'Free' as the new 'Premium Content'

Short version: The ultimate high-margin premium content is an international roaming call, and anything that provokes one -- even if you need to forego some revenue to create the stimulus -- is a net positive.

Long version: Sometimes, you're just plain wrong. For the forthcoming Consumer Voice & Messaging 2.0 report, I'd been planning a section on "The end of pricing plans as the focus of competition". In doing my research, I'm coming to nearly the opposite conclusion: there's lots of mileage left in mining out pricing. It's just buried deeper -- North Sea oil, not Persian.

If you've survived a basic economics course, you'll have seen supply and demand curves. The more you pay, the more the supplier is willing to supply. Today's telco pricing has worked by segmenting the market and offering a handful of bundles at fixed price points along the supply curve to cater for the different demand curves of various market segments and usage levels. A few operators (e.g. Sprint's Fair and Flexible and T-Mobile's Flext) have taken this to its logical conclusion: rather than offering a few discrete choices, let the user pick any point along the curve. Hence the thesis that there's nowhere more to go -- every combination of geography, service, timing and quantity was being covered off.

Except...

Stimulate demand, make more money

This takes too simplistic a view of the market. Demand isn't fixed -- you can work to move the demand curve too. One way is to market the hell out of your product and help people understand their life is incomplete without your service, and only by parting with a small amount of money can their satisfaction be made whole again. This is demand creation, and is a difficult thing to achieve. BT spent a fortune on TV ads in the 1990s on the slogan "It's good to talk", as if it wasn't an innate desire of every human from near birth.

There's a better way. Rather than focusing on the macro marketing push, you work on tuning the micro processes that make people want to communicate more often. The vast fortunes of telecom are built on accumulated pennies and cents, and it's down in those tiny interactions that the marketing needs to occur.

Phone calls and text messages don't exist in isolation: they're part of a conversation and relationship. Most personal communications are responses in an ongoing dialogue. (Go look in your email inbox: excluding the informational newsletters and circulars, which we don't use phones for, I bet most personal messages will begin "Re:".) Furthermore, only the participants have the context of the interaction. The person best-placed to sell you a phone call is someone among your family, friends and colleagues -- not the telco.

So to play the new pricing game, telcos need to make better use in the uniquely two-way interactive networked nature of their products: if I contact you, you might then contact me back. If the cost of the response exceeded the incentive discount for the initial contact, you're a winner. Forgo a buck, make two bucks, and you're a buck up, not down. And the best incentive you can offer? FREE!

Pick the sender and recipient carefully

The idea is to give away communications services to a very select group. You target price-sensitive users -- i.e. ones who aren't likely to expand their communications budget -- so you're not forgoing much. (You might want to check out our previous thoughts on how these can be great customers with an innovative market approach.)

You also don't just give them any old thing for free. You pick a price-elastic communications product, so that dropping the price (ideally to zero) will greatly increase usage among those users. Preferably this is also once of your lower-margin products, mitigating the marketing sacrifice. The communication has to be designed to stimulates demand from the exact opposite kind of user: price insensitive, high-margin users of price-inelastic products. Finally, there should be only a weak substitution effect for other products that the users pay for -- that is, usage is incremental, not replacement.

So in summary there are two groups of users you need to identify, who have a cross-elasticity in their use of services that will overall raise revenues by dropping prices for one of the groups. This particular cross-elasticity effect is likely to be unique to communications products, so they won't teach it to you in business school.

This isn't new

For instance, today my operator, T-Mobile, is deploying something like this scheme. The standard at-home cost of SMS messages is 10p, and MMS messages are 20p. MMS messages whilst roaming cost 20p, whereas SMS messages 40p -- inverting the cost relationship. (I wonder if I could simply compose a multipart MMS and get a 50% discount...) So you're on the beach, and you're quite likely to send pictures of your holidays to those suffering back in the office. If you're (un)lucky, someone will call you. Et voila! A high-margin inbound roaming call.

Another example: "free" voicemail stimulates return call usage, and the "press 3 to return this call" is how you market that. (I've heard some amazing numbers on the extra usage and revenue that one tweak caused.)

There are plenty of possible combinations of product and segment to go for. Pre-pay users are the highest-margin customers, so anything that gets them to make a call is a good thing. Perhaps you offer the kids push email solution for nothing (they wouldn't buy it anyway), so that parental corporate users (who won't touch pre-pay) keep in touch and every so often you get an extra phone call made.

The effect could also be one of stimulating adoption as much as usage. Give away MMS messages, and get people used to using the system. This is the exact opposite of what happened in reality, which was "punishment pricing" of a new service the users were unsure how to use and what the value was.

Future presence-based services are likely to be critical stimulants of communications use. Plenty of people seem to be addicted to Twitter, which simply lets you publish on a minute-by-minute basis what you're up to. (Remember: the Digital Youth don't think or act like you do.) Bundle this with some free data and give it away on mobiles! Stop trying to squeeze service revenue from what are really marketing features of your communications platform.

Optimise customer lifetime value, not product margin

This demands looking at the customer's spend and lifetime value in a holistic manner, and not locally optimising the returns from individual products or features. That consequently probably means changing all kinds of internal metrics and incentives. But why play games of internal cost allocation anyway when what counts is total customer spend and profit? The manufacturing industry has already been here: throughput accounting that focuses on optimising the returns from the whole system, not any individual element.

Furthermore, you can foresee a flip from "pre-marketing" of standardised packages at retail to entice new customers to "post-marketing", where you pitch offers to specific individuals that will be of mutual benefit. It's only once you see that usage and spending patterns of a user, and who else they interact with, that you're in a position to know who will be a profitable "free" target. Hyper-segmentation tailors each offer down to the individual.

You would also adopt a more humble, data-driven approach to marketing. Rather than pretending you know everything about the user and the cross-elasticity of every product set, you just run lots of experiments in personalised offers and see which ones create the results you want. We've seen the trend from "one to many" to "one to one" marketing. This is just taking it a step further to "many to one" -- where the collective behaviour drives the individual offer.

Just make the cogs of the profit machine turn faster

So how does 'free' relate to premium content in the headline? Well, once you've laid a glass pipe or recorded a song, the additional cost of distributing the bits is small to negligible. Margins are high in such a fixed-cost business. Rather than seeking to enter the entertainment and content business, telcos should be milking the high-margin voice and messaging products right under their own noses. The individualised segmentation and marketing skills needed will prove extremely hard for outsiders attacking any one part of the bundle to replicate.

Want to learn more about the future of voice and messaging or telecom services? Then read our report or come to our brainstorm!