I wanted to start a discussion on broadband pricing...In particular broadband pricing and wholesale pricing.
Ive heard a lot of crowing from Voda and ocron recently about how they 'lead the market' in broadband pricing. I wanted to share with you how they do that.
Basically Telecom lives (and dies) by an equivalency obligation. What this means is that not matter what price they set their retail broadband at they need to take a set amount off that (the margin is agreed upon by T/com and the commerce commission) and offer that as a whole sale product to voda, orcon, telstra etc etc.
When the wholesale customer gets that broadband product at wholesale they can then set their own retail price. A good tactic for the likes of voda would be to find the telecom retail price...find out what they pay wholesale and set their own retail price in the middle.
They get to undercut T/com and still make a margin.
Now here is the fun part...voda start to gain market share by undercutting the incumbant so after awhile telecom has to lower their retail price to compete...and here is the clincher... telecom then has to lower their wholesale price as well!
It works out great for the likes of voda because they get to undercut telecom AND keep the same margin they had.
Oh but wait there's more, this concept of equivalency not only applies to price it also applies to promotions and give aways. past a certain cost of sale point Telecom has to pass on promo's to its competitors, that's why all the players offer a free modem and free connection for instance.
Oh but voda don't stop there!
I read earlier this year that when voda launched into wholesale landlines/broadband they actuality started with a 'loss leading' offer. What that means is that they sold the package below the telecom wholesale price and were losing money for every customer they signed up. It's not something you can do for long but its a great way to get market share....
Oh and because their offer was so cheap they pulled a whole heap of customers away from Telecom and Telecom had to lower their price. What other industry could you sell a product for below its cost and then make your competitor pay for it!
So really Telecom only has a few tools it can use to set it self apart from it's competitors and price is not one of them. They only really have their customer service and the premium services.
You know I could say more on the rights and wrongs of this but I'll let the discussion start...
before we get started, I am no lawyer so forgive me If I miss the details but I think I got the basics about right..