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Yield management and mobile communications
22-09-2004 management consultant/Roland Berger source: PeppeR
The telecommunications industry, especially mobile communications, is facing several challenges in terms of today's and future revenues. In an unfavorable market climate and with the delayed introduction of UMTS, operators have to reverse the trend of market saturation and decreasing average revenue per user (ARPU). To achieve this, they have to align their customer structure toward profitability and migrate customers to innovative services. However, data services and products such as GPRS, BlackBerry, and other mobile-enabled PDAs - once seen as the future of mobile communications with high profits guaranteed - are growing more slowly than originally forecasted.

Capacity is limited Mobile telecommunications is thus facing the traditional challenges experienced by many established industries with high fixed costs and investments, such as aviation, transport, and tourism. Buying and operating airplanes is expensive, as is building a UMTS network. Capacity limits play a key role: airlines work on the basis of specific seat quotas. The success of mobile operators in the age of GPRS and UMTS hinges on their capacity and speed of data transmission With yield management, old-economy firms are successfully exploiting customers' willingness to pay while making optimum use of available capacity. This is how airlines determine the number of business class seats according to the expected booking quantity. Specific criteria such as advance booking deadlines in economy class ensure that well-heeled business travelers buy business class seats and accept higher prices. Project experience shows that introducing yield management increases revenues by approximately 3-8 percent and profits by even more. By transferring the yield management approach to the mobile industry, cellcos can adopt state-of-the-art methodologies. These help identify benefit-oriented customer segments in order to increase profitability per customer for voice usage as well. The introduction of GPRS gives a taste of future pricing challenges. Significant price differences between providers at the time of market launch, e.g. price differences of over 100 percent in Germany for a comparable product range, indicate either widely differing strategies and/or a lack of empirical experience. The low takeup of GPRS - as a test field for UMTS - is due both to poor marketing and an unclear pricing structure. The first step in realigning a pricing/yield management strategy is to simulate the "new" characteristics in terms of sales volume development, market share per customer segment, and price elasticity. In mobile data services, this applies to type of transmission (always on/dialup), access priorities (waiting time when capacity is in demand/priority access), office solutions (e.g. calendaring, e-mail, directory SAP access), location-based services, m-commerce, and news functions (e.g. MMS, video conferencing), to name just a few. Business customers as cash cows Especially in the business customer segment, there are many mobile-enabled applications with special features and services which customers may be willing to pay a premium for. For example, service and sales force automation (SSFA). Using these applications in the context of CRM, salespeople can access corporate data while at the customer's office. A crucial success factor for SSFA applications is the speed at which data is transmitted. If the transmission rate is too low, data may be unavailable or too slow for sales negotiations with clients. Dedicated resources for high-yield customers go hand in hand with higher transmission rates. Recent research1) - simulating end-customer behavior and comparing the existing GSM environment as a genuine competitor to UMTS - confirms these pricing/ yield management guidelines:

A product range based solely on innovative services(m-commerce, etc.) is not sufficiently attractive for the user

There is "willingness to pay" for office applications, suggesting a skimming strategy at the time of the market launch

So what does this mean for a mobile operator? Business customers would pay a premium for added value, and cellcos could significantly increase revenues without investing in extra infrastructure. Due to limited bandwidth, mobile network operators need to use capacity efficiently. They must therefore forecast demand precisely and allocate capacity to fixed timeslots. As in the airline industry, packages of guaranteed peak-time bandwidth that can be booked in advance may be feasible. Discounts for early bookers plus low weekend or nighttime tariffs could ensure better utilization of network capacity. And they could be attractive marketing tools as well. Peak/off-peak pricing is the first, albeit a crude step in this direction. However, it is not very sophisticated and does little to maximize profits in specific customer segments. What are the next steps? Mobile operators are no longer rushing to gain new customers in mature markets. Developing value-based strategies to reverse the trend of decreasing ARPU and move beyond ARPU to increase both profit and revenue will be crucial to success in the future. Rather than measuring success by the number of customers or by total revenues, mobile telecom executives will first need to consider how well they identify and serve the customers who generate the highest value. Clear and differentiated segmentation is the first step toward identifying customer value. Only then can an offering be created which customers are prepared to pay premium rates for, thus ultimately generating more revenue and profit. Next, cellcos will have to decide on "smart" needbased product bundles and pricing. In the future, this capability will be an essential source of competitive advantage.

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