Tata Teleservices has triggered another round of tariff wars in Indian mobile by first introducing per-second pulse and then launching a pay-per-call pricing model.
Most of the leading operators have responded by reducing their tariffs and/or by introducing similar price plans. While the crowded and price-sensitive market requires operators to offer low-priced services to defend their market share, such quick and deep reductions in tariff levels will hurt ARPU and margins.
The Indian mobile market continues to experience high subscriber growth. With urban markets already approaching saturation, most of the new subscribers are coming from highly price-sensitive rural and low-income urban segments. In addition, new operators in the market are further increasing competition, putting more downward pressure on prices.
By responding with reduced tariffs, existing operators are trying to win new customers with one hand and fend off the threat of new entrants with the other.
Tariff levels in India are already among the lowest in the world. In responding to these pricing tactics operators are harming their own revenue growth, and the only winners are the end-users, who benefit from even cheaper services. Some customers are even going one step further by keeping multiple SIMs and using different operators for different types of calls in order to minimize their phone bills.
Most will lose out
While the tariff war may help some operators win market share, in the end most stand to lose out as a result. New subscribers thus acquired adversely affect ARPU and profit margins, which are already under severe pressure. Subscriber growth does not result in proportional revenue growth, and also further aggravates capacity problems for already congested networks, resulting in higher network operating costs.
It is difficult to completely resist pricing pressures in a price-sensitive and crowded market such as India. However, by focusing on careful market segmentation and value-based differentiation, operators can grow their subscriber base while maintaining profitability.
Instead of reducing tariff levels across the board to woo low-spending customers, operators can adopt a dynamic pricing strategy that adjusts tariff levels based on the traffic on the network. Such an approach offers a win-win solution as customers get cheap calling rates and operators make good profits by optimizing network usage and operating costs (for more information see our recent report Realtime mobile pricing: solutions and strategies).
While India at large is a very price-sensitive market, there are sizable mid- and high-income customer segments that will value good overall customer experience more than further reduction in already low tariff levels.
By differentiating services offered to these segments through better network quality, customer care and marketing, an operator can maintain and grow its market share without substantially reducing prices. Bharti Airtel provides a good example of this strategy, having not yet responded to the recent cuts but remaining a market leader and a favorite among high-spending customers.