Price cuts in the prepaid economy

By | April 4, 2012

Sunil Bharti Mittal recently referred to a pattern of consumer behaviour that came as a surprise to Airtel Africa, leading to a rethink of their near future pricing strategy for this market.

The Indian telecom company told participants at the Mobile World Congress 2012 in Barcelona, Spain, that it was surprised to find that the African market did not increase its talk-time, which was critical to supporting its low-cost model.

“Unlike India, we were surprised that in Africa, lower tariffs could not increase volumes. In Africa, subscribers use the money saved on lower-calling rates to buy food and not to talk more.

“This means that we have to think of a new model that works there,” the firm’s chairman and MD, Mr Sunil Mittal, said.

The lower income segments of the Indian market were introduced to mobile phone services almost concurrently with the price wars that shook the subcontinent a few years ago, that is, before behaviour around calling and texting had time to establish themselves. New customers experienced a telcom landscape that was in continuous flux and churn was high as people shopped around eagerly looking for the best deal. It was not difficult to assume correlation between ever lower prices and increasing volumes of use – particularly since the total market itself was simultaneously growing at a rapid clip.

Sub Saharan Africa has long gotten accustomed to expensive voice and text rates from mobile service operators, and enough time has passed for a variety of compensatory behaviours to emerge. These have been well documented and include beeps, whistles and flashing. Low cost handsets started proliferating in the past 4 years permitting penetration of the device itself lower and lower down the income stream but user behaviour remained the same as that observed in early 2008 – that often, the phone was simply a device carried around in the pocket due to extortionate cost of calls and text (also documented extensively).

Where it was the price of the service that was the primary driver of the mobile’s adoption in India, in Sub Sahara, it was the price of the device. So, when prices dropped significantly for airtime after Airtel Africa’s entry into this market, existing behaviour did not change so much as an amount of cash was released for other purposes. That is, if one has always budgeted 50 shillings for a top up every 2 weeks and then developed habits of use around the airtime available for that budgeted amount, the cost of that very same airtime being halved would not double the amount of use so much as simply cost less.

Economic conditions and rising inflation resulting in high prices for necessities were also occurring during the very same period that Airtel Africa was dropping prices in Kenya – so the likelihood of the extra 25 Kes  (since one had already budgeted for X minutes of airtime, not X cash amount of airtime) going towards sugar or edible oil or kerosene was greater than that of using more airtime minutes.

I am not an economist to be able to interpret this behaviour in appropriate jargon, however, it is one that I’ve observed in other contexts as well.  An example is that of how long lights are kept on in the evening by rural residents, regardless of whether one is using an expensive fuel like kerosene or a “free” one like solar power. Again, one would think that lights would be used for a longer duration if one didn’t have to ration the nightly quantity of kerosene, but the same behaviour is observed regardless of whether the homestead has electricity, renewable energy or fossil fuel.  That is, the behavior itself is inelastic rather than the quantity of fuel or price particularly if the commodity in question is a high value item in the family’s household budget.

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