand strategy can play a fundamental role in
protecting the profitability of main brands by addressing
the needs of a growing price-sensitive segment in all
markets and avoiding the quick commoditization of
mobile offers.
By Duarte Begonha, Pedro Mendona, and
Hugo Espirito Santo
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Believe it or not, the maelstrom that appears poised to
consume much of the telecoms industry isnt unique.
In fact, many consumer and industrial sectors face the
seemingly endless proliferation of products, serv ices,
channels, segments, and media. The only constant that
most of these industries share is the tirelessly searching
consumers, who are actively trading up or down to capture
the best deals on the best products and services at the
best prices.
These maturing industries face the paradox of sinking
prices and rising customer acquisition costs. In the
telecoms industry, for example, prices dropped by 6 to
16 percent in Europe and the United States from 2003
to 2005, while the costs to acquire a new customer rose
significantly in some markets by nearly 60 percent.
In such an environment, firms seeking to surprise and
delight customers confront the need to provide the best
(and most profitable) value proposition in terms of
product/service, price, and other benefits. Due to attendant
complexities, most telcos trying to deliver on this promise
tend to manage things along a single dimension, focusing
entirely on the product (e.g., prepaid, data, voice), the
price, or the emotional benefit being offered (e.g., fun,
functional, etc.). Instead, McKinsey & Company research
shows that two or more dimensions must really be pursued
in order to deeply understand a category. Further
complicating things, two key dimensions benefits and
price usually dont correlate very well with each other.
Staying on top of so many issues can challenge even the
savviest marketers.
Rather than following conventional approaches,
McKinsey has developed a way in which to understand
a category and define the best product/service, price,
and value proposition all in a single pass. The CHESS
approach integrates pricing conjoint analysis, brand
analysis, and product optimization in one comprehensive
method that provides a way to increase a brands consumer
preference share (i.e., the percentage of customers
preferring a given brands products or services) by, in
some cases, 50 to 60 percent or more.
CHESS enables marketers to see a category through the
customers eyes and identify the right segments. With
it, marketers can locate the ideal (and most financially
attract ive) product and price by segment, understand
which benefits to communicate, and finally, simulate
the impact. There are three primary CHESS piecesthat together can provide an unassailable marketing
strategy (Exhibit 1):
Pricing conjoint analysis determines which product
attributes customers prefer. The representative customer
taking the conjoint survey must choose one product out
of several with different attributes, and the process is
repeated multiple times to determine the persons (i.e.,
segments) product preferences.
BrandMatics is a quantitative analysis that assesses
customer behavior and attitudes towards brands. It
enables marketers to precisely define real consumer
needs using a derived needs analysis technique.
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The Product Optimizer allows marketers to quantify
how many customers would choose a given product.
Through multiple simulations, the optimal product
configurations can be determined, and the calibration
of the optimizer al lows teams to convert preference
shares into gross adds shares (i.e., the proportion of
subscriber additions that an operator can expect from a
given product/service offering).
Opening gambit: pricing conjoint analysis
Consumers often perform a sophisticated calculus when
shopping for products and services, trading off tangible
and intangible benefits against prices within an array of
possible choices, until they narrow down the selection
to a single product and buy it. Pricing conjoint analysis
replicates this highly efficient process by surveying
representative test consumers, who are forced to make
a series of trade-off decisions among various products
at different price points. A three-step process is used:
establish basic factors, create preference clusters, and
fill in relevant details.
Establish basic factors: This first critical step defines
the possible key buying factors that will be tested via
the conjoint analysis. Attributes considered by a mobile
operator, for example, might include the brand, the
handset, bundles of minutes, or voice prices. From among
these attributes, different product/price packages are
then assembled and shown to the survey respondents,
who must choose a favorite bundle from a group of
perhaps three bundles in a 30-minute conjoint survey.
Create preference clusters: Once the basic factors are
established, distinct customer preference clusters can be
identified, based upon the relative weight of purchasing
factors. For mobile operators, first-cut purchasing factorsmay be the brand and the price, with subsequent cuts
refining these factors further (e.g., price may be broken
down into those seeking the lowest possible price per
minute and others seeking the lowest monthly recurring
costs). In terms of process based upon results of the
conjoint survey utility profiles are generated for each
respondent and individual profiles are grouped into
logical clusters. The right number of clusters is achieved
when each is distinct and can be described in a unique
way. Typically, a mobile market has from four to seven
clusters each for pre- and postpaid segments.
Fill in relevant details: Additional research data will
help marketers to gain a deeper understanding of the
initial conjoint clusters. Examples of such data might
include customer commitment levels, sociodemographic
insights, or brand market shares. Ultimately, the conjoint
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process results in the creation of the basic CHESS
board, which identifies customer segments by size.
The CHESS board can also be overlaid with an operators
own market share per cluster (Exhibit 2). From this data,
its possible to establish where the company is leaving
money on the board because it has low market shares
in attractive customer segments.
Middle game: BrandMatics
Brands can be powerful marketing tools that help
companies elevate their ability to capture value or
anchors that drag down competitive products and
services. To better understand these enigmatic assets,
McKinseys proprietary BrandMatics approach
helps marketers identify customer preferences that
extend beyond the product to the brand itself. The
BrandMatics approach typically includes three steps:
the completion of the BrandMatics survey, identification
of the brand drivers for each customer cluster, and the
development of product positioning by cluster.
The BrandMatics survey is used to compile the relevant
set of brand drivers. The survey itself should be part
of the conjoint analysis survey discussed above. To be
effective, the survey must address all four dimensions
of the brand, which comprise:
Emotional benefits,which can include how the brand
interacts with the ways in which respondents view them-
selves (e.g., this brand makes me feel special, connects me
to friends and family, allows me not to worry, etc.)
Rational benefits can include product or functional
attributes (e.g., the handset has a good keypad, a llows
for connection every where, etc.), or values that are
related to the process or relationship that surrounds the
branded product.
Emotional attributes consist of the aura surrounding
the brand (e.g., has a good reputation, is an innovative
company, etc.)
Tangible attributes might include elements of things
that the company does, such as good design, many product
promotions, or offering a helpful Web site.
Attributes and values representing all four of the above
dimensions should be included in the quantitative
BrandMatics survey in order to ensure the holistic
coverage of all relevant brand drivers.
To determine the brand drivers for each customer cluster,
marketers must assess the relative importance of the
drivers in reaching specific customer segments and
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With the advent of convergence, many players in the
telecommunications and media industries are quickly
marketing a set of multi-play offerings in a combination
of products and serv ices, including the Internet (broad-
band), television services (mostly digital), and telephony
(moving to VoIP and wireless).
Todays examples are many from the early VoIP and
digital service bundles from Cox in the United States,
to the multi-play services of Free in France via its Free
box, to the quadruple-play offering being put into place
by NTL-Telewest-Virgin in the United Kingdom. In fact,
given the current number of bundle launches, not offering
them is more the exception than the rule in the digital
convergence services industry.
There have been various business reports showing thestrategic relevance of bundling for the convergence
industry. Likewise, many economists (e.g., Economides,
1993; Bakos and Brynjolfsson, 1999; Stremersch and
Tellis, 2002; Whinston, 1990) have looked at the effects
bundling might have in terms of competition dynamics
especially those motivated by a) the need to define the
underlying variables determining optimal bundling and
b) the need to determine how those factors could lead
to anti-competit ive behavior, which would need to be
closely monitored via antitrust regulation.
From a static economic perspective, bundling can be
seen as a way to differentiate offerings via complementary
services and hence, elude price competit ion. However,
today, the most used bundling strategies in digital
convergence have instead been very competitive, i.e.,
large discounts to motivate quick uptake.
These aggressive, possibly pro-competitive strategies
can, however, have large perverse ef fects if the customers
signing up are only motivated by price discounts, thus
leading to persistent lower margins for the industrys
marginal suppliers of digital services. This, in itself,
compensates by delivering poorly correlated services to
those bundled customers.
There are ways to believe that the best answer is the
middle to gain a welfare perspective with suff icient
room left for profitably offering bundling in order to
achieve quicker new product intake. This article aims
to demonstrate how convergence services players can
leverage the demand functions of tr iple-play services
to create versioning strategies and deliver the best
offering of service bundles and prices in the context of
acquisition. The methodology is based on systematicmarket research and a conjoint analysis. We will explain
the methods and results applied to a set of disguised
European convergence clients, outline the dif ferent
types of optimal bundles and compare them to current
practices, and finally, we will describe the managerial
and strategic implications of the approach.
A research-based approach to optimal bundling
Before explaining the approach in detail, it is important
to understand three underlying principles to be considered
when designing optimal bundling strategies.
The first principle deals with matching the natural
structure of consumer preferences. Beyond the different
weighting consumers place on key buying factors (KBFs)
for each service, there are also differences in the way
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Understanding the natural structure of potentialdemand
At a preliminary stage, a comprehensive piece of market
research should be designed and executed in order to
assess the natural structure of consumer preferences.
With a non-proportional sample that should be structured to
include a minimum number of interviewees with different
consumption patterns (from non-users of each service tosubscribers with different providers), a multi-step adaptive
conjoint analysis is typically required to encompass all the
relevant factors that emulate consumers choices among
alternate suppliers, key service characteristics, and
possible struct ures of the offers (packages) at different
price points. The results of this research will show the
relative importance of key buying factors (e.g., supplier,
standard of the different services, and price) and the
utility of the a lternative attributes within each factor
(e.g., utility of each brand/supplier; of different levels in
each service; and utility of each price level).
Based on these results (the relative importance of
KBFs and the specif ic utility of each attribute), a non-
hierarchical clustering of the sample will provide the
natural market segmentation in terms of what different
consumers look for (Exhibit 2):
At an integrated level 2-play (2P), 3-play (3P), or 4-play
(4P) this will allow for understanding the natural
clustering of consumer reactions to bundled offers
of different services provided by dif ferent suppliers.
As mentioned, beyond the natural brand versus price
trade-offs, consumers also differ in the relative
importance they place upon each service attr ibute.
At a specific product/service level (e.g., TV service), that
same exercise will help identify the natural clusters ofpeople in terms of the relative value of dif ferent service
components. In the case of TV services, for example, we
typically f ind a natural segment of people that equally
value multiple types of content and the diversity of
channels (natural candidates for a basic TV package)
and others who are fundamentally focused on specific
channels and content genres (natural candidates for
vertical packages and/or premium channels).
Overall, the natural segmentation of preferences should
reflect the ultimate drivers of choice in the marketplace.
For some people, a specific provider may have a natural
advantage with an integrated offer; for others, price
discount wil l be the driver in penetration of 2P or 3P
standard solutions. For specific groups, access to
some type of kil ler content or service can be used as a
fundamental lever to foster integrated offers.
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The opportunity to address and serve these natural
segments as such wil l, however, depend on:
Their willingness to pay according to their relative
preferences.In many cases, the greater preference and
importance placed upon a certain element of the offer
by a specific group of people is not enough to make it
exclusive to that segment. This is either because such a
segment is not big enough or because it is not willing to pay
a sufficient premium over the value that the averageconsumer places on the given item. Therefore, deriving
the ideal offer to match the natural structure of demand
requires the analytical assessment of service components
value for a target segment and for the total market.
The degree to which the structure and design of existing
competitive offers already match (or dont match) those
preferences.Operators have the fundamental option
to go head-to-head with existing players or to look for
an alternative and complementary positioning of the
offer. Market simulation can be built upon the research
results, allowing for an estimate of potential reach
(penetration and market share) and profitability of
alternative configurations and price positioning of
the operators own offer vis--vis competitors current
offering and possible reaction.
The dynamic effects, in terms of up-selling, competitive
churn, and margin cannibalization, of launching new
single and packaged offers in the marketplace. Rather
than greenf ield developments, most cases are about
complementing and partia lly replacing the existing
offer, with natural concerns over expected migration of
own customers and competitive reaction. Market
simulation should also be used to define the migration
path from the current offer to the new offer.
With the described systematic approach, convergence
services players can leverage the demand functions of
triple-play services to deliver the best offering of service
bundles and prices in order to maximize the value captured.
Overview of optimal bundles and current practices
As previously mentioned, significant differences have
been identified regarding the nature and size of customer
segments across different markets. These differences
are fundamentally explained by the specific competitive
structure and existing offers in each market, reflecting
consumers experience and influencing the dominant
patterns of consumer reaction. For example, in a market
with only two strong players, the brand lovers segment
will be much larger than in a market with a strong
proliferation of discount players.
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Of the many different types of markets, one could
generally describe three typical ones (Exhibit 3): (1)
markets with a strong telecoms incumbent presence
and a strong media player (e.g., Portugal and Belgium),
(2) markets with strong competition in the telecoms
field, but one dominant media player (e.g., the UK), and
(3) markets with very strong competition from both the
telecoms and media fields (e.g., France).
Markets with a strong telecoms incumbent presenceand a strong media player. These markets are generally
character ized by strong brands competing in a duopoly
and a polarization of customers with interest in dif ferent
premium products. For example, in Flanders, both
Telenet and Belgacom have a strong brand with different
attributes, and both players could develop a portfolio
strategy to extract the most value out of the market.
Markets with strong competition in the telecoms field,
but one media giant. In markets such as the UK, there
is generally a customer preference for specific products
in the media and telecoms arenas (e.g., Sky won against
cable 3P; BT has survived without its mobile arm) and,
in the other extreme, preferences for telecoms bundles
are essentially based on good price offers (e.g., basically,
all players in the UK have added 3P and 4P discounted
offers to their portfolios). This represents both an
opportunity and a challenge to capture 3P and 4P
customers and, at the same time, sustain product
differentiation.
Markets with strong competition in both the telecoms
and media fields. France is an example of a market that
has generated large discount driven segments based
on the development of highly competit ive offers that
have forced all players to lower prices.
To illustrate this approach, the following example
describes a specific market with a typical segmentation
and the types of bundles that better cover the needs of
the segments in order to generate an optimal portfolio.
Lets picture a market with four segments: (1) discount
driven individuals, for whom discounted price is their
key driver and who have no special request for product
specif ications, (2) the product oriented, who generally
have one or two core product needs and are receptive to
packages that include other services, (3) the brand lovers,
with a clear preference for a specific provider and who are
generally interested in one or two core products from that
company, and (4) the piece buyers, who want the best
solution for each service and rarely react to bundled offers.
In this market, the optimal portfolios aim would be
to maximize the value extracted from each segment,
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adjusting the offer to the needs of each segment. The opti-
mal portfolio for this market could be structured as follows:
Individual premium products to cover the needs of the
piece buyers with the high-end products of the port-
folio range. Prices for these products should be maintained
while offering product enhancements, since discounts
on premium combinations dont drive up customer
penetration and would imply a reduction of value.
2P/3P bundles combining design-to-margin products
and high-end solutions at a discount. These packages
attract product oriented individuals to the offer with
a better solution for their core needs. The optimal price
for these bundles will be defined based on the price
sensitivity of this segment in order to foster up-selling.
2P/3P bundles combining standard and low-end solutions
at a discount to attract discount driven individuals.
The price sensitivity of this segment forces the offer to
be quite price attractive, and a combination of pay-per-use
products with standard services achieves this requirement
while avoiding cannibalization of other segments.
Along with these bundles, a dif ferentiated offer should
be designed for the brand lovers segment. In markets
where this segment is strong, a great opportunity exists
for capturing the brand premium that these individuals
are willing to pay. However, the solution is not as simple
as increasing prices across the entire portfolio, since
there will be a strong impact on customer loss from other
segments. In this case, the optimal strategy would
consist of a combination of the standard product version,
with over-allocation of the advertising budget and optimalchannel distribution. Knowing the most common service
level valued by this segment allows for enhancement
of the standard product (either individual products or
2P/3P offers), thus developing an exclusive offer that
captures this segments surplus.
Achieving success in this context underscores the
importance of understanding the specific needs for each
market, given the fundamental differences observed,
which are explained as we have seen by the specific
competitive structure and existing offers.
Managerial and strategic implications
Overal l, most operators have not yet found the way to
optimize development of their offering or to deal with
the increased complexity of a multi-play world.
Underestimating market elasticity has inhibited
established players from making bold pricing moves
that could result in significant market share growth and
preemptively fil l the natural room for new attackers.
In many cases, the unstructured response to new
offers in the marketplace is also inducing margin
cannibalization of traditional business.
To profit from proliferation and succeed in the transitionto a multi-play landscape, operators still face serious
challenges that go far beyond the analytical skil ls and
capabilities needed to deal with the increased complexity
of pricing and offering design (Exhibit 4):
First, top management has to be involved and willing
to take risks. Bold pricing moves typically encompass
some downside risk (e.g., cannibalization of the existing
offer and margins) and therefore, should not be relegated
to marketing managers who will always choose an
incremental path.
Second, it often calls for a significant shift in operators
posture towards regulation.To ensure the required
degrees of freedom to develop new bundled offers
(deregulation of retailing conditions), operators may
have to make wholesale conditions more transparent.
Finally, operators will also need to learn how to navigate
uncharted waters. In a number of circumstances, telecoms
operators lack consideration for what it takes to design
a TV offer that will drive subscription and high usage.
The same happens to other media-based players that are
extending their reach into the telecoms services realm,
such as with broadband access and VoIP.
Although recognizing that the convergence of these services
brings significant differences back into the competitive
landscape from one market to another (often requiring
local regulatory frameworks), we believe this transfor-
mation process and the corresponding challenges that
lie ahead should play a fundamental role in the telecoms
and media CEOs agenda in the coming years.
By Jacques Bughin, Armando Cabral, Patricia Ferruz,
Pedro Mendona, and Steven Spittaels
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To better understand the challenges facing mobile
players in Europe, McKinsey & Companys RECALL
magazine had the opportunity to talk with T-Mobiles
chief marketing officer (CMO) in Croatia and the head
of Telenors consumer mobile business in Norway.
T-Mobiles Hendrik Kasteel spoke about his companys
success in defending itself against the market entrance
of a new network operator, while Telenors Jon Erik
Haug shared his perspective on pricing strategies and
future developments in markets that have a heavy
MVNO influence.
Hendrik Kasteel
Hendrik Kasteel, T-Mobiles CMO in Croatia, has spear-
headed a remarkable achievement, namely, growing the
market leaders revenue market share and profits at a timewhen a third network operator entered the Croatian market.
McKINSEY: When you heard that a new player was
about to enter the market, what were your thoughts?
HENDRIK KASTEEL: A mix. On the one hand, the
new operator has a certain reputation, and I realized we
(T-Mobile Croatia) were facing a substantial challenge.
On the other hand, I was inspired by the challenge. This
challenge injected energy into the entire organization.
McKINSEY: Established operators have used different
strategies when encountering new entrants. What was
T-Mobiles strategy?
HENDRIK KASTEEL: Our ambition was to stop the
new player at the beach. We didnt wait for them to
enter the market and make the first move; we proactively
rebalanced our prices prior to the new operators entry.
The principle underpinning our pricing adjustment was to
establish a few price plans that all had one really attractive
price point. We launched an aggressive on-net price plan
one price plan with low prices for calls to fixed services
and so on. This made it difficult for the new player to
undercut our portfolio on all the important dimensions.
The on-net dimension was absolutely essential. On-net
is key for Croatian subscribers and by leveraging it, we
gained a market share greater than 50 percent, making
this a huge advantage relative to the new operator. In
fact, many subscribers compared our on-net price to the
new entrants off-net price. This dynamic really hurt
them, since our on-net price was set close to interconnect
rates. The real beauty of our new portfolio was theopportunity that it gave us to respond to the new players
marketing strategy. Whatever they communicate, we
can always communicate one price element from one of
our price plans that is better or is at least perceived to
be better than their offerings. We can now adjust one
price plan if we need to change prices, rather than having
to cut prices across the board.
McKINSEY: By how much did you actually reduce the
price level?
HENDRIK KASTEEL: We reduced prices by about 20
percent. However, the price elasticity effect has proven
to be much larger than we expected. In fact, the elasticity
has far outweighed the price reduction. Blended ARPUs
(average revenue per user) and revenues have increased
a lot, despite the price reduction.
06 Points of ViewInterviews with Hendrik Kasteel, CMO of T-Mobile Croatia, and Jon Erik Haug,head of mobile, Telenor
RECALL No 1 Pricing
Points of View
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McKINSEY: How did T-Mobiles position change after the
new player entered and you introduced the new price plans?
HENDRIK KASTEEL: Our revenue market share is
around 55 percent (up from 52 percent) and margins
have increased somewhat. The new entrant has gained
about a 4 percent share, mostly coming from the other
network operator in the market, Vipnet. The market
has also changed. Marketing intensity has increasedand communication is much more aggressive. Vipnet
has also launched a no frills brand in order to strike
back at the new player. The total minutes of usage have
increased significantly by about 30 percent and
interestingly enough, SMS (short message service)
usage is down by 20 percent or so. The SMS reduction
is probably due to subscribers getting dual SIMs
(subscriber identity modules, which are smart chip
cards used in handsets) and thus, replacing off-net SMS
with on-net calls. The MoU (minutes of usage) increase
is partly due to lower minute prices and is partly a sign
of emerging fixed-to-mobile substitution.
McKINSEY: Going forward, what are your priorities?
Are you considering launching a second brand?
HENDRIK KASTEEL: We are very satisfied with our
brand position. Despite being an incumbent, our brand
is dynamic and stronger today than before the new
player entered. A part of the brand success is our ability
to shape the market. We are usually the first-to-market
with innovative price plans and new products. For
instance, we were the first operator within the T-Mobile
group to launch the value bundle or Flext concept in
the postpaid segment. The ability to shape the marketis a core reason for our strong brand and the successful
fight against the new entrant.
However, our experience doesnt necessarily mean that
other operators shouldnt have more than one brand.
Generally, the mobile category is maturing and consumer
preferences are becoming more diverse and sophisticated.
I would, therefore, expect to see more future brand
proliferation in the mobile industry.
Whether to have more than one brand must be a case-by-
case decision, based upon the merits of the respective
markets. I do not believe there is a general rule about
if operators should or shouldnt have more than one
brand. Im surprised that many firms seem to be launching
no-frills brands. The mobile industry should introduce
brands that move the consumer focus away from price.
Just look at retail banking: We all know we could get
better deals somewhere else, so why do consumers
not move? I believe it is due to comfort. Customers are
comfortable with the bank they have, although it may be
neither the cheapest nor the best in terms of service. The
mobile industry should build brands that move consumers
into the comfort zone.
Jon Erik Haug
Norways Telenor enjoys a strong position in its domestic
market, with a subscriber market share close to 60
percent and healthy margins. Last summer, Telenor
introduced new postpaid price plans in the consumer
market that resulted in a 7 percentage point increase in
EBITDA (earnings before interest, taxes, depreciation,
and amortization) margins and a small market share
increase. However, the head of Telenors Norwegian
mobile business, Jon Erik Haug, is far from complacent.
He sees several threats on the horizon, including the
current challenges from aggressive MVNOs (mobile
virtual network operators). In McKinseys conversation,
Jon Erik Haug expands on this point and discusses future
threats such as VoIP (voice over Internet protocol).
McKINSEY: How price-sensitive are Norwegian mobile
subscribers and how has this developed over the last few
years?
JON ERIK HAUG: When MVNOs entered the market
around 2003, they focused on price and claimed this
position in the minds of the consumers. This clearly
increased subscriber price awareness, and we now find
price hunters in all classic sociodemographic andneeds-based segments. The established operators, for
example, Telenor and TeliaSonera, responded to the
price competition by differentiating in terms of simplicity,
coverage, network quality, and innovation. This was only
partly successful, and as long as established operators such
as Telenor struggle to successfully differentiate on para-
meters other than price, price sensitivity will probably
continue to increase in most segments. In the market-
place, we see our brand premium diminish year-on-year.
McKINSEY: Telenor and other mobile operators have,
in the last few years, invested significantly into their
brands. To what extent have they been able to capitalize
on this investment?
JON ERIK HAUG: In Scandinavia, incumbents have
had limited success wit h brand investments due to
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a lack of consistency. Telenor and others have shifted
focus between several differentiators for example,
coverage, innovation, serv ice, and simplicity. In a
European context, numerous attempts have been
made at building brands, but in my opinion, few if any
established operators or incumbents have succeeded
in doing this. The most successful cases actually seem
to be attackers that have a clear price-focused value
proposition. Overall, I would be surprised if the mobileindustry as a whole has had positive returns on brand
investments.
McKINSEY: Your main competitor has at least had
some success focusing on simplicity; and the MVNOs
focus on simplicity in addition to price. Is simplicity a
must in your opinion?
JON ERIK HAUG: Ideally, price plans should be simple
and straightforward for consumers to understand.
Transparent price structures do, however, stimulate
price competition and reduce industry margins
although attackers sometimes benefit profitwise from
price reductions. I believe operators should try to appear