Thursday, 12 June 2008

Subscribers aren't stupid, they buy big bundles because they need big bundles

Mobile operators spend (necessarily) a lot of time thinking about pricing. One of the issues that crops up is why people buy more mins/SMS than they logically need. Surely a cheaper contract with lower limits would be better, given a utilisation rate of about 40%. Right? Wrong.

I like to equate it to car parking charges (I'm really sharpening up my analogies in advance of getting back into the analyst space). If you regularly park in a shopping centre and regularly spend 50 mins doing your shopping, how much time will you put on your car? 1 hour? Almost certainly not. For a small incremental cost you can get 2 hours and remove the risk of being landed with a parking ticket. Let's not forget, your average is 50 mins, but you may be 1 hr 5 mins. So buying what you 'need' is risky. Buying more than you need is not.

In mobile the same is true. People don't want to exceed their allowances. They pay x for what should be their monthly need and they don't want to exceed it. Admittedly proportionately the cost of exceeding (10p-15p/min) is nothing compared to the cost of a parking fine relative to a ticket, but I believe psychologically it's pretty much the same. This situation is particularly exacerbated by the fact that most people have no idea how much they'll pay for out-of-bundle usage. They'll assume "a lot".

So, if, on average, I use 200 mins per month, I'm not going to buy a 200 minute bundle because logically I can expect to exceed that limit on a reasonably regular basis, say 4-5 months per year. If that's the case, then 500 mins is a much more logical option. It means I definitely won't exceed my allowance and it'll probably only cost me an extra £5/month. £60/year for the certainty that even when I exceed my usual 200 min usage I won't be charged any more.

Throw in the fact that most people have no idea how many minutes they use and that better handsets are thrown in free on higher value contracts (and lots of people only buy based on handset) and you have a very logical set of factors driving users towards a bundle utilisation rate of only about 40%.

People are generally pretty logical in their choices. They buy big bundles because they need big bundles. Not because they will use it, but because they might. And it's the only way to get a free N95 8GB.

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