Price promotions – an effective tactic for some, but it may not be right for everyone

August 12, 2013 | Mobile Money | Global | Lara Gilman

Price is one of the most dynamic marketing tactics in an operator’s toolkit because it is easy to implement and, under the right circumstances, can efficiently drive network effects. As Ignacio Mas has highlighted and we’ve referenced before, price penetration worked for PayPal who willingly lost $23 for every new customer in their first 9 months.  More recently, going “free” has again proven itself in Somaliland.   For Zaad, offering an entirely free service was cited as a critical success factor in facilitating rapid mobile money adoption.  Although Zaad’s innovative approach is somewhat unique, we have seen varying price penetration strategies (from free money transfers to airtime bonuses) be effective in moving the needle in mobile money adoption.

However, pricing promotions are not riskless. In a previous post, Neil Davidson  reviewed the benefits and considerations of using price to subsidize early adopters.  This post aims to further the discussion by identifying three questions that operators might consider before launching a new pricing strategy in order to avoid the unintentional consequences that could come from playing with pricing.

(1)    Is price the major barrier to adoption?

Price promotions only work when a decrease in price results in an increase in volume. The cartoon above illustrates a doomed price reduction strategy because the stuff that is on sale seems to have little or no value.  Although an amusing hyperbole, the underlying message is applicable to this discussion.  If your mobile money service isn’t perceived as relevant and reliable to your target market, then price is not the pain point and a reduction in price will not result in an increase in volume.

Before cutting prices, take the time to assess whether affordability is a major barrier for your target customers. As an example from our recent study on mobile money in the DRC, when customers chose a money transfer service, price wasn’t much of a deciding factor.  Easy, fast & safe were more important suggesting consumer demand is relatively inelastic – meaning a price-reduction campaign may not yield the right results.  In this type of context, operators may find product positioning around “easy, fast & safe” more effective than reducing prices.

(2)    What’s the risk of permanently undervaluing the service?

Operators also need to consider the long-term impact of a price penetration strategy.  In some highly competitive markets, price promotions could result in a price war between operators and/or other service providers.  Price wars are easy to start and expensive to win (as MNOs remind us again and again.)  So, before launching a promotion, operators need to consider both their position in the market as well as that of their competition.

  • What’s the likelihood that one of your competitors will follow-suit?  How long will you realistically be able to sustain a clear pricing advantage?
  • What effect will pricing have on your brand?  Large marketing campaigns focused on pricing can erode brand strength, which is a valuable asset in building trust with customers.
  • How much can you afford to lose?  Without significant increases in volume, price reductions have an exponential impact on profitability.  As an example, for a company with 10% profit margin, a reduction in price of 1% will result in a 10% decrease in operating income unless there’s an increase in volume. [1]

(3)    How does the pricing promotion fit into your long-term business model?

Pricing penetration can be an effective way to drive network effects but operators also need to determine how they will otherwise recoup the value left on the table.  This question applies mostly to operators who have either decided to maintain an indefinite pricing promotion or those who find themselves in a position where re-introducing prices is proving challenging (dropping them tends to be a lot easier than raising them).  In either case, operators need to find other ways of making mobile money economically sustainable.

Let’s take free P2Ps as an example pricing penetration strategy and look at a long-term view.  Currently, cash-outs are globally more frequent than P2Ps. This tends to make cash-outs a more valuable revenue generator.  However, over time, we anticipate (and hope) that on-network activity increases to a point where customers prefer holding e-money rather than cash.   In this scenario, it would be challenging to rely only on cash-out revenues because the frequency of cash-outs would decline while the rest of the business is growing. Thus, if the P2P service remains free, operators either need to identify alternative sources of direct revenue (i.e. new products and services) or need to quantify indirect revenues to compensate for the diminishing revenues from cash-out.

There is no question that innovative approaches to price can yield significant value.  However, price penetration strategies do not come without risks and in some markets, a price promotion could result in unintended (and uneconomic) consequences.  As operators look to tip the market toward mobile money, price promotions can be an effective strategy, but the circumstances are unlikely to work for everyone.

 



[1] Chernev, Alexander. “Strategic Marketing Management,” Brightstar Media, Inc.  July 2008.

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