The thriving market for mobile services is intensely and relentlessly competitive, where mobile phones today outnumber inhabitants in 105 countries, according to the International Telecommunications Union, the United Nations body that works to coordinate telecommunications policy globally. Operators are constantly seeking new promotions, enticements and other marketing “hooks” to attract new customers, and capture share from their competitors.
In this noisy and highly-pressured landscape, one such hook — the price war — reaches the top of marketing department agendas with alarming regularity in markets of all maturity levels and across all service categories, voice and data. Yet, while this always sounds like a good idea, our research shows that in practice, this hook should be rejected quickly and firmly. Put simply, nobody wins. Price wars damage entire mobile markets every time they are rolled out.
Which factors make price wars look attractive? New market entrants, changes in market structure, regulation-enforced mobile number portability or simply aggressive management targets can all prompt marketing managers to push for the quick surge in sales that can come from a price war.
However, price wars leave the aggressor operator, and the market as a whole, worse off because they stop market value from developing to reach true potential. Consumers, superficially the winners thanks to tantalizing price offers, also lose. Network quality becomes strained as available capacity falls, driving dissatisfied customers to churn again. Customers expect ever better deals from their new operators, and the downward pricing spiral gains momentum.
Given the negative impact of price wars, telecom players should take steps to avoid them at all costs if they can. Indeed, where they have been successful in taking evasive action, the negative impact of price wars has been largely contained. Yet we also realize that situations can spiral out of control. In these cases, and only when there are no alternatives, we accept that operators have to join the battle. Hence our price war mantra: “Avoid if you can, win if you can’t.”
Anatomy of a price war
From the outside, all price wars look very similar. They start when one operator becomes an aggressor in the market. Prices are slashed, generous offers are made, and some consumers start chasing the best deal. Other operators quickly lower their prices in response, eager to contain the damage. More consumers churn, and eventually market prices stabilize at a new, lower level.
From the inside, the perspective is quite different. Gross additions to the aggressor jump as customers join the aggressor’s network. But network capacity is tested as traffic rises, with increased risk of blocked calls and lower voice quality. Competitors increase their media spend and offer incremental incentives to lure their customers back. Even if they succeed, their customers return at a lower average revenue per user (ARPU), similar if not slightly increased traffic, and after considerably increased cost of acquisition.
By any measure, the net outcome is positive for the consumer’s pocket in the short term, and negative for the operator. Value has been removed from the market for good, while the costs of acquiring and keeping customers have risen. Shareholder returns have been lowered permanently.
The Middle East has not been immune to detrimental price wars among competing operators after governments opened markets and subscriber numbers soared in the past 10 years. In one Middle Eastern country, for example, the mobile market was at 79 percent of potential value in March 2008 when a price war broke out. If ARPU and customer growth dynamics had remained at pre-war levels, it would have reached 100 percent of potential over the following year and a half. Instead, that year and half was spent on a damaging price war that reduced the market to 74 percent of its potential value. And yet the dynamic persists; while full-scale wars are rare, smaller scale price wars — in effect brush conflicts — break out in most markets on a monthly basis.
Facing the threat
We see three short-term “plays” that will allow mobile operators to face the threat of price wars, each requiring a different, defined set of capabilities. We also advocate a fourth, bolder play, in which the mobile operator completely revises its cost structure, and enters the fray with a sustained, structural advantage.
We refer to the short-term plays as: “Sword Waving”, “Surgical Strike”, and “Capture and Keep the Hill”. Each involves a measure of risk, but when applied correctly they can defuse a price war or shorten the conflict. We call the fourth play “A New War-Fighting Machine”, in which the mobile operator redefines its cost structure — and enters the “no-go area” where all-out price wars are waged.
Our first play, “Sword Waving”, aims to postpone conflict by signaling the intent to win, whilst not actually engaging. In this play, defending operators can deter a price war by drawing attention away from an imminent attack. We see operators using free minute bonuses for pre-purchased blocks of time, free trials of new content services, discounted tickets to an event for higher-ARPU customers and so on. In the best outcome, the aggressor retreats, and the price war is avoided.
“Surgical Strike”, our second play, acknowledges that conflict is inevitable. The defending operator changes the direction of the price war to its advantage, chooses the marketing weapons it will use, and hence aims to wrong-foot the aggressor. We see operators executing this play by targeting a narrow audience and focusing on value delivered, not price offered. Offering a time-of-day-bound, low-rate international tariff accessed only through referrals is one example of a possible tool. Executed correctly, this play can increase value extracted from a specific mobile market segment.
Our third play, “Capture and Keep the Hill”, joins the price war with an aggressive counter attack, limiting the scale of engagement while ratcheting up the level of intensity. “Capture and Keep the Hill” targets an entire market segment with the intent of dominating it, rather like isolating and taking a hill on a battlefield. Typical approaches may involve operators providing special services to niche vertical or lateral segments, such as medium and large enterprises or advertising agencies and creative media companies. In the best outcome, we see operators using this play to establish a commanding presence in a specific segment which yields sustained, protected value.
To weigh the risks of being forced into a price war against the potential gains that operators can achieve if they apply the above plays, we calculated a risk to reward ratio of 1.34:1 based on average additional revenues across three plays if the play is successful versus the drops in revenue that operators would risk if their plays are not successful.
Our fourth and final play is somewhat special. “A New War-Fighting Machine” requires mobile operators to rethink their business models. This play can involve organizational restructuring and process reengineering to yield substantial, structural reductions in operating cost. By dramatically refining and improving these structural elements, the operator builds a new war-fighting machine with a structurally lower cost model capable of supporting market price leadership. The result is an operator that can lead all-out price wars if necessary, entering the dangerous “no-go area” in which price war engagement and escalation are at their most intense.
While we believe price wars are in general value-destructive and produce no winners, we contend they are controllable and often avoidable if others are set to trigger them. Our three tactical plays present a framework within which operators can avoid the most harmful effects of conflict, while entering the fray where needed. Finally, our fourth and most demanding play outlines a roadmap for sustained market price leadership. Avoid if you can, win if you can’t.