Abstract

As technological capabilities provide potential for new mobile services there has also emerged a need for new innovative pricing schemes. Consumers from other businesses have shown distinct preference for flat-rate and bundle pricing. Through our theoretical and case analysis we found that bundle pricing approach is parallel by third-degree price discrimination. And, furthermore we were able to draw the three necessary conditions for price bundling to occur: i) firm must have some market power; ii) there can at best be imperfect arbitrage opportunities for consumers; iii) and consumers have different price elasticity of demand. It was also shown that mixed bundle strategy was more profitable than pure bundle strategy. As there is also strong consumer preference and evidences that it would best support the diffusion of usage of new mobile services, we found bundle pricing approach to be most appropriate for new mobile services.

Keywords: pricing, bundling, mobile services, price discrimination

1. Introduction

On a common marketing tactic, bundling is defined by Guiltinan (1987) as “the practice of marketing two or more products and/or services in a single package for a special price” (Yadav & Monroe 1993). Research has examined intent to purchase through determining what to bundle together and when bundling is a prudent business strategy (e.g. Ansari et al. 1996); Venkatesh & Mahajan 1993). The Literature has also addressed optimal pricing and framing (Harlam et al. 1995; Kaichker et al. 1995) and consumer preferences for bundles (Fishburn & Odlyzko 1997; Strouse 1999). The price bundling literature, however, has not focused much attention on the non-price dimensions of price bundling (Gillian & Kimberly 2001).

In mobile services industry pricing practices are yet to be defined and pricing is at the moment in flux – whether to use micro payment (Fishburn & Odlyzko 1997) or bundle pricing scheme; and should there be emphasized the monetary or non-monetary aspects? For example, Kollmann (2000) found in his studies, that customers of telecommunication, who are willing to swap providers, will make their decision on price first. Innovation management for telecommunication products is thus said to be a question of pricing. Features and development of the wireless business makes it therefore necessary to develop and invent new methods of pricing.

The bundle pricing should support the diffusion of the usage of new mobile services, and the formation and development of mobile services environment. In this paper we examine the bundle pricing and its capability to provide the needed incentives for consumers of mobile services business. The mobile services environment includes at least three co-operating parties: operator/service provider, content provider, and consumer (technology provider is also often included). The publicly presented price should be transparent, unambiguous, and thus risk reducer that it would best support the diffusion advancement. And still, it should include charges from the all co-operating parties.

There have been suggested two alternative basic pricing schemes for mobile services business – micro payments and bundle pricing. Despite the plans that consumers would in the future pay for each bought items through micro-payment schemes, it is unlikely to be the dominant mode of pricing for established producers. Economic arguments and observations of market behaviour show that consumers are reluctant to pay multiple micro-payments. (Fishburn & Odlyzko 1997)

It has also noted that mobile services cannot be distributed without a charge – free of charge services cannot exist - and possibly arising congestion should be managed somehow. Therefore the optimistic law of Metcalfe states that the benefit of users grows with the square of the number of other users in the network is only true as long as the marginal user does not cause congestion (Jonason & Eliasson 2001). Innovation management for telecommunication services is thus a question of pricing (Kollmann 2000).

The objective of this paper is to track down an ability of bundle pricing to create and support the diffusion and perceived value of mobile services. In this paper we have pursued theoretical approaches in examining the adoptability of bundle pricing for mobile services. Main incentive for studying suitability of bundling in mobile service business is that consumers have expressed a clear preference to paying from bundles of services rather than multiple micro-payments from each service separately. Especially, as in the micro-payments strategy the strategic role of pricing as competitive tool would be restricted.

2. Pricing of mobile services

New features of mobility and personalization over mobile devices enable new types of mobile commerce applications (Jonason & Eliasson 2001). The unique characteristics associated with services compared with products include intangibility, inseparability of production and consumption, heterogeneity, and perishability. Since services themselves are intangible, one of the most tangible aspects of the offering is the price of the service. (Finch et al. 1998) According to Kollmann’s (2000) studies customers of telecommunication makes their decisions on price first. And also from a company point of view according to Mckinsey Company’s consultants, the fastest and most effective way for a firm to achieve maximum profit is to get its price right (Tung et al. 1997).

In mobile environment the providers of content and applications contribute value to services, but rely on the network operators to charge the end-user (Jonason, 2002). Thus, operators are to be more or less service integrators in m-commerce as seen in figure 2. The content providers bring the richness while the operators bring the reach (Jonason & Eliasson 2001). By providing technical capabilities and environment for the use of service and content providers, the operator plays an important role but is not the value provider perceived by consumers (Mylonopoulos 2002). E.g. DoCoMo’s I-mode is successful Japanese operator which users are charged for surfing Web pagers and sending or receiving e-mail 0.3 yen per packet of 128 bytes of transferred data. The billing of these services is exclusively handled by NTT DoCoMo costing the content provider 9 per cent of the revenue from the end-user while the remaining 91 per cent of the content charge goes to the content provider. (Jonason & Eliasson 2001)

The most common arrangement is also that operators handle the billing towards the end-users, while the providers add value to the end-users in the form of branded services and applications. It is thus debated, how end-users revenues are to be divided between these third party providers and the operators. (Jonason & Eliasson 2001)

In general, one of orientations for creating innovative pricing schemes is the aim that consumers would become used to the particular features of their products/services that they would find it hard to change to another system. Ross (1984) has suggested in his studies that effective price changes are based on anticipated reactions of customers and competitors, rather than jus the firm’s own costs and circumstances. (Finch et al. 1998)

The flat rate option (in which bundle pricing is also based on) was usually selected by over 50% of the customers who were making fewer local calls than the 50 covered by the measured rate basic charge, even though they clearly would have benefited from per-use pricing. (Fishburn & Odlyzko 1997) This is a concrete evidence of the aspects of perceived values related to pricing. Monetary is only one perceived aspects which addition there can be identified multiple non-monetary attributes that affect to customer perceived values. Chen has studied processes of perceived pricing. According to his definition, the perceived price can be defined as the customer’s judgment about a service’s average price in comparison to its competitors (Chen et al. 1994).

There have been experimented and suggested multiple charging models for mobile and internet usage. These methods will be probably merged to a combination which would best support the business goals of the parties in a question. For example following have been mentioned by Cushnie and Hutchison (2000):

• usage based charging, in which consumer is charged according to realized consumption,

• fixed price, is non- or partly metered pricing scheme which does not change according to the usage,

• bundle pricing, is used for pricing/billing of bundles of services or products with a lump sum,

• Paris-Metro, is a pricing method especially for congestion management purposes, the pricing scheme is mostly self-regulating the congestion with two-piece pricing model,

• packet charging, is used in new e- and mobile services which uses packet-based technology, and

• edge pricing, is characterised by concentrating charging functionalities at the edges of the network (e.g. access routers) and has become one of the central paradigms for charging Internet services. (Reichl & Haidegger 2002)

Typically we find arguments which favour the producers of charging on a fixed-fee basis especially as consumers are also willing to pay more to avoid per-use pricing. It seems likely that subscription or fixed-fee approaches are likely to be dominating also in mobile services business. We strongly suspect that pure à la carte pricing schemes will not be successful in the marketplace, even though it will probably find some niche areas to be applied.

2.1 Pricing cases of mobile services business

In mobile services business there arises problems of which dimensions/services/content should be charged and which offered free of charge. And yet which dimensions are chargeable from the technological point of view. According to Jonason (2002) technically more complex products are faced with this kind of pricing problems such as the delivery of content and applications to mobile devices, typically news, and banking and entertainment services. When products are multidimensional and the producer has difficulties determining which dimensions are in demand and which dimensions can be charged for. In such a situation the product or output (Hayek 1945) is not well defined and, hence, neither is price.

To show more explicitly the problem of mobile services pricing, below is presented some pricing cases from mobile telecommunication industry:

At the moment, operators are experimenting with a broad range of pricing structures for GPRS network access. These include introductory unmetered packages (operators in Italy and Sonera in Finland), as well as complicated combinations of volume and time-based pricing by some German operators. Another German operator, VIAG, charges per WAP page. Telia and Comviq, two Swedish operators, have gone to offer GPRS access free for a limited trial period. Vodafone UK offers two GPRS price packages for consumers, which they can attach to their normal monthly price plans. Vodafone is offering a flat-rate “GRPS 1” option for the more frequent WAP user, which includes 1MB worth of data transferral for EUR 12 per month. With an average WAP page measuring between one and two Kb, GPRS 1 will allow customers to access anything between 500 and a 1,000 WAP pages per month. Alternatively, customers can choose a GPRS price plan with no monthly fee, paying for WAP access pro-rata at two pence per Kb. There is no peak or offpeak with GPRS pricing plans. (Davis 2002; Jonason & Eliasson 2001)

In case of DoCoMo the subscriber’s bill depends on usage of the I-mode function on the phone, and the number of fee-based I-mode content services he/she subscribes to. There is a basic fee of 300 yen per month to access the I-mode service which is paid via the subscriber’s phone bill to NTT DoCoMo. Since I-mode is based on packet-data transmission, users do not pay for the time they are connected to a service. Instead they are charged according to the volume of data transmitted. (Davis 2002; Jonason & Eliasson 2001)

Telecom Italia Mobile SpA (TIM) launched its business GPRS service in 2001 with a base price of 30 euros per month for 60 mega bytes of data transferred. Mobilkom Austria AG, with 2.8 million customers the largest operator in Austria, claims to be the first operator worldwide to have introduced GPRS. The company launched GPRS IN August 2000 and doesn’t sell bundles of data. They chose time-based billing similar to the circuit-switched world, a simple approach and transparent to the customer said Patrick Krückeberg, head of product development at Mobilkom. Data minutes cost between a half and one-third of the price of voice minutes. Leading Czech operator Eurotel, partly owned by AT&T Corp., introduced a GPRS service in 2001. They used a premium service and charged by kilobyte of usage. Downloading one Web page costs about 1.5 euros. (ITworld.com)

The flat-rate pricing plans may not always be most economic schemes for consumers, and there might be substantial marginal costs in providing such services, but the strong consumer preference will force the mobile service providers to adopt the bundle and flat-rate pricing schemes to mobile services business. As Baumol asserted that consumers derive a positive utility from fixed pricing, it appears to be a major factor that will favour fixed-fee schemes. Content producers can take advantage of this preference by charging higher prices than they would if consumers behaved more as utility maximizers. (Fishburn & Odlyzko 1997)

2.2 Bundle pricing

By definition telecommunication services bundling is the packaging of different telecommunications services for customers. Usually, telecommunications bundling simply refers to local and long-distance services, but it is also used to describe the combination of either or both of those service with Internet access, cable television, wireless, and any other service broadly described as telecommunications. (Strouse 1999)

According to the Stigler’s and Adams and Yellen’s (1976) analysis the reservation values for the components of the bundle were negatively correlated. That feature made it appear that bundling serves much the same purpose as third-degree price discrimination. A surprising result of Schmalensee (1984) analysis was that bundling can be profitable even when demands are uncorrelated or even positively correlated. His explanation for the profitability of bundling was that it reduces the effective dispersion of reservation values and thereby makes it possible for the seller to extract a greater fraction of the potential surplus. (Salinger 1995)

By applying findings above to Carroll’s discoveries we are able to set conditions under which bundle pricing is profitable strategy for a mobile services company. Carroll et al. (1999) discovered that a company should cover the three necessary conditions for price discrimination to occur. Which are: i) the firm must have some market power; ii) there can at best be imperfect arbitrage opportunities for consumers; and iii) consumers have different price elasticity of demand. (Jeitschko 2001)

In generally, according to Schmalensee a seller faces three alternative strategies to offer her or his products or services (Venkatesh & Vijay 1993):

1. Pure components: the seller prices and offers the component products/services as separate items, not as bundles.

2. Pure bundling: The seller prices and offers the component products/services only as a bundle and not as individual items.

3. Mixed bundling: The bundle as well as the individual component products/services are priced and offered separately.

Adams and Yellen (1976) argued that mixed bundling at least weakly dominates pure bundling. Moreover, McAfee, McMillan, and Whinston (1989) have shown that, while mixed bundling virtually always strictly dominates pure bundling, the optimal bundle price is sometimes greater than the sum of the prices of the individual goods (Salinger 1995). When valuing pricing strategies for new mobile services, there should be laid few goals, which are expected to be covered. These goals are attendance maximization, service usage maximization, and surplus maximization (Ansari et al. 1996). The optimal number of items to be included in a service bundle for a profit-maximizing firm that uses pure components, pure bundling, or mixed bundling strategies is determined (Venkatesh & Vijay 1993).

The context of bundle pricing approach covers is complex and there are several aspects that should be considered when choosing right strategy (see above). The bundle context includes following areas: price segmentation, price discrimination, and product range restriction, reduction in classification /processing costs, scope economies, consumers’ search economies, and risk reduction. (Venkatesh & Vijay 1993) In this paper we will highlight the areas of price segmentation, price discrimination, and risk reduction.

Some examples of practices of using bundle pricing (Strouse):

Wireless providers have bundled services as a competitive differentiation tactic. Cellular providers bundled airtime minutes into their service offerings to serve as a competitive weapon against their local competitors. PCS providers, eager to attract the customers of cellular providers, have leveraged the digital capabilities of the PCS technology to bundle news and stock quotes, messaging services, and other enhanced services in the basic price of the wireless service. Paging services frequently offer stock quotes and voice mail in their subscription prices.

Local exchange carriers have discovered a synergy between their high-speed digital subscriber line (DSL) offerings and Internet access. IXCs have found markets by bundling long-distance and other services such as Internet access. MCI offers its long-distance subscribers a lower-than-market price for Internet access. In another example of bundling, in the United Kingdom, cable operator Nynex Cablecomms Ltd. offered its customers free local calling within its franchised area if they would subscribe to two premium-priced cable television channels. Nonetheless, bundling of local exchange and long-distance services is the most anticipated form of bundling, and it is not yet widely available to consumers.

The arguments in favour of bundling are thus strong, and suggest that à la carte or unit pricing will not be the dominant mode of commerce in information goods. Observation of Adams and Yellen shows that mixed bundling items are offered for sale separately, (and in combination, but with the price of the individual items higher than they would be otherwise) is always better than pure bundling (items are available only in combinations). Furthermore, bundling is most appropriate for producers with an established brand. (Fishburn & Odlyzko 1997)

In online service area, it is common for customers to pay for larger blocks of time than they used. The reason is that there exists a need for insurance (predictable costs), overestimation of usage, and a hassle factor (whether each call is worth the money or not). In addition to the consumer preference for flat-rate and bundle pricing, there are reasons for producers, especially in areas where network externalities are important, to also like these plans. These factors are part of a general preference by consumers for simple and predictable pricing. (Fishburn & Odlyzko 1997)

Information goods are characterized by negligible marginal costs, and therefore arguments in favour of bundling are stronger for them than for physical goods. Bundling arguments show that producers can obtain more revenue by combining disparate items, since that allows them to exploit uneven preferences that consumers have for different goods. In most situations bundling is advantageous to the producers. (Fishburn & Odlyzko 1997)

When using a flat-rate or bundle pricing, there should not be used pure single price strategy as there are related obvious shortcomings. First, the firm is clearly leaving excess money on the table for many buyers who are willing to pay more (i.e. consumer surplus). These high-end buyers may perceive significantly greater value from purchasing this product, relative to other buyers. Second, the firm leaves nearly half of the market unsatisfied, even though it could serve it at prices above the unit variable cost. In industries with high fixed costs, serving those additional customers is very tempting, and possibly very profitable. And by ignoring these buyers, the firm leaves wide open an opportunity for low-cost competitors to enter the market and establish a competitive presence. (Nagle & Holden 2002)

3. Discussion

Bundling pricing is seen by Jonason very promising method for mobile businesse. When consumers have similar average valuations for the information goods, profits are highest in selling only a single, complete bundle. (Jonason & Eliasson 2001) Bundle pricing is a way to present an unambiguous price for the usage of a bundle of services. Bundling also increases the amount of pricing tools and choices for service producers. E.g. Laffont argues that it is optimal to lower the price of a service if doing so raises the demand for a complementary service on which the utility charges a mark-up (Laffont & Tirole 2000).

Cable companies are providing voice and Internet access services over the coaxial cable in their networks. High-density television broadcasts will be digital, presenting opportunities to merge services. Convergence represents the trend under which formerly separate services are merging, and bundling will represent the packages of service. (Strouse 1999) One of the big attractions of Java and the Network Computer to the software industry seems to be the possibility of charging consumers according to their usage of a particular product. However, while there are obvious attractions to per-use pricing, the basic economic arguments based on utility theory are not as clear as for bundling, where those arguments strongly support the idea of selling combinations of items. The simple utility maximization argument might favour per-user pricing in a substantial fraction of cases, what we observe in the market are repeated failures of à la carte pricing. (Fishburn & Odlyzko 1997)

The arguments in favour of bundling are strong, and suggest that à la carte or unit pricing will not be the dominant mode of commerce in information goods. E.g. in the United States, customers wants bundling and so do carriers (Strouse 1999). However, even if bundling does dominate, as Fisburn predicted, there are likely to be niches for fixed-fee sales. One of the few general results about the economics of bundling is the observation of Adams and Yellen that mixed bundling is always better (with proper price) than pure bundling. (Fishburn & Odlyzko 1997)

For a company of mobile services business, the bundle pricing to be employed, there must be realized three, basic conditions: the firm must have some market power; there can at best be imperfect arbitrage opportunities for consumers; and consumers have different price elasticity of demand.

As mobile services business, as mentioned, is yet to be defined and services are thus difficult to value and compare. Therefore the perceived risk is relatively high for consumers and service and content providers. By bundling services into larger blocs, consumers need to evaluate only one bloc of services rather than several items separately (see figure 1). Hence total costs are more transparent and total expected value is easier to perceive. From the basis of these observations, there can be come to a conclusion that through bundling of mobile services there can be modified service bundles which have higher cost transparency, greater perceived value, and lower price elasticity. Consumers make their decisions according to their own personal perceptions of expected values and perceived costs of mobile services with, often contradictory, information.

Also for service and content providers perspective there exists great uncertainties related to mobile services business. By creating blocs of services, there is created better defined and easier to value mobile services environment. This means less perceived risk and increased calculable of the service environment. The bundling is also a clear way of positioning the services and content in comparison to competitors. Bundles may thus be considered as an indicator of service/content quality and used for segmentation purposes. The definition problems can thus be radically diminished through bundle pricing approach.

Bundling in mobile services marketing where are two or more co-operating actors, pricing decision and the follow-up of services usage gets easier as services are included into bundles. Moreover this supports also strategic perspective of positioning services into chosen bundles. In mobile environment billing would be co-ordinated by operator which would further distribute the earnings according to usage of services in the bundle.

The objectives for mobile pricing should be: to enable fixed prices, price differentiation, and increase the efficiency of pricing (by capturing part of this consumer surplus). From customers perspective bundles are shown in a simple and transparent way when acquiring bundles of mobile services. And from mobile services producer’s perspective bundling is considered as price discrimination which offers practical and profitable tool for defining emerging business; reducing perceived risks of consumers and service providers; and aggregating the modest value dimensions into a bloc of higher perception of total value.

In addition to above mentioned arguments for the bundle pricing strategy, also Strouse (1999) found several benefits on favour of bundling: the preference of customers for a single bill, and for simplicity which bundled services offer; for providers that are currently prohibited from entering certain markets, bundling represents the opportunity to enter new markets without requiring large investments (bundling requires smaller investments in existing facilities); bundling creates an excellent cross-selling opportunity (it is many times easier to sell a new product to an existing customer than to sell existing products to a new customer); etc..

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