Page 51 - State-of-the-Industry-2013

Part 1 - mOBile mOney

TexT BOx 13
Price Promotions: an effective tactic for some,
but it maY not be right for everYone*

Price is one of the most dynamic marketing tactics in an operator’s toolkit because it is easy to implement and, under the right
circumstances, can efciently drive network efects. As Ignacio Mas has highlighted, price penetration worked for PayPal, which
willingly lost $23 for every new customer in their frst 9 months[1]. More recently, going “free” has proven itself in Somaliland. For
ZAAD, ofering an entirely free service was cited as a critical success factor in facilitating rapid mobile money adoption. Although
ZAAD’s innovative approach is somewhat unique, we have seen varying price penetration strategies (from free money transfers to
airtime bonuses) be efective in moving the needle in mobile money adoption.

However, pricing promotions are not without risk. Here are three questions that operators might consider before launching a new
pricing strategy to avoid the potential unintended consequences of playing with pricing.

(1) IS PRICE THE MAJOR BARRIER TO ADOPTION?

Price promotions only work when a decrease in price results in an increase in volume. If a mobile money service isn’t perceived as
relevant and reliable to its target market, then price is not the pain point and a reduction in price will not result in an increase in
volume. Before cutting prices, take the time to assess whether afordability is a major barrier for your target customers.

(2) WHAT’S THE RISK OF PERMANENTLy UNDERVALUING THE SERVICE?

Operators also need to consider the long-term impact of a price penetration strategy. In some highly competitive markets, price
promotions could result in a price war between operators and/or other service providers. Price wars are easy to start and expensive
to win (as MNOs remind us again and again). So, before launching a promotion, operators need to consider both their position in the
market as well as that of their competition.

• What’s the likelihood that one of your competitors will follow suit? How long will you realistically be able to sustain a
clear pricing advantage?

• What efect will pricing have on your brand? Large marketing campaigns focused on pricing can erode brand strength,
which is a valuable asset in building trust with customers.

• How much can you aford to lose? Without signifcant increases in volume, price reductions have an exponential impact on
proftability. As an example, for a company with 10% proft margin, a reduction in price of 1% will result in a 10% decrease in
operating income unless there’s an increase in volume. [2]

(3) HOW DOES THE PRICING PROMOTION FIT INTO yOUR LONG-TERM BUSINESS MODEL?

Pricing penetration can be an efective way to drive network efects, but operators also need to determine how they will otherwise
recoup the value left on the table. This question applies mostly to operators who have either decided to maintain an indefnite pricing
promotion or those who fnd themselves in a position where re-introducing prices is proving challenging (dropping them tends to be a
lot easier than raising them). In either case, operators need to fnd other ways of making mobile money economically sustainable.

There is no question that innovative approaches to price can yield signifcant value. However, price penetration strategies do not
come without risks and, in some markets, a price promotion could result in unintended (and uneconomic) consequences. As opera-
tors look to tip the market towards mobile money, price promotions can be an efective strategy, but the circumstances are unlikely
to work for everyone.

*This text box was adapted from a blog post by Lara Gilman (MMU) published on the MMU website on August 12, 2013
1. Financial Access Initiative, “Contrasting Two E-payment Success Stories: PayPal and M-PESA”, (June 13, 2011), http://www.fnancialaccess.org/blog/2011/06/contrasting-two-e-
payment-success-stories-paypal-and-m-pesa
2. Alexander Chernev, “Strategic Marketing Management,” Brightstar Media, Inc., (2008).

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