Businesses want customers to stay, not leave. It becomes logical to draw them in with low prices and then add in many administrative processes such that if they want to switch to another company, they will think twice, maybe thrice. Customers don’t seem to have many choices, after all.
Telecommunications companies which held this thinking in the late 1990s and the years after found their plans upended when countries started implementing Mobile Number Portability (MNP) policies. The policy was carried out to increase industry competition and hopefully reduce prices for customers. The policy meant that customers would find it a breeze to switch telco providers, as they could port their original mobile number to the new provider. No more calling everyone to say that you have changed your number!
While it seemed like telcos were on the losing end of the move, time will show that they are actually winners. In our study on 563 telcos across 178 countries from 2000 to 2017, of which 337 telcos had experienced the MNP policy, we found that telcos benefitted from the policy. Their average revenue per user increases by up to 16%. A greater proportion of their customers (13% more) moved from the basic prepaid plans to the more expensive postpaid plans. The study, done jointly with Professor Andrea Fosfuri from Italy’s Bocconi University, was published in Strategic Management Journal earlier this year.
Business models change
What was the reason behind this outcome? The MNP policy had caused a change to telcos’ business models. Previously, telcos were in a price battle to entice customers to sign up for their basic prepaid plans. Never mind that they would make a loss, their thinking was that some of these customers could not switch providers easily and would opt for the more expensive and advanced postpaid plan one day. This is the conversion funnel business model, attracting a broad base of customers and converting some of them to rake in profits for the firm at a later stage. The basic plans of different companies had similar features; they only could compete on offering the lowest prices for basic plans.
With the introduction of the MNP policy, where customers could switch providers easily, companies now had to change their business models. They had an impetus to compete in a different space, the more differentiated plans of postpaid service. This shift in the locus of competition overall helped telcos revise their pricing strategy, which brought them more revenue and profits.
As for customers, they benefitted from the convenience of retaining their original number and the choice of a variety of telcos and perhaps plans.
More research has to be done on whether the findings will apply to different industries and contexts. Still, we may likely see similar results in industries with the conversion business funnel, such as software, mobile apps, cable TV and cars. The logic can also apply to developing countries where the spending power is lower, where companies often adopt a conversion funnel business model to offer affordable products or services to gain a higher market share.
It may have been more than two decades since the first MNP policy was introduced. However, the turn of events continues to hold lessons for telcos and other industries. Trying to earn profits exclusively through trapping customers is probably not going to be a good idea, especially in the contexts where companies may end up competing on prices. Our counterintuitive findings show that when customers have choices to go to other providers, companies have to go on the offensive in the battle of wits in the space where they can differentiate themselves, which eventually helps them to increase their prices and profits.
The article is an edited version of the first one published in SCMP.