Perhaps we should congratulate the revenue maximizers who work for UK telcos, because the BBC recently reported that they generate an extra GBP6bn (USD9bn) every year, because their customers are on the wrong tariffs. Good work chaps! That equates to roughly GBP100 (USD150) a year from every man, woman and child living in the UK. £6bn is more than double the £2.34bn raised by the UK government’s auction of 4G spectrum, and is about 0.4% of the UK’s GDP – which is not bad, considering the country is forecasting growth will be 0.6% in 2013. And all these billions are collected because customers are on the ‘wrong’ tariff. In other words, the telcos are making this extra money in exchange for nothing. That sounds like the inverse of a revenue leakage to me. Net that off against the last leakage report, and you can all go on vacation for the rest of the year. But do we believe it? Or was this an early April Fool’s joke from the BBC?

For their article, the BBC relied heavily on billmonitor, a website where people compare their existing spending to what they would spend on other tariffs. In their 2012 report, billmonitor concluded that GBP4.32bn was wasted on tariffs with allowances greater than the user needed. A further GBP1.66bn was wasted because consumers had insufficient allowances for their needs, causing them to spend more on usage. When confronted with that kind of analysis, there is only one answer: duh. You might as well argue that anyone buying insurance, but not making a claim, must have wasted their annual premium. If customers want to constantly review their tariffs, to ensure the allowances perfectly match their use, then that is up to them. Most people have better things to do, like constantly changing their bank account to get the best interest rate, constantly changing their electricity provider to get the best price, and constantly monitoring their calorie intake to avoid being fat. Or maybe they have even more important things to do. Like going to work, sleeping, making babies and raising children. The fact that consumers ‘waste’ GBP6bn by not checking their tariff, tells us something about their priorities.

According to the UK regulator, total UK telecoms revenues are GBP40bn (USD60bn). This means that billmonitor has identified ‘inverse leakage’ worth 15% of telecom revenues. (If leakages involve supplying something but not getting the money in return, then getting money for supplying nothing would be an inverse leakage.) Is this believable? I think it is. And whilst the 15% estimate is derived from UK telecoms data, I expect it is a useful starting point for understanding how sub-optimal tariff choices will boost revenues in other countries. To my mind, I can perfectly understand why some customers prefer to have a large allowance and the confidence to use their phone whenever they like, whilst knowing their bill will be predictable. Even an ‘eat all you want’ plan could give less than the optimal economic return, if you do not eat that much. But that does not mean we go to the pizza parlour and make ourselves sick just to get the maximum return from an ‘eat all you want’ buffet. Billmonitor may call it ‘waste’, but everybody puts a value on their time, and this 15% variance measures how British customers spend their time doing other things, instead of optimizing their phone bill.

I find this 15% of inverse leakage interesting because it puts into context the fuss that is often made about telecom efficiencies and accuracies. Billmonitor is approved by the regulator and claims to have checked over 2mn bills since 2009. If billmonitor’s numbers can be trusted, then UK telcos generate 15% of their revenues from customer apathy and ignorance about usage and tariffs. Whilst that is no reason for telcos to waste their own money, it highlights that revenue maximization is not just about crunching data to calculate what is optimal. No amount of data is helpful, unless it is used to understand how real people behave, and human behaviour cannot be reduced to crude calculations about optimal returns.

More importantly, a lot of what is written on billmonitor’s site, and in the BBC’s article, is misleading and encourages customer ignorance. I am not disputing the 15% variance that they present, and which they crudely refer to as ‘waste’. Both the BBC and billmonitor argue that people may not correctly understand their data usage. Duh. Of course people do not understand their data usage. But the problem is not restricted to how many bytes people use, compared to the size of their allowance. The problem is that the same user experience, on a different network, using a different handset, will consume a different number of bytes. Customers pay for services because they want to watch a video, send an email, browse a website, update their Facebook profile or download a document. They have no knowledge of how the ‘same’ experience may consume different numbers of bytes, depending on the network and handset. To use an analogy, when we buy a car, we might check the stats on its fuel efficiency. There may be a variety of stats relating to whether the car is driven around the city, or on the motorway. These fuel efficiency indicies give us a very rough guide of how much fuel the car uses, and help us to understand the total costs when we use the car to satisfy real, human goals – which may be the commute to work, or a visit to see Aunt Mabel. Checking a phone tariff and allowance is like comparing fuel prices. It tells us nothing about the relative efficiency of our car, as relevant to the roads we drive it on. As a result, we have no point of view on whether we have an inefficient handset, or if we drive it through the internet’s least efficient highways. These factors are also relevant, if we want to understand the efficiency or wastefulness of customer behaviour. However, that kind of efficiency comparison would be complicated, which is why the BBC and billmonitor are too apathetic to discuss them!

Let me wish you a happy April Fool’s day. We work in an industry which maximizes revenues because customers do not check their tariffs. And we have no idea how wasteful or efficient data services really are, because we do not really compare user expenditures, relative to the experience they wanted and purchased. But we work in an industry with lots of data, and we talk about optimizing and maximizing everything. Is the joke on us?

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4 Responses to “Do Wrong Tariffs Cost UK Consumers $9bn?”

  1. Dan Baker says:

    Eric,

    I wonder how much correlation there is between billmonitor’s numbers and the premium that postpaid business earns over prepaid.

    Several years back, the great industry buzz (especially among BSS vendors) was that prepaid/charging was the obvious way the industry was headed. Some of the conferences even had “Kill the Bill” sessions. The conventional wisdom was: if India is mostly pre-paid, it’s only a matter of time before all the industrialized countries would move from postpaid to prepaid in a very big way.

    At the time, I was highly interested in the subject since I was writing a research report, so upon attending the CTIA show, I popped the question about prepaid’s attractiveness to a panel of high level business guys featuring all the big U.S. players – AT&T, Verizon, Sprint etc.

    Much to my surprise, not a single panel member defended prepaid. The consensus of the panel was that postpaid was here to stay. And it was not long after that the iPhone emerged, a product that solidified the pre-eminence of postpaid in the U.S. – and boosted the postpaid market in many other part of the mobile world too.

    On reflection, the postpaid bill is probably the biggest revenue enhancement tool mobile operators have for a few simple reasons:

    1) The more you can get consumers to pay their flat (or flat with capped data usage) bill on a steady monthly budget, the more out-of-mind the cost becomes.

    2) If the consumer knows she’s got a big bucket of minutes in her plan, then she uses her phone more often, and this stimulates usage of the mobile service across the entire market.

    3) The added revenue assurance and customer care costs of pre-paid plans are not trivial.

    So I’m wondering what the trends look like for postpaid vs. prepaid in their consumer markets?

  2. Eric says:

    @ Dan, you leave a thoughtful comment as ever. Let me throw something else into the mix, because I think it’s critical to understanding the revenues/costs of prepaid vs. postpaid, but it hardly ever gets mentioned. I generate rules of thumb based on data I’ve seen across various telcos. One of my rules of thumb is that postpaid customers generate four times as many complaints as prepaid customers. This should be a big deal!!! But like so many examples of ‘intelligence’, people don’t look at the relevant data to observe the trend. More complaints mean additional costs in serving postpaid customers, through driving costs for the Customer Services function etc.

    Why do postpaid customers complain more than prepaid customers? I have no strong data to explain why, but I can speculate based on what kinds of complaints I’ve seen from both types of customer. Postpaid customers are much more likely to complain about how much they’ve been charged. Duh!!!! Of course!!! They receive a bill, so they have more information which leads to complaints. In contrast, prepaid customers just run out of credit and then top-up, and because they don’t tend to have good data on how they used their credit, they don’t complain. So it’s possible to argue that a sneaky telco would want people to switch from postpaid to prepaid for what seems like a tangential reason – because the prepaid customer chooses to receive poorer information about the charges they pay. And that, in turn, would be an opportunity to levy higher prices without the customer noticing or responding. In other words, prepaid customers may be less price elastic than postpaid customers, because they receive weaker ‘signals’ about the telco’s prices.

    Truth be told, I think I’ve described a factor that is more than offset by the price and cost factors you’ve identified. However, it’s worth understanding all the factors, in order to devise truly intelligent strategies to profit maximization. For example, Some of the negative factors you’ve identified may be neutralized by having prepaid customers set up an automatic recurring top-up using their credit card, or from their bank account. Then you might be able to get some of the postpaid-like behaviours you’ve identified, whilst also enjoying some of the desirable prepaid-like behaviours, like low levels of complaint.

  3. Dan Baker says:

    Eric,

    You’re right. I overstated my case on customer care costs. We need to differentiate between prepaid “handling costs” for top-ups vs. “bill complaints”. It’s interesting to hear that postpaid complaints are much higher: it definately makes a lot of sense.

    Another factor I just thought of is that postpaid makes it easier to deceive the customer. And for an example of that I need to go back 15 years or so to a certain wireline bill I got from NYNEX, the LEC for the New England region.

    NYNEX provided a comparative graph on the bill so you could analyze your usage month by month over the previous 24 months. Well, at first glance, I looked at the chart and was pleased to see the vertical bars for the current year were shorter than those of the previous year. Great! I’m spending less money per month on local business calls.

    But wait. On closer look, I noticed that the bar values on the chart where not the actual bill amounts at all, but some relatively meaningless measure like rate of billing increase — or something similar.

    So this was NYNEX’s retention plan. Busy business peoople who merely scanned the comparison chart would walk away thinking NYNEX was a better deal than yesterday!

    One of these days, Eric, you need to write a blog on the ROI of treating customers honestly. Not sure a formal telco study has ever been done on this subject, but I suspect lots of people have long memories. . .

  4. Eric says:

    @ Dan, I’ve become more cynical is I’ve got older, so I’m no longer that sure about the ROI of treating customers honestly. When I was younger, I was very sure that treating customers well resulted in loyalty, and hence superior returns. Now I think it’s more complicated than that. Convincing customers that you’ve treated them well leads to superior returns. But note the extra step – it’s the customer’s beliefs and expectations that matter, not just how you treat them.

    In the book, I wrote a piece about ‘visibility’ also influencing whether a customer complains. The idea was that a customer was more likely to complain about a very noticeable problem, and less likely to complain if they didn’t “see” the problem. Oddly, the consequence is that customers may complain about matters that are very noticeable but which aren’t, in fact, wrong. So that leads to two ways to reduce the number of complaints: explain things so people don’t get upset about things that are really fine, OR just make those pseudo-issues less visible to the customer.

    I’ve increasingly noticed that some of the brands in our sector with the best reputation are very good at keeping things simple – another way of saying they manage presentation so it doesn’t occur to customers to complain. For example, the UK RAG recently discussed how some UK telcos have gamed the tax rules so sales tax is paid at Luxembourg’s lower rate. The way the bill is presented, the patriotic customer doesn’t realize he’s paying taxes that pay for schools and roads in Luxembourg. It simply wouldn’t occur to the average person that there’s something funny with their bill. But the customer is bound to notice the extensive use of the UK’s flag all over that company’s marketing material… ;)

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