Mobile Telephony Pricing in Emerging Markets

Over 90% of wireless mobile subscribers in emerging wireless markets such as India employ pay-as-you-go prepaid plans. In contrast, over 90% of subscribers in mature markets such as the US pick postpaid plans with long-term contracts. Indian wireless firms fret about this because prepaid consumers generally have low loyalty and generate lower average revenue per unit than postpaid consumers. However, the outcome is not surprising, considering the pricing strategies employed in the two markets. Postpaid plans in India are quite unattractive relative to prepaid plans, do not exhibit quantity discounts, and do not encourage consumers towards higher-level tiers, unlike the US where postpaid plans offer a much lower per-unit rate, feature aggressive quantity discounts, and impose such a high penalty for above-allowance consumption that consumers tend to move towards higher-tier plans. Why then do firms in India embed these characteristics into their pricing strategies? We identify puzzling characteristics in the Indian market, develop an innovative model that explains the pricing strategies employed in India, and propose evolutionary steps for wireless firms to adapt their strategies as the market matures. We show that the pricing plans are driven by firms’ desire to compensate for fixed costs of offering postpaid plans, and a focus on instantaneous profit margins. Reversing the outcome will require shifting the focus to lifetime revenues from customers, and a willingness to offer postpaid plans to customers whose account size does not, at the time, justify incurring the additional fixed cost of postpaid service.