McKinsey Telecoms. RECALL No. 01, 2007 - Pricing

8/2/2019 McKinsey Telecoms. RECALL No. 01, 2007 - Pricing

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Telecommunications

Pricing

RECALL No1


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3RECALL No 1 Pricing

Welcome ... to the first issue of Recall, a new publication for

executives and board members that provides insights

into marketing and sales for the telecommunications

industry.

Our industry is changing at an unprecedented pace.

Market saturation, new technologies, regulatory pres-

sures, and the emergence of new players are just a few

of the issues among many. The way in which successful

companies currently create marketing opportunities in

this space is very different compared to just some years

ago and will again be different in the years to come.

Marketing and sales in telecommunications has never

been more exciting and challenging.

Recall aims to offer you a holistic view of the implica-

tions of these challenges and to recall how successful

companies managed to take advantage of them and,

how they have created positive recall with customers

and consumers and hence, value. Recall will cover one

marketing or sales topic at a time and is firstly published

on the McKinsey Telecommunications Extranet (to

register, see page 47). Topics will range from pricing via

branding to channel management, striving to provide

you with the latest thinking on telecommunicationsmarketing and sales.

The authors of Recall are members of McKinsey &

Companys Global Telecommunications Practice,

a group of more than 380 dedicated practitioners and

some 60 research analysts. Together with leading

academics, they aim to bring you an integrated

perspect ive on key marketing and sales topics.

We hope that you find Recall interesting and that it

provides you with unique insights and ideas that are

useful in your daily work. We look forward to your

feedback and thoughts on relevant topics you would

like to see covered in this publication.

Jrgen Meffert

European Leader of McKinseys

Telecommunications Practice

Thomas Barta

Leader of European Telecoms Branding /

ROI, Editor Recall

Pedro Mendona

Leader of McKinseys Marketing

in Telecommunications Practice

Boris Maurer

Leader of McKinseys

Telecommunications Extranet


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About This IssuePricing is the focus of this first issue of Recall. It starts

with Triple-play pricing. Like no other area, this topic

combines many industry challenges into one: fixed-

to-mobile substitution, migration towards flat rates,

the increasing commoditization of broadband, and theemergence of IPTV. If you can make it there, you can

make it anywhere see what it takes to be successful in

this arena.

The next article is Value Pricing for Profitable Growth.

Maturing mobile markets make sustaining profitable

growth an increasing challenge for operators. Pricing

creates a host of opportunities for those who know how

to work with it, as examples show.

Second Brands & Wholesale Plays: Pricing Strategies

for a Changing Market is the next topic. A multi-brand

and wholesale strategy can play a fundamental role in

protecting the profitability of main brands.

Part four explains McKinseys CHESS approach.

This approach integrates pricing conjoint analysis,

brand analysis, and product optimization in a single,

comprehensive method that provides a way to increase

a brands consumer preference share by in some

cases 50 to 60 percent or more.

The fifth part Best-Practice Multi-Play for DigitalConvergence describes a market-research-based

methodology for defining an optimal range of bundles.

Digital convergence is quickly leading to the emergence

of various telecoms and media services bundles,

creating a new space of multi-market and product

competition. Bundling is a way to differentiate offerings

via complementary services and hence, reduce price

competition.

The first issue of Recall concludes with interviews

with the CMO of T-Mobile Croatia and Telenors Head of

Mobile. Get an inside viewpoint as T-Mobiles Hendrik

Kasteel describes his companys success in defending

itself against the market entrance of a new network

operator and as Telenors Jon Erik Haug shares his

perspective on pricing strategies and future develop-

ments in markets that have a heavy MVNO influence.


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Contents01 Value Pricing for Profitable Growth 9

02 Customer-Centric Success: Triple-Play Pricing 15

03 Beyond Traditional Market Pricing: Second Brands and Wholesale Play 21

04 CHESS Moves: Creating a Complete Customer Value Proposition 29

05 Best-Practice Multi-Play for Digital Convergence 35

06 Points of View 43

Appendix

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Value Pricing for Protable Growth

01Value Pricing for Profitable Growth

Europes maturing mobile markets and price-testing

regulatory environment make sustained profitable

growth a newly daunting challenge for operators,

despite their significant brand-building investments.

This value-killing shift has been an emergent reality in

Europe since early in the decade, when revenue growth

and earnings quality began to wane as markets became

saturated. Regulation-driven cuts in interconnection

rates are expected to cause up to 35 percent of the industry

profit pool to evaporate over the next two to three years.

Additionally, new regulations for mobile virtual network

operators (MVNOs) are triggering price wars in basically

all markets.

To counter this downward spiral, operators should

adopt a value-based pricing strategy, something thathas, for the most part, been overlooked thus far. The

typical marketing approach taken in the mobile industry

has consisted of combining massive brand-building

investments (with leading mobile operators emerging

as top advertisers in each market) and more recently, a

general shift towards viral marketing again,

with significant investment into CRM systems and

capability development. However, between these levers,

little attention has been given to pursuing a consistent

pricing and portfolio design, which proves crucial in

effectively extracting the corresponding premium from

such heavy brand investments and better focusing

targeted promotional campaigns (Exhibit 1).

A value-based pricing strategy involves better matching

the natural segmentation of consumers reaction to

each of the mobile price components. Such an optimized

pricing structure should allow operators to capture

their brand premium from those who are less sensitive

to price, while exploring profitable trade-offs with those

who react to specific price components rather than to

the price as a whole. A dual strategy is often required

since, while on the one hand, a large majority of mobile

customers are stil l willing to pay a brand premium or

choose a price plan based upon a particular tariff

component and on the other hand, a growing segment

in each market is becoming increasingly sensitive to

transparent, simple value propositions (Exhibit 2).

Such a strategy, which takes advantage of the innate

brand-building skills that operators have developed,

consists of two complementary elements:

1. Leverage the inherent strength of the current mainbrand McKinsey & Company research conducted

across different European markets reveals that a

significant segment of customers (i.e., 30 to 40 percent,

depending upon market) choose their mobile service

based primarily upon brand appeal. Still, others react

to specific price components rather than to the price as a

whole. Operators should work to maintain and enhance

the brand premiums captured from these customers

by differentiating pricing according to a given groups

willingness to pay, while exploring profitable trade-offs

among the price components.

2. Launch a value-focused second brand and/or open

own network to third parties Value-driven brands can

enable operators to de-complicate pricing structures

for price-driven customer groups. These new price-

focused brands allow operators to protect their premium


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Value-based pricing (and product) design should be regarded as a crucial

element to ensure marketing spend effectiveness01

brands price position, while fighting for market share

in other, more price-sensitive customer segments.

Leveraging current brand power

Europes mobile operators have worked hard to build

power brands, having increased advertising spend

over the past decade to the point where they outspend

other traditionally brand-focused industries in

many markets. The results of this spending have beenimpressive McKinseys analysis reveals that brand-

driven price premiums can represent 30 to 50 percent

of a European operators margin pool (i.e., earnings

before interest, taxes, depreciation, and amortization

EBITDA). Unfortunately, these brand-based premiums

are expected to decline by a range of between 9 to 32

percent, depending upon the country.

To protect brand value, operators can explore a range

of possible trade-offs among selected price factors. One

key task involves clearly identifying price components

that are fully visible to customers, as well as those that

are less so (Exhibit 3). The former can include plans that

leverage on-/off-net pricing dif ferentials or the intro-

duction of minimum consumption schemes. Such offers

can have a big impact on churn and market share, but

typically require a structured approach in order to fully

explore the profitability trade-offs that each plan brings

with it. Less visible components, which can often be

addressed on a stand-alone basis, could include roaming

charges or fees associated with taxation periods.

Acting upon visible price components requires an

in-depth understanding of customer key buying factors

(KBFs). For example, in segmenting a market in terms of

price-sensitive buyers versus other types of customers

(e.g., those driven by brand, network size, etc.), takinga closer look can help to clarify true customer needs.

In one case, such an analysis revealed that fewer than

10 percent of price-sensitive customers were influenced

by overall pricing schemes, but instead, were actually

interested in specific aspects of their mobile pricing

plans (e.g., on-/off-net pricing, no minimum usage

requirements, etc.). Such an analysis can help operators

to pinpoint value drivers for different customer groups

and to maintain pricing levels (and associated profits)

in areas of less interest.

Price plans must be adjusted to exploit profitable trade-

offs that occur between different price components.

For example, the pricing plans of one operator were not

focused on delivering the value that customers in

different KBF segments wanted. By realigning plans to

better address true customer needs, the operator was


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To protect their revenues, MNOs should evolve towards a dual strategy,

better matching of significant differences in consumer price sensitivity02

able to meet the real requirements of specific customer

segments and boost its ability to capture value. In a plan

targeted towards on-net, price-driven customers, the

operator discovered that by making a small decrease in

the on-net tarif f (which customers sought) it was also

able to substantially increase off-net tariffs and thus,

capture additional value.

In addition, a brand price plan should be carefully

designed to retain and extract appropriate premiumsfrom brand-driven customers, but without destroying the

portfolios consistency (Exhibit 4). Such a plan should

be guided by two basic rules. First, no aggressive

discounts should be offered in any of the key price com-

ponents, which may include pricing for SMS (Europes

dominant text messaging technology), off-peak calling,

minimum consumption requirements, and on-/off-net

plans. Second, the brand must be more competitive

than other mobile network operator (MNO) brands in

terms of at least one of these price components.

By following these and other recommendations, one

European mobile operator experienced a 33 percent

increase in SMS ARPU (average revenue per user), with

little or no churn impact. Additionally, the operator has

already moved roughly 40 percent of its consumer

customer base onto the new price plans, which are

generating an ARPU increase of 8.5 percent.

Opening up to second brands:simplicity wins!

In most cases, boosting mobile plan simplicity and

transparency levels in order to attract price-sensitive

customers without damaging the primary brand can

only be accomplished by launching an own secondbrand or opening up the network to MVNOs and SPs

(service providers).

Over the last couple of years, tens of new mobile brands

were launched in European markets. Starting this new

category of secondary brands, MNOs goals include

protecting their main brands from aggressive price

movements; addressing an important and growing

consumer segment, estimated to represent more than

20 percent of most European markets; and, in some

cases, launching a preemptive strike against the expected

proliferation of MVNOs and SPs. Three common factors

characterize the positioning of most of these second

brands, either those belonging to MNOs or others

developed by third parties:

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Visible and less visible pricing factors may vary by market and require

different approaches03

Simplicity:All elements of the offer should convey ease

of use and total transparency (i.e., no footnotes or tiny

type).

Low prices: Pricing should be competitive and based

upon a single plan that essential ly offers a 20 to 30

percent discount versus comparable MNO price plans

(no hidden charges).

Effectiveness: Although focused on the main servicecomponents, customer care should be distinctive

(it works). Goals include problem resolution on first

contact, innovative features that promote simplicity and

cost control, and automatic interaction either online or

through IVR (interactive voice response).

Any of four models can be used to create a second

brand (Exhibit 5), providing MNOs with a variety of

options that can be tailored to specific needs and

market conditions.

Brand positioning should be delivered via a no frills

value proposition. Pricing, for example, should be a

single, flat-tariff plan, featuring the 20 to 30 percent

discount versus comparable main-brand price plans.

Products and services should be based upon a SIM

card only offer, complemented by a limited portfolio

of low- to medium-range handsets. Distribution plans

can include remote (e.g., the Internet) and direct

(e.g., call centers) channels, complemented by non-

traditional physical distribution channels. From the

customer franchise perspective, the new brand should be

designed to allow for smart and effective media choices.

The above-mentioned elements must be supported by a

low-cost operational model. For example, customer care

should be very eff icient, based upon Internet and IVRaccess, and augmented by a paid customer helpline.

In terms of IT and systems, highly automated and

integrated IT systems can enable end-to-end work flows

and tariff flexibility. Human resources need to be

optimized in a low fixed-cost structure featuring a single-

layer organization of 30 to 40 dedicated people. Support

services could include formal service agreements

supported by service level agreements for network access

and shared services between MNOs and new operators.

Overall governance issues include the need for the new

brand to be managed in strict alignment with the MNOs

main brand in order to prevent cannibalization.

By Pedro Mendona, Duarte Begonha, and

Ole Jrgen Vetvik


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A consistent portfolio should be composed of x+1 default price plan04

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Recent proliferation of asset-light mobile brands has been taking place in

Europe illustrative examples/not exhaustive05


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Across both developed and emerging markets, wireline

operators are seeing substantial developments in the

marketplace, driven by the acceleration of f ixed-to-

mobile substitution, the continual migration towards f lat

rates, an increasing commoditization of broadband, and

the emergence of IPTV. When combined, these trends are

shifting the balance in the residential consumer demand

profile, reducing the value of traditional voice, limiting

the differentiation via broadband access, raising the

importance of new service lines (such as TV), and above

all, increasing the appetite for integrated home solutions

with multiple services in bundled offerings.

For incumbents, these trends clearly represent a threat,

but also some positive aspects. On the negative side,

they result (in most cases) in the ability of attackers to

undercut their offers with dual- and triple-play bundlesof 50 percent or higher price discounts, with a substantial

impact on market share. However, and depending

upon specific market conditions these changes also

represent an opportunity to proactively accelerate fixed-

line market growth through broadband and in some

cases, access uptake.

Responding to these strategic shifts poses substantial,

unseen challenges for incumbent operators: exploding

complexity in product options and bundles; risky choices

with substantial potential for cannibalization (e.g.,

flat voice, VoIP); complex trade-offs (e.g., regulatory

concessions); the need to develop new skills in previously

untested waters, which tend to be low-margin businesses

for incumbents (e.g., TV); and most importantly, the need

to deeply understand consumer demand and preferences.

The case for developing an integratedcustomer-centric approach

To effectively address the new paradigm, incumbent

operators must follow a set of fundamental principles.

These principles call for an integrated customer-centric

approach and must guide the way in which operators

develop and price their offer structure across the full

product portfolio.

1. Product and pricing architectures that focus on

segmented customer preferences can result in both

gaining penetration/share and improving ARPU.

Customer needs are not necessarily aligned with mini-

mizing prices. Systematically, in all cases, McKinsey has

identified sizeable segments of customers that are not

driven by pure total price, but rather by specific pricecomponents or other elements of the offer. For instance,

there are typically some segments that prefer lower-price

entry TV packages and are willing to heavily consume a

la carte channels and personalized on-demand content,

resulting in higher penetration and ARPU. Others prefer

an integrated, less flexible package. In a particular

example, an optimized design of an IPTV offering yielded

75 percent higher penetration and 10 percent higher

ARPU. In another example, for a particular customer

segment, a lower monthly rental was a key buying factor

in exchange for a higher per-minute price, thus allowing

the capture of an important share of mobile-only house-

holds with limited cannibalization.

In this context, designing suboptimal offer structures

based only upon traditional intuition may yield

02 Customer-Centric Success:Triple-Play Pricing

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Customer-Centric Success: Triple-Play Pricing


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substantial loss of penetration and more importantly,

lower product margins due to increased cannibalization.

On the contrary, by leveraging carefully designed market

research, operators can understand the key buying factors

(KBFs) behind the selection of individual products

(and bundled offers) and structure an offer that is able

to address the full range of customer segments, extracting

the maximum value (ARPU and/or increased share/

penetration) from each segment (Exhibit 1).

2. There is substantial value to be gained from taking

a comprehensive portfolio approachthat goes beyond

simple discounting. Matching underlying customer

needs in a holistic manner by redesigning and optimizing

a complete set/portfolio of integrated offerings in a single

effort allows for compensating the likely cannibaliza-

tion with increased up-selling and retention (namely,

of broadband). Many operators still see bundling as a

mechanism for delivering discounts. On the contrary,

experience shows that well-designed bundles can,

by far, compensate for the reduction of ARPU in some

customer segments, with substantial gains in other

segments. The key to success lies in being able to

simultaneously understand preferences and trade-offs

for multiple offerings, determining the net impact at the

consumer level by using market research coupled with

internal consumption data (Exhibit 2).

As an example of the benefits of applying these principles,

one incumbent operator managed to carefully design a

dual- and triple-play portfolio offering that resulted in

having, in terms of ARPU, an up-selling, retention, and

win-back potential six times higher than the cannibal-

ization risk (40 to 50 percent of the customers acquiring

any of the offers). This allowed the operator to achieve

all-time record sales in broadband (multiplying by a

factor of two) and a net ARPU increase in all segments,

significantly contributing to total revenue growth.The key to the design of the offer was to develop a structure

that was attractive to the segment at risk of churning,

while at the same time, providing significant up-

selling potential to a large share of the segment at risk

of cannibalization.

3. A consumer-integrated perspective should be taken

into consideration, even when designing product/pricing

architectures for individual products. A larger and

increasing share of consumers make their consumption

decisions in a comprehensive total spending manner.

Hence, when redesigning indiv idual products (e.g.,

ADSL structures), companies need to consider a full-

spending perspective on the consumer (Exhibit 3). In

fact, very often, new products derive more value from

the side effects of other products than from their own

self-standing business case (e.g., there has been a beneficial

Principle 1 design integrated offers that match the KBFs in the market01


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effect of IPTV on increased broadband uptake). Also, ade-

quate bundling can minimize cannibalization within a

specific product (e.g., bundling of f lat voice with DSL).

All of these are ef fects that can only be accounted for

if tackled from an integrated consumer perspective.

In one particular case, the optimized design of an

IPTV offer al lowed for a significant impact on ADSL

cross-selling, which added nearly 35 percent more

higher-margin ARPU to the initial business case. Theseprinciples will be critical for incumbent operators in

addressing individual and bundling product development

decisions in an effective manner:

In voice, flat-rate pricing requires a holistic approach.

In order to develop an aggressive offer that adds

significant value, operators need to move away from

launching offers on a product-by-product basis towards

the design of a full offer structure that covers the needs

of all segments from infrequent users (that for the

most part, will not buy flats) to more frequent users

(that will require premium voice offers to avoid the

reduction in ARPU from the unlimited f lat), e.g., the

new voice offer from Telecom Italia.

In broadband, offer structuring will become more

sophisticated.To further stimulate growth, operators

will have to explore the remaining opportunities in

order to adjust the existing offers (driven by speed and

price structure) to better match the existing structure

of customer needs. At the same time, they will need to

develop bundled offers with content and value-added

services, contributing to differentiation and unlocking

new broadband segments that are currently dormant

(e.g., the Comcast approach).

In IPTV, maximum value extraction for telcos requireseffective matching of consumers underlying needs.

Although new in the pay-TV markets, telcos must leverage

a higher degree of offer f lexibility than established

competitors (e.g., mini-basic entry packs or a la carte

channels, such as the PCCW offer). Telcos must also

provide a higher degree of interactivity (e.g., personal/

shift TV) with new creative pricing structures (e.g.,

flat rates for on-demand catalog movies, bundles of

channels with PPV/on-demand content). For optimum

design of their IPT V offer, operators need to use a

systematic approach based upon a deep understanding

of consumers underlying preferences.

Dual- and triple-play bundling requires sophisticated

pricing. As markets evolve into integrated home solutions,

operators will face the diff icult choice of pricing their

bundles to compete with aggressive attacker offerings,

Principle 2 focus bundling not on discounts but on up-selling02

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Principle 3 take an integrated perspective even when designing

individual products03

while avoiding the risk of cannibalization. To avoid this

deadlock, operators need a new way of thinking about

bundles, based upon launching all new bundled products

not necessarily developing individual products that

are then bundled at a discount, but rather thinking

about full offerings from the start (e.g., Fastweb triple-play

entry offer) that truly promote up-selling and retention.

Shifting from product-oriented to customer-centric

pricing will be a key differentiating element betweenbest and worst performers in the sector, particularly as

the market gets more competitive and complex. Players

that manage to develop the necessary capabilities and

processes will be able to sustain a higher premium and

take advantage of opportunities and threats that lie ahead.

The proposed customer-centric approach

While the challenges may be very specif ic, the approach

that operators should follow in order to develop their

offer structure is very similar. This approach can be set

up in two phases (Exhibit 4).

The first phase is based upon sophisticated consumer

market research, conjoint analysis, and will lead to the

identification and design of the ideal offer structure.

This would allow for the development of an integrated

(consumer- and competitor-based) market tool that

can be used for both tactical as well as for more strategic

pricing and product development.

Operators will be able to thoroughly understand consumer

preferences and potential decisions in each competitive

scenario. In fact, the approach includes the development

of an optimized product and pricing market segmentation

based upon key buying factors, which is instrumental for

the purpose of offer design and allows for the structuringof the full tr iple-play offer or specific components of it.

The model will simulate the likely customer adoption rates

given different price points and competitor reactions,

and will support the development of migration paths from

the current situation.

This first phase is required for in the complex design of

new products (i.e., identify ing what to offer), but could

be avoided if a clear idea of a desired offer structure

already exists.

The second phase will simulate up-selling, down-

selling, retention, etc., based upon a usage-oriented

segmentation and identif ied consumer preferences

in order to refine pricing and optimal structure of the

offer. Consumer preferences can be performed with the

conjoint simulator (if Phase 1 were conducted) or with


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Product and pricing approach based on an end-to-end customer-centric

integrated methodology04

simplified price-testing research. This phase, which

will be required in all cases, wil l result in the offer road

map, including key implications of implementation and

net impact on overall economics.

This overall approach would also allow for understanding

the impact of multiple critical decisions that take place

during product development, including technical,

operational, regulatory, and even those related to media

content acquisition, which are absolutely key to successfulnet value creation.

Wireline operators are facing new unforeseen challenges

in the marketplace, which will require a much more

sophisticated approach to product portfolio and pricing

design. Recent examples demonstrate that, by adopting a

systematic methodology to understand customer needs

and match the offer structure to satisfy these needs,

operators can extract substantial benefits (in volume

and/or ARPU) and significantly improve their competitive

positioning.

By Armando Cabral and Pedro Mendona

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Can mobile operators develop a successful multi-brand

strategy? Many apparently think so, judging by the

exploding number of virtual players entering the market.

In fact, over the past five years, players launched nearly 300

mobile brands worldwide (two-thirds of them in Europe),

significantly changing the traditional three-to-four-player

competitive market landscape in many countries.

Within the f lood of new offerings, most mobile virtual

network operators (MVNOs) and mobile network

operators (MNOs) second and sometimes even third

brands seem quite similar, as they typically feature asset

light low-cost operational structures that are 20 to 50

percent below those of MNO primary brands. However,

upon closer examination, significant differences emerge.

These new operators tend to assume different businessmodels, depending upon whether they possess their own

network code, interconnection agreements, customer

relationship management programs, or pricing schemes.

The different players align as follows:

MVNOs tend to control all four of the above elements,

thus ensuring full separation from the MNO.

ESPs (enhanced service providers) lack network code

(and may or may not have interconnection agreements).

MNO second brands are generally similar to ESPs,

but are MNO owned.

Brand partnerships (between an MNO and retailers)

feature separate pricing plans.

SPs (service providers)act as pure resellers of MNO

tariff plans.

Furthermore, the positioning of MVNOs and second

brands tend to vary across regions, since the competitive

challenges faced by players are significantly different

(Exhibit 1):

In Europe,where national regulatory agencies strive

to enforce the creation of wholesale offers in mature

markets with excess-installed capacity, MNOs must

decide whether to open their networks to MVNOs and/

or launch their own second brands. In either case, such

brands can address a growing market segment that

is sensitive to low prices and transparency (i.e., no

frills), but less demanding in terms of service or the

need for interaction.

In the United States, where there still remain important

penetration pockets, MNOs aggressively attempt to

gain market share through the development of wholesale

offers that allow different MVNOs to target and penetrate

specif ic sizeable groups, such as the youth and Hispanic

segments, as well as develop premium-based offerings.

In developing markets, where the most profitable

segments have already been skimmed, MNOs have

been launching second brands in order to prof itably

penetrate low-income customer segments. Focused on

affordable positioning (e.g., low consumption, low

denomination vouchers, inexpensive intra-group/zone

prices, and basic handsets), emerging operators seek to

ensure differentiation in terms of brand, product/

03 Beyond Traditional Market Pricing:Second Brands and Wholesale Play

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Beyond Traditional Market Pricing: Second Brands and Wholesale Play


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service, and channels to avoid cannibalization of the

existing customer base.

How MNOs can address the multi-brand issue

Clearly, questions surrounding MVNOs and second

brands will continue to make their way to the top of the

mobile CEOs agenda either as major opportunities to

conquer additional market share (i.e., attracting new

customers via a differentiated positioning) or to preemptthird-party competitive moves driven by regulatory action.

Because the premature launch of a second brand or

aggressive pursuit of a wholesale strategy can jeopardize

the profitability of the current and potential new

customers, MNOs should consider two central dimensions

in order to determine the best time to act. First, they

need to evaluate their prospects for profitable growth in

terms of EBITDA, which hinge largely on market

competitiveness. Second, MNOs must assess the inherent

risk of these initiatives starting a price war, which

depends upon both the potential for price reductions

(measured by comparing the lowest flat fee versus

interconnection rate) and other specific market conditions,

including perceived price elasticity, current brand

positioning of different players, and current existence

of other MVNOs or second brands (Exhibit 2). Overall,

MNOs should develop a multi-brand strategy only when

it either presents a limited risk of triggering (or fueling)

a price war (having a negative impact on the current client

base) or when the actual market context indicates poor

future profitable growth prospects. However, if the high

risk of a price war exists and there are still interesting

growth prospects in the market, MNOs should maintain

a wait and see posture and evaluate trade-offs in cases

in which at least one of these elements may jeopardize

MNOs future performance. If the case for action isclear, MNOs need to decide between launching a second

brand or pursuing a leading wholesale market strategy,

taking into account their actual market position, the

strength of existing no frills players already operating in

the market, and the level of regulatory pressure focused

on opening up networks.

A critical aspect of this decision centers on the MNOs

current market position. Market leaders are able to offer

lower flat tariffs (due to a relatively higher portion of

on-net minutes at marginal costs), thus they typically

should pursue a second brand strategy instead of the

less attractive option of selling wholesale minutes to

MVNOs. Conversely, a mobile attacker will likely develop

a wholesale strategy because of its ability to offer lower

wholesale prices without the fear of cannibalizing its

(relatively smaller) customer base (Exhibit 3).

MVNOs/second brands dominant purpose and positioning have been

different across regions01


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The prevalence or lack of no fri lls operations in the

market should also influence MNO strategies.

Experience shows that a first mover in this category

clearly benefits from a winner takes all dynamic,

easily capturing a 10 percent overall market share,

which usually equates to a 50 to 60 percent share of the

no fril ls category. If no/a few strong no fril ls

competitors currently exist, launching a second brand

may seem like an obvious move. However, if many

planning-stage MVNO candidates may soon emerge,using a wholesale strategy to lock in potential winners

without losing control of prices or customers may

constitute a better approach. Finally, regulatory pressure

to accommodate MVNOs also drives MNO strategies

towards wholesale, since launching a second brand

while negotiating with MVNO candidates can reduce an

operators degrees of freedom and drive down wholesale

prices. As an alternative to launching a second brand

or opening its network to a wholesale play, MNOs can

consider collaborating with strong customer franchisees

or distributor networks in order to leverage their retail

brands, while maintaining some degree of control over

potential competitors. Partnership models can be

structured like second brands (e.g., simple brand-

licensing agreements) or like real MVNO wholesale

deals (e.g., selling large minute bundles to a jointly owned

new MVNO).

Typical positioning of a second brandin Europe

European operators position most second brands (e.g.,

Uzo, YESSS!, M-Budget, Tchibo, simyo) based upon

three fundamental factors simplicity, low prices, and

effectiveness. These factors differentiate virtual operators

from both the complexity inherent in main brand pricing

schemes and the need for massive communication of

low penetration services. Such positioning targets agrowing segment that according to extensive market

research in various European countries and five years

experience in Scandinavian countries can represent

from 20 to 25 percent of all current users, making it

much larger than any other market niche built upon

sociodemographic factors (Exhibit 4).

A no-frills value proposition relies upon four key

attributes. First, most no-frills players focus on a SIM

card only offer, complemented by a limited portfolio

of low- to medium-range handsets and a very simple

and reduced range of services. Second, from a pricing

standpoint, they offer single plans with f lat tariffs and

no minimum consumption obligations at a discount of

approximately 50 percent compared to similar plans

from main brands. Third, no-frills operations usually

offer a combination of remote and direct channels (e.g.,

To understand if it is time to act, MNOs need to consider 2 key factors02

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the Internet and call centers), complemented by non-

traditional physical distribution channels at half the

cost of telecoms retailers (e.g., post office branches,

kiosks). Fourth, no-fril ls players brand design and

positioning typically favor innovative and cost-efficient

marketing campaigns focused on younger customer

segments, but with universal reach.

In order to be able to systematically offer low prices,

MVNOs and second brands rely upon low-cost operationalmodels. The key elements of these low-cost models

include efficient Internet and IVR (interactive voice

response) customer care, complemented by a paid customer

helpline, and highly automated and integrated IT sys-

tems that enable end-to-end work flows and billing/cus-

tomer care f lexibilit y. Other features include a reduced

fixed-cost structure with a single-layer organization of

about 30 to 40 dedicated people and the outsourcing of

all shared services (e.g., accounting, human resources)

supported with pre-negotiated service level agreements

(SLAs) with the MNOs.

Best practice in designing a winning mobilewholesale strategy

When pursuing a leading wholesale market strategy,

MNOs must simultaneously take into account the effect

that wholesale will have on the operators market share

and ARPM (average revenue per minute). In this context,

designing a winning wholesale strategy requires the

answers to three fundamental questions:

What wholesale pricing conditions should operators

push for? While the maximum wholesale price per tran-

sit for MVNO breakeven typically runs at about half the

interconnection level, MNOs must avoid very low whole-

sale tariffs, since they will lead to MNO retail price cutsand thus, destroy value across the industry.

Therefore, MNOs should attempt to maintain as

much control as possible over wholesale pricing and

avoid indexing them to interconnection rates (that are

doomed to be cut in the future). Furthermore, leading

MNOs should resist engaging in wholesale price wars

in order to retain a fair market share, since in most

situations they are economically better off with a lower

wholesale market share than with lower retail prices

(induced by the wholesale price war).

Which services should be provided? Restricting an

MVNO to a basic offer limits its ability to compete in

high-end customer segments. However, enabling a

wholesale offer of data connectivity and content can

drive upscale MVNO business models focused on value-

added services that prevent pure voice price competition.

Second brands seem to be more attractive for market leaders, while

wholesale seems to be more favorable for attackers03


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Which partners should be engaged? Selecting wholesale

partners forces MNOs to make important trade-offs

between locking in potential winners in order to gain

share in the wholesale business and minimizing the

negative effects on retail prices by, for example, filling

the market space with non-voice-focused business

models.

To clear these significant hurdles while creating a

wholesale business model, MNOs should follow threebasic principles. They should establish a retail minus

wholesale pricing scheme that ensures better control

over the wholesale price and avoids setting prices that

are oriented to cost. Next, they should offer a stan-

dard closed list of services and maintain the ability to

negotiate ad hoc services according to the profile and

objectives of each MVNO. Finally, MNOs should provide

a balanced offer for different types of virtual operators

(such as pure MVNOs, enhanced service providers, and

pure service providers). At the same time, they need to

ensure a pricing scheme that allows for appropriate

profitability to different types of MVNOs one that

doesnt feature conditions that can be used by the NRA

(national regulatory authority) to impose special

benefits to pure MVNOs under the non-discrimination

principle umbrella.

Adjusting the organization to a multi-brandreality

As MNOs evolve into more customer-centric organizations,

selecting the right organizational framing for second

brands and/or wholesale businesses can help ensure the

appropriate coordination and development of value-

creating solutions going forward. To manage a second

brand, early evidence suggests that the most appropriate

framing is to position the new brand as an independentconsumer unit within the MNO organizational structure,

ensuring coordination through a unified command

(e.g., both reporting to the same COO). This model

fosters the independent and flexible development of a

second brand, enables accountability, and ensures basic

coordination between the main and second brands,

while preventing regulatory action. In short, an MNOs

second brand should be seen by consumers as a new

operator, by other departments in the MNO structure

as an autonomous but articulated marketing unit, and

by NRAs as just another tariff plan (Exhibit 5). MNOs

should avoid organizational solutions that either make

the second brand little more than a simple tariff plan

within the MNO consumer market division or create a

full-fledged independent operation with transfer prices

for network usage.

In Europe, most operators second brands have been targeting a market segment (20 -

25% of mobile consumers) more sensitive to low price and simplicity of mobile service04




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There are 3 alternative organizational framings for an MNOs second brand05

There are 3 alternative organizational framings for the wholesale business06


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To manage the wholesale business, MNOs should adopt

different organizational models depending upon the

nature of the contract and the relationship established

with the virtual operator (Exhibit 6):

Pure service providers should be managed by the MNOs

consumer business unit, which simplifies the close

articulation required between retail and wholesale, and

facilitates the contracting process.

Pure MVNOs should be managed by the interconnection

area or by the area that manages the MNOs business

with other operators. This makes for a less complicated

interface with the other areas, such as network and IT,

and increases transparency for the regulator and

contracting entities.

All enhanced service providers are best managed by

an independent business unit. This unit assumes

responsibility for the overall development and management

of the no-fri lls and other niche segments (including

potential MNO second brands).

Actual experience across markets shows that, in most

cases, few MNOs strictly follow these rules. Some attackers

opened wholesale access too early, jeopardizing

profitable growth. Market leaders often chose to open

their networks to third parties rather than launching

second brands. Several operators have launched their

second brands with no clear dif ferentiating positioning

or, even worse, as simple price plans. Given these missteps,

the mobile brand explosion under way legitimatelygenerates mixed feelings. However, McKinsey & Company

believes that when appropriately managed and positioned,

the multi-brand strategy can play a fundamental role in

protecting the profitability of main brands by addressing

the needs of a growing price-sensitive segment in all

markets and avoiding the quick commoditization of

mobile offers.

By Duarte Begonha, Pedro Mendona, and

Hugo Espirito Santo




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Believe it or not, the maelstrom that appears poised to

consume much of the telecoms industry isnt unique.

In fact, many consumer and industrial sectors face the

seemingly endless proliferation of products, serv ices,

channels, segments, and media. The only constant that

most of these industries share is the tirelessly searching

consumers, who are actively trading up or down to capture

the best deals on the best products and services at the

best prices.

These maturing industries face the paradox of sinking

prices and rising customer acquisition costs. In the

telecoms industry, for example, prices dropped by 6 to

16 percent in Europe and the United States from 2003

to 2005, while the costs to acquire a new customer rose

significantly in some markets by nearly 60 percent.

In such an environment, firms seeking to surprise and

delight customers confront the need to provide the best

(and most profitable) value proposition in terms of

product/service, price, and other benefits. Due to attendant

complexities, most telcos trying to deliver on this promise

tend to manage things along a single dimension, focusing

entirely on the product (e.g., prepaid, data, voice), the

price, or the emotional benefit being offered (e.g., fun,

functional, etc.). Instead, McKinsey & Company research

shows that two or more dimensions must really be pursued

in order to deeply understand a category. Further

complicating things, two key dimensions benefits and

price usually dont correlate very well with each other.

Staying on top of so many issues can challenge even the

savviest marketers.

Rather than following conventional approaches,

McKinsey has developed a way in which to understand

a category and define the best product/service, price,

and value proposition all in a single pass. The CHESS

approach integrates pricing conjoint analysis, brand

analysis, and product optimization in one comprehensive

method that provides a way to increase a brands consumer

preference share (i.e., the percentage of customers

preferring a given brands products or services) by, in

some cases, 50 to 60 percent or more.

CHESS enables marketers to see a category through the

customers eyes and identify the right segments. With

it, marketers can locate the ideal (and most financially

attract ive) product and price by segment, understand

which benefits to communicate, and finally, simulate

the impact. There are three primary CHESS piecesthat together can provide an unassailable marketing

strategy (Exhibit 1):

Pricing conjoint analysis determines which product

attributes customers prefer. The representative customer

taking the conjoint survey must choose one product out

of several with different attributes, and the process is

repeated multiple times to determine the persons (i.e.,

segments) product preferences.

BrandMatics is a quantitative analysis that assesses

customer behavior and attitudes towards brands. It

enables marketers to precisely define real consumer

needs using a derived needs analysis technique.

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The Product Optimizer allows marketers to quantify

how many customers would choose a given product.

Through multiple simulations, the optimal product

configurations can be determined, and the calibration

of the optimizer al lows teams to convert preference

shares into gross adds shares (i.e., the proportion of

subscriber additions that an operator can expect from a

given product/service offering).

Opening gambit: pricing conjoint analysis

Consumers often perform a sophisticated calculus when

shopping for products and services, trading off tangible

and intangible benefits against prices within an array of

possible choices, until they narrow down the selection

to a single product and buy it. Pricing conjoint analysis

replicates this highly efficient process by surveying

representative test consumers, who are forced to make

a series of trade-off decisions among various products

at different price points. A three-step process is used:

establish basic factors, create preference clusters, and

fill in relevant details.

Establish basic factors: This first critical step defines

the possible key buying factors that will be tested via

the conjoint analysis. Attributes considered by a mobile

operator, for example, might include the brand, the

handset, bundles of minutes, or voice prices. From among

these attributes, different product/price packages are

then assembled and shown to the survey respondents,

who must choose a favorite bundle from a group of

perhaps three bundles in a 30-minute conjoint survey.

Create preference clusters: Once the basic factors are

established, distinct customer preference clusters can be

identified, based upon the relative weight of purchasing

factors. For mobile operators, first-cut purchasing factorsmay be the brand and the price, with subsequent cuts

refining these factors further (e.g., price may be broken

down into those seeking the lowest possible price per

minute and others seeking the lowest monthly recurring

costs). In terms of process based upon results of the

conjoint survey utility profiles are generated for each

respondent and individual profiles are grouped into

logical clusters. The right number of clusters is achieved

when each is distinct and can be described in a unique

way. Typically, a mobile market has from four to seven

clusters each for pre- and postpaid segments.

Fill in relevant details: Additional research data will

help marketers to gain a deeper understanding of the

initial conjoint clusters. Examples of such data might

include customer commitment levels, sociodemographic

insights, or brand market shares. Ultimately, the conjoint

CHESS integrates pricing conjoint analysis, brand analysis, and product

optimization in one comprehensive approach01


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process results in the creation of the basic CHESS

board, which identifies customer segments by size.

The CHESS board can also be overlaid with an operators

own market share per cluster (Exhibit 2). From this data,

its possible to establish where the company is leaving

money on the board because it has low market shares

in attractive customer segments.

Middle game: BrandMatics

Brands can be powerful marketing tools that help

companies elevate their ability to capture value or

anchors that drag down competitive products and

services. To better understand these enigmatic assets,

McKinseys proprietary BrandMatics approach

helps marketers identify customer preferences that

extend beyond the product to the brand itself. The

BrandMatics approach typically includes three steps:

the completion of the BrandMatics survey, identification

of the brand drivers for each customer cluster, and the

development of product positioning by cluster.

The BrandMatics survey is used to compile the relevant

set of brand drivers. The survey itself should be part

of the conjoint analysis survey discussed above. To be

effective, the survey must address all four dimensions

of the brand, which comprise:

Emotional benefits,which can include how the brand

interacts with the ways in which respondents view them-

selves (e.g., this brand makes me feel special, connects me

to friends and family, allows me not to worry, etc.)

Rational benefits can include product or functional

attributes (e.g., the handset has a good keypad, a llows

for connection every where, etc.), or values that are

related to the process or relationship that surrounds the

branded product.

Emotional attributes consist of the aura surrounding

the brand (e.g., has a good reputation, is an innovative

company, etc.)

Tangible attributes might include elements of things

that the company does, such as good design, many product

promotions, or offering a helpful Web site.

Attributes and values representing all four of the above

dimensions should be included in the quantitative

BrandMatics survey in order to ensure the holistic

coverage of all relevant brand drivers.

To determine the brand drivers for each customer cluster,

marketers must assess the relative importance of the

drivers in reaching specific customer segments and

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With the advent of convergence, many players in the

telecommunications and media industries are quickly

marketing a set of multi-play offerings in a combination

of products and serv ices, including the Internet (broad-

band), television services (mostly digital), and telephony

(moving to VoIP and wireless).

Todays examples are many from the early VoIP and

digital service bundles from Cox in the United States,

to the multi-play services of Free in France via its Free

box, to the quadruple-play offering being put into place

by NTL-Telewest-Virgin in the United Kingdom. In fact,

given the current number of bundle launches, not offering

them is more the exception than the rule in the digital

convergence services industry.

There have been various business reports showing thestrategic relevance of bundling for the convergence

industry. Likewise, many economists (e.g., Economides,

1993; Bakos and Brynjolfsson, 1999; Stremersch and

Tellis, 2002; Whinston, 1990) have looked at the effects

bundling might have in terms of competition dynamics

especially those motivated by a) the need to define the

underlying variables determining optimal bundling and

b) the need to determine how those factors could lead

to anti-competit ive behavior, which would need to be

closely monitored via antitrust regulation.

From a static economic perspective, bundling can be

seen as a way to differentiate offerings via complementary

services and hence, elude price competit ion. However,

today, the most used bundling strategies in digital

convergence have instead been very competitive, i.e.,

large discounts to motivate quick uptake.

These aggressive, possibly pro-competitive strategies

can, however, have large perverse ef fects if the customers

signing up are only motivated by price discounts, thus

leading to persistent lower margins for the industrys

marginal suppliers of digital services. This, in itself,

compensates by delivering poorly correlated services to

those bundled customers.

There are ways to believe that the best answer is the

middle to gain a welfare perspective with suff icient

room left for profitably offering bundling in order to

achieve quicker new product intake. This article aims

to demonstrate how convergence services players can

leverage the demand functions of tr iple-play services

to create versioning strategies and deliver the best

offering of service bundles and prices in the context of

acquisition. The methodology is based on systematicmarket research and a conjoint analysis. We will explain

the methods and results applied to a set of disguised

European convergence clients, outline the dif ferent

types of optimal bundles and compare them to current

practices, and finally, we will describe the managerial

and strategic implications of the approach.

A research-based approach to optimal bundling

Before explaining the approach in detail, it is important

to understand three underlying principles to be considered

when designing optimal bundling strategies.

The first principle deals with matching the natural

structure of consumer preferences. Beyond the different

weighting consumers place on key buying factors (KBFs)

for each service, there are also differences in the way

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Understanding the natural structure of potentialdemand

At a preliminary stage, a comprehensive piece of market

research should be designed and executed in order to

assess the natural structure of consumer preferences.

With a non-proportional sample that should be structured to

include a minimum number of interviewees with different

consumption patterns (from non-users of each service tosubscribers with different providers), a multi-step adaptive

conjoint analysis is typically required to encompass all the

relevant factors that emulate consumers choices among

alternate suppliers, key service characteristics, and

possible struct ures of the offers (packages) at different

price points. The results of this research will show the

relative importance of key buying factors (e.g., supplier,

standard of the different services, and price) and the

utility of the a lternative attributes within each factor

(e.g., utility of each brand/supplier; of different levels in

each service; and utility of each price level).

Based on these results (the relative importance of

KBFs and the specif ic utility of each attribute), a non-

hierarchical clustering of the sample will provide the

natural market segmentation in terms of what different

consumers look for (Exhibit 2):

At an integrated level 2-play (2P), 3-play (3P), or 4-play

(4P) this will allow for understanding the natural

clustering of consumer reactions to bundled offers

of different services provided by dif ferent suppliers.

As mentioned, beyond the natural brand versus price

trade-offs, consumers also differ in the relative

importance they place upon each service attr ibute.

At a specific product/service level (e.g., TV service), that

same exercise will help identify the natural clusters ofpeople in terms of the relative value of dif ferent service

components. In the case of TV services, for example, we

typically f ind a natural segment of people that equally

value multiple types of content and the diversity of

channels (natural candidates for a basic TV package)

and others who are fundamentally focused on specific

channels and content genres (natural candidates for

vertical packages and/or premium channels).

Overall, the natural segmentation of preferences should

reflect the ultimate drivers of choice in the marketplace.

For some people, a specific provider may have a natural

advantage with an integrated offer; for others, price

discount wil l be the driver in penetration of 2P or 3P

standard solutions. For specific groups, access to

some type of kil ler content or service can be used as a

fundamental lever to foster integrated offers.

A non-hierarchical clustering provides a natural market segmentation02

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The opportunity to address and serve these natural

segments as such wil l, however, depend on:

Their willingness to pay according to their relative

preferences.In many cases, the greater preference and

importance placed upon a certain element of the offer

by a specific group of people is not enough to make it

exclusive to that segment. This is either because such a

segment is not big enough or because it is not willing to pay

a sufficient premium over the value that the averageconsumer places on the given item. Therefore, deriving

the ideal offer to match the natural structure of demand

requires the analytical assessment of service components

value for a target segment and for the total market.

The degree to which the structure and design of existing

competitive offers already match (or dont match) those

preferences.Operators have the fundamental option

to go head-to-head with existing players or to look for

an alternative and complementary positioning of the

offer. Market simulation can be built upon the research

results, allowing for an estimate of potential reach

(penetration and market share) and profitability of

alternative configurations and price positioning of

the operators own offer vis--vis competitors current

offering and possible reaction.

The dynamic effects, in terms of up-selling, competitive

churn, and margin cannibalization, of launching new

single and packaged offers in the marketplace. Rather

than greenf ield developments, most cases are about

complementing and partia lly replacing the existing

offer, with natural concerns over expected migration of

own customers and competitive reaction. Market

simulation should also be used to define the migration

path from the current offer to the new offer.

With the described systematic approach, convergence

services players can leverage the demand functions of

triple-play services to deliver the best offering of service

bundles and prices in order to maximize the value captured.

Overview of optimal bundles and current practices

As previously mentioned, significant differences have

been identified regarding the nature and size of customer

segments across different markets. These differences

are fundamentally explained by the specific competitive

structure and existing offers in each market, reflecting

consumers experience and influencing the dominant

patterns of consumer reaction. For example, in a market

with only two strong players, the brand lovers segment

will be much larger than in a market with a strong

proliferation of discount players.

Different market structures can be identified and influence consumer

reaction patterns03


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Of the many different types of markets, one could

generally describe three typical ones (Exhibit 3): (1)

markets with a strong telecoms incumbent presence

and a strong media player (e.g., Portugal and Belgium),

(2) markets with strong competition in the telecoms

field, but one dominant media player (e.g., the UK), and

(3) markets with very strong competition from both the

telecoms and media fields (e.g., France).

Markets with a strong telecoms incumbent presenceand a strong media player. These markets are generally

character ized by strong brands competing in a duopoly

and a polarization of customers with interest in dif ferent

premium products. For example, in Flanders, both

Telenet and Belgacom have a strong brand with different

attributes, and both players could develop a portfolio

strategy to extract the most value out of the market.

Markets with strong competition in the telecoms field,

but one media giant. In markets such as the UK, there

is generally a customer preference for specific products

in the media and telecoms arenas (e.g., Sky won against

cable 3P; BT has survived without its mobile arm) and,

in the other extreme, preferences for telecoms bundles

are essentially based on good price offers (e.g., basically,

all players in the UK have added 3P and 4P discounted

offers to their portfolios). This represents both an

opportunity and a challenge to capture 3P and 4P

customers and, at the same time, sustain product

differentiation.

Markets with strong competition in both the telecoms

and media fields. France is an example of a market that

has generated large discount driven segments based

on the development of highly competit ive offers that

have forced all players to lower prices.

To illustrate this approach, the following example

describes a specific market with a typical segmentation

and the types of bundles that better cover the needs of

the segments in order to generate an optimal portfolio.

Lets picture a market with four segments: (1) discount

driven individuals, for whom discounted price is their

key driver and who have no special request for product

specif ications, (2) the product oriented, who generally

have one or two core product needs and are receptive to

packages that include other services, (3) the brand lovers,

with a clear preference for a specific provider and who are

generally interested in one or two core products from that

company, and (4) the piece buyers, who want the best

solution for each service and rarely react to bundled offers.

In this market, the optimal portfolios aim would be

to maximize the value extracted from each segment,

Serious challenges ahead, beyond analytical complexity04

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adjusting the offer to the needs of each segment. The opti-

mal portfolio for this market could be structured as follows:

Individual premium products to cover the needs of the

piece buyers with the high-end products of the port-

folio range. Prices for these products should be maintained

while offering product enhancements, since discounts

on premium combinations dont drive up customer

penetration and would imply a reduction of value.

2P/3P bundles combining design-to-margin products

and high-end solutions at a discount. These packages

attract product oriented individuals to the offer with

a better solution for their core needs. The optimal price

for these bundles will be defined based on the price

sensitivity of this segment in order to foster up-selling.

2P/3P bundles combining standard and low-end solutions

at a discount to attract discount driven individuals.

The price sensitivity of this segment forces the offer to

be quite price attractive, and a combination of pay-per-use

products with standard services achieves this requirement

while avoiding cannibalization of other segments.

Along with these bundles, a dif ferentiated offer should

be designed for the brand lovers segment. In markets

where this segment is strong, a great opportunity exists

for capturing the brand premium that these individuals

are willing to pay. However, the solution is not as simple

as increasing prices across the entire portfolio, since

there will be a strong impact on customer loss from other

segments. In this case, the optimal strategy would

consist of a combination of the standard product version,

with over-allocation of the advertising budget and optimalchannel distribution. Knowing the most common service

level valued by this segment allows for enhancement

of the standard product (either individual products or

2P/3P offers), thus developing an exclusive offer that

captures this segments surplus.

Achieving success in this context underscores the

importance of understanding the specific needs for each

market, given the fundamental differences observed,

which are explained as we have seen by the specific

competitive structure and existing offers.

Managerial and strategic implications

Overal l, most operators have not yet found the way to

optimize development of their offering or to deal with

the increased complexity of a multi-play world.

Underestimating market elasticity has inhibited

established players from making bold pricing moves

that could result in significant market share growth and

preemptively fil l the natural room for new attackers.

In many cases, the unstructured response to new

offers in the marketplace is also inducing margin

cannibalization of traditional business.

To profit from proliferation and succeed in the transitionto a multi-play landscape, operators still face serious

challenges that go far beyond the analytical skil ls and

capabilities needed to deal with the increased complexity

of pricing and offering design (Exhibit 4):

First, top management has to be involved and willing

to take risks. Bold pricing moves typically encompass

some downside risk (e.g., cannibalization of the existing

offer and margins) and therefore, should not be relegated

to marketing managers who will always choose an

incremental path.

Second, it often calls for a significant shift in operators

posture towards regulation.To ensure the required

degrees of freedom to develop new bundled offers

(deregulation of retailing conditions), operators may

have to make wholesale conditions more transparent.

Finally, operators will also need to learn how to navigate

uncharted waters. In a number of circumstances, telecoms

operators lack consideration for what it takes to design

a TV offer that will drive subscription and high usage.

The same happens to other media-based players that are

extending their reach into the telecoms services realm,

such as with broadband access and VoIP.

Although recognizing that the convergence of these services

brings significant differences back into the competitive

landscape from one market to another (often requiring

local regulatory frameworks), we believe this transfor-

mation process and the corresponding challenges that

lie ahead should play a fundamental role in the telecoms

and media CEOs agenda in the coming years.

By Jacques Bughin, Armando Cabral, Patricia Ferruz,

Pedro Mendona, and Steven Spittaels


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To better understand the challenges facing mobile

players in Europe, McKinsey & Companys RECALL

magazine had the opportunity to talk with T-Mobiles

chief marketing officer (CMO) in Croatia and the head

of Telenors consumer mobile business in Norway.

T-Mobiles Hendrik Kasteel spoke about his companys

success in defending itself against the market entrance

of a new network operator, while Telenors Jon Erik

Haug shared his perspective on pricing strategies and

future developments in markets that have a heavy

MVNO influence.

Hendrik Kasteel

Hendrik Kasteel, T-Mobiles CMO in Croatia, has spear-

headed a remarkable achievement, namely, growing the

market leaders revenue market share and profits at a timewhen a third network operator entered the Croatian market.

McKINSEY: When you heard that a new player was

about to enter the market, what were your thoughts?

HENDRIK KASTEEL: A mix. On the one hand, the

new operator has a certain reputation, and I realized we

(T-Mobile Croatia) were facing a substantial challenge.

On the other hand, I was inspired by the challenge. This

challenge injected energy into the entire organization.

McKINSEY: Established operators have used different

strategies when encountering new entrants. What was

T-Mobiles strategy?

HENDRIK KASTEEL: Our ambition was to stop the

new player at the beach. We didnt wait for them to

enter the market and make the first move; we proactively

rebalanced our prices prior to the new operators entry.

The principle underpinning our pricing adjustment was to

establish a few price plans that all had one really attractive

price point. We launched an aggressive on-net price plan

one price plan with low prices for calls to fixed services

and so on. This made it difficult for the new player to

undercut our portfolio on all the important dimensions.

The on-net dimension was absolutely essential. On-net

is key for Croatian subscribers and by leveraging it, we

gained a market share greater than 50 percent, making

this a huge advantage relative to the new operator. In

fact, many subscribers compared our on-net price to the

new entrants off-net price. This dynamic really hurt

them, since our on-net price was set close to interconnect

rates. The real beauty of our new portfolio was theopportunity that it gave us to respond to the new players

marketing strategy. Whatever they communicate, we

can always communicate one price element from one of

our price plans that is better or is at least perceived to

be better than their offerings. We can now adjust one

price plan if we need to change prices, rather than having

to cut prices across the board.

McKINSEY: By how much did you actually reduce the

price level?

HENDRIK KASTEEL: We reduced prices by about 20

percent. However, the price elasticity effect has proven

to be much larger than we expected. In fact, the elasticity

has far outweighed the price reduction. Blended ARPUs

(average revenue per user) and revenues have increased

a lot, despite the price reduction.

06 Points of ViewInterviews with Hendrik Kasteel, CMO of T-Mobile Croatia, and Jon Erik Haug,head of mobile, Telenor

RECALL No 1 Pricing

Points of View


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McKINSEY: How did T-Mobiles position change after the

new player entered and you introduced the new price plans?

HENDRIK KASTEEL: Our revenue market share is

around 55 percent (up from 52 percent) and margins

have increased somewhat. The new entrant has gained

about a 4 percent share, mostly coming from the other

network operator in the market, Vipnet. The market

has also changed. Marketing intensity has increasedand communication is much more aggressive. Vipnet

has also launched a no frills brand in order to strike

back at the new player. The total minutes of usage have

increased significantly by about 30 percent and

interestingly enough, SMS (short message service)

usage is down by 20 percent or so. The SMS reduction

is probably due to subscribers getting dual SIMs

(subscriber identity modules, which are smart chip

cards used in handsets) and thus, replacing off-net SMS

with on-net calls. The MoU (minutes of usage) increase

is partly due to lower minute prices and is partly a sign

of emerging fixed-to-mobile substitution.

McKINSEY: Going forward, what are your priorities?

Are you considering launching a second brand?

HENDRIK KASTEEL: We are very satisfied with our

brand position. Despite being an incumbent, our brand

is dynamic and stronger today than before the new

player entered. A part of the brand success is our ability

to shape the market. We are usually the first-to-market

with innovative price plans and new products. For

instance, we were the first operator within the T-Mobile

group to launch the value bundle or Flext concept in

the postpaid segment. The ability to shape the marketis a core reason for our strong brand and the successful

fight against the new entrant.

However, our experience doesnt necessarily mean that

other operators shouldnt have more than one brand.

Generally, the mobile category is maturing and consumer

preferences are becoming more diverse and sophisticated.

I would, therefore, expect to see more future brand

proliferation in the mobile industry.

Whether to have more than one brand must be a case-by-

case decision, based upon the merits of the respective

markets. I do not believe there is a general rule about

if operators should or shouldnt have more than one

brand. Im surprised that many firms seem to be launching

no-frills brands. The mobile industry should introduce

brands that move the consumer focus away from price.

Just look at retail banking: We all know we could get

better deals somewhere else, so why do consumers

not move? I believe it is due to comfort. Customers are

comfortable with the bank they have, although it may be

neither the cheapest nor the best in terms of service. The

mobile industry should build brands that move consumers

into the comfort zone.

Jon Erik Haug

Norways Telenor enjoys a strong position in its domestic

market, with a subscriber market share close to 60

percent and healthy margins. Last summer, Telenor

introduced new postpaid price plans in the consumer

market that resulted in a 7 percentage point increase in

EBITDA (earnings before interest, taxes, depreciation,

and amortization) margins and a small market share

increase. However, the head of Telenors Norwegian

mobile business, Jon Erik Haug, is far from complacent.

He sees several threats on the horizon, including the

current challenges from aggressive MVNOs (mobile

virtual network operators). In McKinseys conversation,

Jon Erik Haug expands on this point and discusses future

threats such as VoIP (voice over Internet protocol).

McKINSEY: How price-sensitive are Norwegian mobile

subscribers and how has this developed over the last few

years?

JON ERIK HAUG: When MVNOs entered the market

around 2003, they focused on price and claimed this

position in the minds of the consumers. This clearly

increased subscriber price awareness, and we now find

price hunters in all classic sociodemographic andneeds-based segments. The established operators, for

example, Telenor and TeliaSonera, responded to the

price competition by differentiating in terms of simplicity,

coverage, network quality, and innovation. This was only

partly successful, and as long as established operators such

as Telenor struggle to successfully differentiate on para-

meters other than price, price sensitivity will probably

continue to increase in most segments. In the market-

place, we see our brand premium diminish year-on-year.

McKINSEY: Telenor and other mobile operators have,

in the last few years, invested significantly into their

brands. To what extent have they been able to capitalize

on this investment?

JON ERIK HAUG: In Scandinavia, incumbents have

had limited success wit h brand investments due to


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45

a lack of consistency. Telenor and others have shifted

focus between several differentiators for example,

coverage, innovation, serv ice, and simplicity. In a

European context, numerous attempts have been

made at building brands, but in my opinion, few if any

established operators or incumbents have succeeded

in doing this. The most successful cases actually seem

to be attackers that have a clear price-focused value

proposition. Overall, I would be surprised if the mobileindustry as a whole has had positive returns on brand

investments.

McKINSEY: Your main competitor has at least had

some success focusing on simplicity; and the MVNOs

focus on simplicity in addition to price. Is simplicity a

must in your opinion?

JON ERIK HAUG: Ideally, price plans should be simple

and straightforward for consumers to understand.

Transparent price structures do, however, stimulate

price competition and reduce industry margins

although attackers sometimes benefit profitwise from

price reductions. I believe operators should try to appear

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