Service bundles attractive for consumers, only if price savings significant: Yankee

Bundles of telephony, television and Internet services hold strong attraction for customers, says the Yankee Group, but only if they offer significant price savings. The research firm argues in its most recent Canadian Technologically Advanced Family (CTAF) survey that consumers can be persuaded to jump from incumbent providers with the right pricing package, and it congratulates Bell Canada on its recent decision to slash long distance prices as a defensive maneuver against competitors’ bundling strategies. The CTAF study, conducted by mail of 1,106 Canadian households, shows that a lower monthly cost would be the main factor in a decision to switch local telephone providers in 89% of cases. Better overall service and better customer service trail as reasons at 37% and 36%, respectively. Their likelihood of switching providers, however, becomes greater when companies offer increasing discounts on local service. Only 6% of customers would switch to a provider offering service at the same monthly discount, but 37% would consider switching with a 10-15% discount, and 73% might be motivated to switch by a 15-25% discount. To increase the odds of convincing customers to switch, says the Yankee Group, companies including competitive telcos and cablecos will have to offer bundles that provide further savings. During a conference call exploring the group’s findings, researcher Mark Quigley noted: "I don’t think it comes as any great surprise to find that lower monthly cost is at the top of the list…If you take a look at the Canadian market for consumer products in the telecom world, and, indeed, in most segments of the marketplace, the compelling reason for people to do anything is the cost-based one - the notion that you can save money by purchasing something from another provider, by exploring other vendors out there, whether it’s for services, for products, what have you. On the telecom, price has long been used as both the carrot and the stick to get consumers to jump. That’s been true for wireless service, for long distance, for Internet." He added that customers are looking for steep discounts before they’ll switch, which presents companies with a pricing problem. "It does present, I think, a particular quandary if you’re a service provider and you’re trying to encourage those consumers to jump from one place to another, and that’s that the discount that seems to be demanded is a fairly hefty one, indeed, especially if one looks at driving significant churn from one provider to another." He warned, however, that simply offering bundles to reduce the number of bills a customer receives won’t drive churn from one provider to another. "I think if the only value proposition you can present to the end user is that it’s one throat to choke, then the value proposition you’re presenting is not quite so compelling. Similarly, if the only value proposition you can demonstrate is receiving one bill instead of multiple bills, if discounts aren’t there across that bill, again, I think that the value proposition for the purpose of a bundle becomes significantly less," Quigley said. On a cheerier note, however, Quigley said that providing the deep discounts that customers are demanding can be offset through lower churn - and a resultant greater net value for the customer. For example, cable television service has a churn rate of 2.5% when offered as a standalone product, with a customer net present value (NPV) of $702.74. Bundling cable with a second product reduces churn to 1.88%, bumping the NPV to $922.80. Adding a third product into the mix reduces churn further to 1.64%, bumping the NPV to $1,036.65. The greater NPV numbers, says Quigley, will allow companies to boost their discounts to incite consumers to switch providers. "From my perspective, the consumer bundle is going to be an absolutely integral component in the local battlefield. Without the power presented by a bundle, both from a discount perspective as well as from a value proposition perspective, the ability to encourage a consumer to churn from their existing incumbent provider to alternate provider, whether that be another telephone company such as Sprint Canada, a cable company, or perhaps even some of the even more innovative broadband voice carriers out there - that the ability to bundle will be absolutely key if those companies are going to see success in the marketplace." He added, however, that incumbents have already begun to respond. He noted that Bell Canada has recently created a $5 per month LD price point when customers buy a bundle of digital services, a move he characterized as "defensive" (NL, June 22/04).

Service bundles attractive for consumers, only if price savings significant: Yankee

News | September 15, 2004

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