April 15, 2013
Three Software Pricing Strategy Lessons from T-Mobile "Un-Carrier"

T-Mobile has long been the neglected step-sister in the US mobile carrier family. She just hasn’t been able to compete with her more popular, older sisters, Verizon and AT&T, who dominate the US market at a rate of nearly 5 to 1.

Fear not though, T-Mobile has been working hard to improve, especially with an announcement that can only be the start of our own fairytale as consumers: T-Mobile has officially released their “Un-Carrier”, contractless pricing strategy. For years consumers were placed atop the anvil of the telecom bells’ harsh oppression with early termination fees and contracts longer than any union should be between a human being and a circuit board.

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Why should you care? Well, T-Mobile is making a huge pricing strategy splash in a heavily competitive market and they're already seeing traction. If you’re here, then you’re probably looking to make your own splash with pricing as a core competency. As such, let’s breakdown what’s so revolutionary about T-Mobile’s new strategy, and reveal which aspects of the new approach you can bake into your own pricing strategy for immediate positive impact in the revenue department.  

Listening to the customer: Why T-Mobile made the pricing change

Traditional cell phone contracts make us nauseous 

Unless you’re one of the .0001% of netizens with access to the Internet, but no cell phone, you probably have some form of contractual relationship with a telecom company. Yet, one fact that is oddly missed on a large number of consumers is that when you buy a smartphone with contract from a carrier, the price you pay is heavily subsidized. This is why you can get a pocket size computer that can capably fly the space shuttle for $99.

Carriers use these subsidized phones as a promotional aspect to their pricing strategy, because no one wants to pay the true cost (up to $1000) plus the cost of service. In this manner, carriers make the bulk of their cash on guaranteeing that you’ll stick around and pay for the service plan for two or more years through a contract. Of course, you can leave before the contract is up, but you’ll be assessed an enormous early termination fee (ETF) to essentially cover the cost of the subsidy on your smartphone. Unfortunately though, telecom companies aren’t well known for their customer service and when the poor service mixes with a major new smartphone release rate of at least every six months, these stiff contracts become universally hated by consumers that feel trapped.

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photo credit: Hello Turkey Toe

How T-Mobile's "Un-Carrier" plan is differnet

T-Mobile’s new approach to cell phone plans doesn’t completely get rid of an agreement, but allows consumers to leave T-Mobile at any time, as long as they pay for the remaining subsidy on the smartphone. So, for instance, if you want to buy the new iPhone 5 on T-Mobile you’d pay the $99 up front and then each month you stay with T-Mobile $20 comes off the value of the phone. After two years, the balance on the phone is paid off, but you can still leave by paying $600 minus the $20 for each month you were a customer.

Why this change is brilliant, and what you can learn

T-Mobile isn't necessarily doing anything revolutionarry, but it seems that way because they're in a market where a contractless relationship with a customer is considered lunacy. Here’s why we like the move from a pricing strategy perspective....and what you can learn:

1. Consumers love flexibility, and the flexibility onus is on you

Technically under the new plans, T-Mobile customers aren’t under contract, except for an agreement surrounding the smartphone subsidy. The flexibility to leave before two years is absolutely brilliant, because the more choice you put in the hands of your customers the better the producer/consumer relationship.

Term and pricing flexibility remains key to success, because you’re able to appeal to a wider array of potential customers. Some people want to pay for a year of a service up front, while others want to pay month to month - especially in the SaaS world.  Unlike the telecom space though, a lot of customers won’t voice the need for these options. Instead, they’ll just go to your competition that offers them the solution in the structure they seek. You’re probably already taking advantage of flexibility with multi-tiered pricing saas pricing, but think about additional ways you can be more flexible to accommodate your target customer personas. Term conditions and add-ons are a great place to start.

2. Take advantage of the “time value” of money

Letting people pay off smartphones in monthly installments allows them to take advantage of the power of "the time value of money", which Albert Einstein called the most powerful force in the universe. The time value of money gets to the core of liquidity, essentially saying that a dollar today is worth more than a dollar tomorrow, because you can invest the dollar you have today in this moment in time; the dollar tomorrow isn’t guaranteed.

We’ve already mentioned being flexible on payment terms, but when you are flexible keep the language of your product in the context of the monthly investment your customers are making in your product. Individuals are buying a product to quelch a pain they’re feeling right now, and on a recurring basis. No matter the terms, psychologically, thinking about the solution as a small monthly charge shows the investment. Yet, this mindset also helps you take advantage of the “time value” principal by turning a $1200 charge into “only $100 per month for the year.” Non-profits, infomercials, and all kinds of software companies take advantage of this phenomenan all the time.

3. Differentiate your pricing to align with customer value

T-Mobile’s marketing team has been out in full force since the announcement of the “Un-Carrier” plan, which is positioned as something completely different than any other cell phone service provider. Remember though, it really isn’t that different. T-Mobile is still covering any potential losses. Yet, now they’re recognizing a major pain customers voiced and aligning their new plans along what each value. Telecom customers have evolved from simply finding value in connection, minutes, bandwidth, and tests to all of those things plus freedom.

Just as T-Mobile has recognized and taken advantage of this new axis of value, you need to truly understand every aspect of your customers’ view of value in your product. You need to know not only what pain are you solving, but what aspects of the pain are the most important to your customer. Recognizing the primary, secondary, and even tertiary levels of your customers’ value metric allows you to truly be a leader in your market, because when everyone is pricing based on number of seats or API calls you’ll be pricing on number of database connections, number of tests, or even conversions. Essentially, you should get paid along the same axis that the customer finds value.

Seriously: Revenue maximizing pricing is all about the customer

We’ve always been told that it’s all about the customer, but this goes well beyond your customer service and product departments into the very core of your pricing strategy. T-Mobile listened and made changes to better align with their customers’ wishes with more flexibility and a downright better deal, which is going to come up huge for differentiating them from the rest of the market. Of course, companies have gone too far in their differentiation, such as JC Penney’s disastrous pricing strategy. Yet, retail customers weren’t/aren’t as up in arms as current smartphone customers.

We’ll see how the T-Mobile strategy pans out, but we’re very optimistic, especially considering Verizon is seriously looking into following the contractless trend. As for your pricing strategy, look deeply into the perspective of your customers. Find what makes them tick, price along that value, and be flexible enough to capture each shade of that persona.

To learn more, check out our Pricing Strategy ebook, our Pricing Page Bootcamp (it’s free!), or learn more about our price optimization software and solutions. We're here to help!

 


Eric Yu is a software engineer at Price Intelligently.
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