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Thursday, July 19, 2007

LUI: episode V – Return of the Voice Margin

Jeremy described our main broadband product set in episode IV, what was missing was the description of our voice services and our plans for video. This article covers the current state of LUIs voice offer.

In preparation for our voice launch we played the find the money game in the UK residential voice market:

uk telephony q3

We were really surprised that although the volume was with uk geographic calls, nearly 50% of the value was with access charges (monthly line rental) that most Communications Providers sell line rental at zero margin matching BT’s price. One of our first voice decisions was that we didn’t want to be a zero profit collection agent for BT while taking all the bad debt risk. Therefore we decided to price our line rental at above market pricing - £11.50/month. Despite this pricing policy 16% of our base has taken the line rental option and despite the price it is still only marginally profitable. Apparently people do place a value on receiving just one bill.

Something even more surprising happened when we performed market research with focus groups consisting of existing users of our broadband product on potential voice products:
  • people, especially youngsters and students, thought text messaging is an integral part of voice service (yes we know that is nonsensical technically, but LUI only exists to serve) and wanted a cheap way of sending and receiving them from their home as well as from their mobiles;
  • people thought the most equitable way to bundle by far was the "T-Mobile Flext" method where different elements were combined and interchangeable in a monthly price with an overall usage limit;
  • people were totally confused by non-geographical call pricing and felt like they were being ripped off; and
  • people thought calling overseas was really expensive and something to be avoided.
As a result of these focus group sessions we decided we wanted to be as transparent as possible on non-geographic calls and decided to market the calls to our base with a pledge - “LUI will only charge our non-geographic calls at cost with a 2.5p/call transaction processing fee”. At least our customers know we are not the people doing the rip-off.

We also decided to tie in our mail services with a mobile operators SMS gateway, so that we can offer outbound texting. We were really surprised how easy and potentially profitable this was to do and how helpful the tools our mobile operator already had available were. We are experimenting with some voice to text convertors to make the service even more user friendly but to perfectly honest the software seems to have big problems handling the Yorkshire accent and isn’t ready for the mainstream yet. We also white label the BT Text-to-Voice wholesale service to allow people to text our fixed lines and allow our customers to listen to the message if the home handset doesn’t have a SMS client built into it.

We also decided to design a “Flext”-like tariff plan for voice, which currently looks like:


All components in the bundle are interchangeable. Once people reach their bundle limit for the month we send an email informing them of the situation. In this way we are not over exposed to heavy consumption by a group of individuals and people do not suffer from "first bill shock". We provide online tools for viewing the progress of the bundle through the month and also permit our users to receive completely automated email alerts when they reach 50% and 75% of their monthly allowance. We find that people's consumption patterns are pretty stable after an initial couple of months.

The beauty of the plan is that it looks really good value for the customers compared to other offers in the market and our customers are happy effectively managing a monthly budget. We make most margin on Evening and Weekend Calls which is when the majority of our customers are at home. But, basically make our money with what is left over in the bundle every month.

For an example of the profitability of our services, see the attached summary management accounts for June. Please note our advertised prices include UK Sales Tax at 17.5%:


We would love to bundle in the line rental with the service, unfortunately we feel that adding a zero margin product of £11.50 actually detracts from the value message we are offering. However, once we fully unbundle we can cut the umbilical cord from BT and offer a much better package for overall voice, broadband and hopefully video services. 

We are currently testing our softswitch for deployment of the full unbundled voice service. We are negotiating with the other Communications Providers to maximise our share of incoming call termination. Also, we feel that the community effect of our ISP will kick in: we have a lot of calls that are already on-net which we effectively in the future we won’t have to pay BT wholesale charges. We feel confident for a launch of fully unbundled product in Q4 2007.

Episode 6 - video bits and bytes is available from Jeremy’s blog for Monday
Lunchtime consumption ;-)"